Marginal Revolution: Paul Krugman wins the Nobel Prize: Well, as someone more loudly commenting here on the Nobel before it was awarded, I was very wrong about the big item, while being right about two others. I actually said that Krugman would not get it this year: Very Wrong. I was right to put trade at the top of the list (I said Bhagwati and Dixit with a third, but not Krugman), and I was right that it would not be someone forecast by either the prediction markets or the Harvard betting pool, both of which were wrong again.
So, given that he is probably reading this, let me first praise Paul Krugman, with whom I have only had one extended one-on-one conversation. He is one of the most brilliant living economists, he has done very innovative work in many areas, he has been absolutely on the money regarding the current crisis (and I suspect that this has been a factor in the award, although it is not supposed to be). Clearly he is also an excellent writer and very articulate. While "popularizing" is not supposed to get awards, it is still something admirable to be able to do.
To those who are convinced this is simply anti-Bush, I remind that two years ago the prize went to Kydland and Prescott, whose views are very different from Krugman's on macroeconomics, and who are definitely Republicans, if not former members of the Bush administration. Prescott followed his award by writing a column in the Wall Street Journal effectively praising Bush's fiscal policies and calling for supply side tax cuts. So, this argument is a pile of manure, although I am certain there are plenty of people around the world who will be cheering the political aspect of appearing to kick the very unpopular George Bush as he goes out the door, even as you folks are upset by this appearance. Anyway, if they are political, they try to keep a balance. Plenty of strongly pro-free market people have gotten the prize, and the University of Chicago remains Number One as the university with economics Nobel recipients.
I think that Tyler is right that there was a nod to the "real world" here also, with I suspect an eye on the global concerns about the current crisis. The hard fact is that many economists (myself included) have thought that Krugman was most deserving for his work on foreign exchange rate modeling (which, curiously enough, was not mentioned in the official statement). But given the prize being given mostly for trade, the link with international finance is there.
I also think Tyler is right that it is probably the combination of trade and location theory that is the key here, and Krugman certainly has been front and center on this. He is clearly the person who applied the Dixit-Stiglitz model to both trade and location theory, and it would appear that this is really the bottom line on what he got it for. It is indeed correct that the Swedes (and many other Europeans) are much concerned with location theory and economic geography. Krugman has defended regional economics, even as "regional science" has faded in the US. But that last trade prize recipient, Ohlin's most famous book was International and Interregional Trade. Indeed, the principles behind them are deeply linked.
Given all this why then did I go out on a limb to say it would not be Krugman? Well, I thought that since what Krugman was most famous for was applying the Dixit-Stiglitz model to both trade and geography, and Stiglitz already got his for asymmetric information, that paper was clearly deserving, and Dixit should get it. Also, and Krugman has recognized this, others beat him to the punch in applying Dixit-Stiglitz in applying it to trade, with some of the other "losers" mentioned by others being here among those. However, Krugman clearly applied it more thoroughly and widely and vigorously.
In a sense there is a bit of a comparison with the prize for Lucas here. He got it for applying rational expectations to macroeconomics. In the meantime, the man who invented rational expectations, John Muth, has never received the prize (although some would claim it was Jacob Marshak who did so).
Regarding the economic geography part of this, Krugman clearly was almost the first to apply Dixit-Stiglitz to the matter (although he was preceded in this by Masahisa Fujita of Japan, whose work he has cited and with whom he later coauthored works), and then took it very far as the remarks by Venables indicate (Venables has coauthored an excellent book with Krugman and Fujita also).
But, I must now confess that I wrote a very critical review of the book on this that Tyler praises, Development, Geography, and Economic Theory (1996 in JEBO). I had two complaints. One was that the Dixit-Stiglitz heterogeneous goods model from monopolistic competition is not in fact the main source of agglomeration economies in actual regional economies, although Krugman defended his use of this model in that book by arguing that it was useful for providing a rigorous mathematical model, which it does. He compared himself to the person who provided a map to "darkest Africa" when those who had written of it earlier could only vaguely speak of it in words.
My other criticism, connected to the first, was that there had been a long literature in the 1980s that did mathematically model agglomeration economies (not using Dixit-Stiglitz) that he never cited, in contrast with his citing of the use of Dixit-Stiglitz by others before him in trade theory and by Fujita in urban and regional economics. However, most of this literature was by physicists publishing in regional science or geography journals, such as Peter Allen, who was a student of Ilya Prigogine in Brussels, and Wolfgang Weidlich, who is an associate of Hermann Haken at the Institute for Theoretical Physics in Stuttgart. Krugman has never cited these people, and to be very blunt, I publicly called him out on this when he made a presentation at a session on complexity at the AEA meetings in the early 1990s (he was chairing the session and replied "we can discuss citations later, next question" [end of discussion]). Having made this rather snarky remark, I must admit a hard bottom line: it is very possible that Krugman never actually saw or read any of this literature, and certainly none of these people are as deserving of this prize as he is, due to his broader accomplishments (and if he did read it, he may have rejected their approaches as too "ad hoc," even if mathematical). However, at the time I thought it highly likely he was aware of it, which is what motivated the much more critical remarks I made in my book review, which I shall not repeat here, inappropriate as they would be on this day.
Because, in the end, I would say that this is indeed like the award to Lucas. Paul Krugman may not have been the ultimate originator of the ideas for which he is being cited. But he has certainly done a much better job of working them out thoroughly and applying them more broadly than anybody else, indeed following on Sweden's Ohlin in making that deep link between trade and regional economics. Also, I have long said that he deserved the prize for his foreign exchange rate models, so I do not at all mind seeing him receiving it, even if I forecast he would not get it this year. So, Paul, assuming you are reading this, much congratulations (and keep up the good work on your commentaries on the current crisis situation).
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