Paul Krugman: The Nobelist Blogger

The Royal Swedish Academy of Sciences has decided to award the 2008 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel to Professor Paul Robin Krugman (born 1953).

Krugman belongs to a generation of "activist" economists, such as Larry Summers, Glen Hubbard, and Ben Bernanke: scholars who held or hold senior positions in various American administrations. As opposed to them, Krugman is more of an intellectual: he constructs mathematical models of real-life economic phenomena and writes and publishes profusely in the media. He is a cherished teacher and author of a textbook on international economics.

When asked why he was never offered a high-ranking job, he answered: "I'm temperamentally unsuited for that kind of role. You have to be very good at people skills, biting your tongue when people say silly things."

His main contributions to the discipline deal with international economics. Currency crises, he postulated, are the inevitable and rational outcomes of misguided government policies. Consumers appreciate diversity and variety of goods and services.

And, most famously:

Economies of scale in manufacturing provide countries with a comparative advantage in international trade that is every bit as important as the comparative advantage gained from technological advances and from access to resources (natural endowments, labor, or capital). This "New Trade Theory" made his name and won him the coveted Nobel Prize.

New Trade theory also forms the foundation of the discipline of "New Economic Geography". In the words of the prize committee, Krugman's work helps explain "(w)hy do increasing numbers of people flock to large cities, while rural areas become depopulated? (W)hat goods are produced where ... (What are) the forces whereby labor and capital become located in certain places and not others."

New Economic Geography teaches us that workers in countries with large populations enjoy higher real wages. This is because the costs of producing goods are lower due to economies of scale. Prices are cheaper and diversity of good higher. This state of enhanced welfare attracts immigrants which makes production even cheaper. Firms invest in such countries, as they balance benefits from economies of scale against transportation costs.

Krugman is a great prognosticator: he predicted literally every major currency crisis in the past 10 years. He has an intuitive grasp of policy options. Thus, he understood early on that the "Asian Miracle" of the 1980s was merely the result of massive capital and labor infusions. He was among the first to foresee the gravity and scope of the current fiasco in the global financial system. He strongly believes in globalization and free trade, but is among the foremost critics of the corrupt confluence of multinationals with "cooked" books, special-interest groups, and political parties.

Krugman made no bones about his anti-Bush stance. He blamed the administration for all conceivable economic ills: from the widening income inequality in the United States to the unsustainable public sector deficits. The venerable (but conservative) magazine "The Economist" criticized him harshly:

"A glance through his past columns reveals a growing tendency to attribute all the world's ills to George Bush ...Even his economics is sometimes stretched...Overall, the effect is to give lay readers the illusion that Mr Krugman's perfectly respectable personal political beliefs can somehow be derived empirically from economic theory."

It is a good sign, therefore, that he is equally decried by Obama supporters. Being attacked by both sides literally guarantees his place as an honest and objective - and prescient - observer of our particularly turbulent times. Krugman is my favorite political-economic columnist precisely because he cannot be safely claimed by any party.