Monday, October 13, 2008

Krugman Did Not Win Because Of His Keynesianism

As many of you have heard now, Paul Krugman won the Nobel price in economics today. The "Information for the public" release from the Riksbank can be read here, the "scientific background" can be read here.

The award made Bill Anderson at the LRC blog furious because it could be seen as an endorsement of Krugman's Keynesianism and left-liberal political views. And he has a point in the sense that Krugman and some of his followers could abuse the award as an endorsement of his macroeconomic and political views. And for that reason this award is indeed bad news.

However, it must be emphasized that he did not win the award on account of his macro economics, much less his politics. As is apparent if you read the information release, what he receives the award for is his contributions to trade theory. And his ideas in that area really aren't that bad.

His main contribution is that he emphasized that contrary to traditional non-Austrian trade theory, trade need not arise because of differences in technology or relative endowment of production factors, but also because of economies of scale. This is really not a departure from the core idea of comparative advantage, but more an extension.

Similarly, his idea that trade arise because of preference for diversity of brands is correct, though not really revolutionary. The same thing goes for pointing out that if international trade is not possible, the bigger of two different countries will be richer. That is simply a result of the bigger country having a bigger intranational trade.

His final theory that he is awarded for is that if initially there are high transportation costs for manufactured products but no transportation costs for agricultural products and if there is free migration between regions for manufacturing workers but not peasants, then this will inhibit urbanization as it will be more profitable to move workers to rural areas to overcome transportation costs. And from this it follows that if these costs fall, those incentives will weaken and so encourage urbanization.

None of these theories are really seriously objectionable and although some of them had already been advocated by Austrians they weren't popular or even known among non-Austrians, so in that sense, Krugman is actually one of the more well-deserving winners in recent years. The only problem is the risk that it will be believed that he is awarded for his other ideas, those that are more well-known to the public.


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