Wednesday, December 10, 2008

On Krugman's Nobel Prize Speech

One can access Paul Krugman's Nobel Prize speech at In it he gives a pretty clear description of the new trade and new economic geography approaches, with some interesting discussion of how this fits with the broad history of urbanization in the US. Unsurprisingly he once again fails to cite important predecessors of these ideas, with him basically deserving credit for linking them and doing a good job of publicizing them with his clear models. The two names not mentioned that most deserved to be were Avinash Dixit, co-developer of the Dixit-Stiglitz model that is the key to "Krugman's" theories, with Krugman briefly noting that the theory ultimately came from industrial organization. The other was the first person to apply the Dixit-Stiglitz model to economic geography, who would be Masahisa Fujita, 1988, "A monopolistic competition model of spatial agglomeration: a differentiated product approach," Regional Science and Urban Economics, vol. 18, pp. 87-13124. Krugman is a better writer than the Japanese Fujita, but Fujita has done far more innovative work in this area than Krugman ever did, which I think Krugman knows as he later coauthored with Fujita, even as he did not cite him in his much cited 1991 paper in the JPE that used the same approach as Fujita. Having Dixit and Fujita share the prize with Krugman would have been appropriate and also given the prize to someone from East Asia for the first time. I hope that Krugman finally gets it right for the written version of his speecch and cites the even longer list than this of people who preceded him and deserve recognition for it by him. The model here is Stiglitz, whose reference list for his Nobel Prize speech paper goes on for 13 pages in the AER.

As for his remarks on the auto industry in Detroit, in the end his only explanation is that wages and medical care costs are too high in Detroit compared to the Deep South (no mention of legacy pension costs). Supposedly he was going to explain the problems of the auto industry in Detroit by his theory, which supposedly explains "agglomeration," but he made no reference to his theory other than a vague statement that economies of scale are declining, which supposedly has been going on since about 1965, according to him. However, how or why they have been declining was not explained by him. This rather puts to shame his bragging that he has explained "agglomeration," in contrast to all those pathetic people prior to him, whom he assiduously avoids citing, except for a couple of ancient scribes who used no math, so he can present himself as the great savior who uses math to lead us all to enlightenment regarding these important matters. If Detroit arose because of the factors laid out in his model, he does not say how this happened nor how they stopped holding so that Detroit is now doomed. Blaming high wage and medical care costs amounts to nothing more than de facto union bashing with no link to any version of his model discernible at all. A pretty pathetic performance all in all, especially after he went after Brian Arthur some years ago in Slate for supposedly overselling his role in describing increasing returns, which took Kenneth Arrow to come in and defend Arthur, noting that he, unlike Krugman, actually cited his appropriate predecessors.


Anonymous said...

I made a few comments when Krugman got the (non)-Nobel which noted that he is very much a neo-classical synthesis Keynesian. Which means he ignores market power, class, time and such like in his little stories

On Paul Krugman

I'm currently working on a review of his last book (The Conscience of a Liberal) which will, in part, contrast his arguments in that with his introduction to economics textbook.

All in all, he has progressed somewhat but he still is mired in neo-classical assumptions...

An Anarchist FAQ

Barkley Rosser said...

I am not surprised. A crucial factor here is David Colander's "Rule of 15%," which says that if one wants to write a successful textbook in a field, it cannot deviate by more than 15% from the norms of the existing leading textbooks. Otherwise, professors teaching in the field will not adopt it, a major source of intellectual inertia.

Greg Mankiw may have been more notorious than Krugman in this. When he was Bush's CEA Chair, he spouted ideological nonsense about fiscal policy that blatantly contradicted things in his widely used intermediate macro textbook. In the case of Krugman, it is his Principles textbook having to conform to orthodox norms, while this other book shows him deviating more from them.

kevin quinn said...

In commercial society, as Smith noted, every man is in part a merchant. It's an old story in the history of economic thought that those who never tire of repeating how ground-breaking their work is - whether it is or isn't - get the applause, while those who do ground-breaking work but neglect to hawk it, thinking it will speak for itself, or perhaps not even realizing how ground-breaking it is, are neglected.

Daro said...

To his credit Krugman got his predictions on Japan in the late 90's exactly right while the whole Japanese government went the other (wrong) way. But his rah-rah support for NAFTA has shown up to be a very poisoned seed. Everyone could see it was a good idea theoretically but practically it would just eviscerate American industry. He's ameliorated/ fallen quieter on the issue now but there's a lot of broken people shuffling down barren streets in the US for reasons he's championed.
Stiglitz should've won it again(!) if only for his prescient predictions on the coming depression. said...


Agreed, unfortunately.


Krugman was very acute on both Japan and East Asia more generally in the 1990s. However, I am less convinced than you are that NAFTA was such a terrible disaster for American workers. Some lost jobs but others gained them, with the evidence pretty mixed on the net outcome, but no obvious net disaster.

Regarding Stiglitz, I will say that I think that both he and his co-winner, George Akerlof, deserved to receive the prize by themselves more than Krugman did. Of course, the model that Krugman got the prize for for applying to trade and location theory (after others did so before him) is one co-developed by Avinash Dixit and Joseph Stiglitz in 1977, the Dixit-Stiglitz model, and it would have been appropriate to have recognized Dixit at this time.

Unknown said...

on the NAFTA scorecard, it's important to look beyond the net jobs question. The "giant sucking sound" was in falling and flat wages, not net jobs.

TheTrucker said...

I think the correct take on NAFTA (or maybe it was so without NAFTA) was that American Financiers were able to consolidate the small subsistence businesses (mostly small farms) in Mexico and this drove the people northward seeking jobs and income. And consolidation is more the reason for depressed wages in Mexico and here than anything else.

Mexico is Prop 13 on steroids. said...

Well, on NAFTA, and we have been through this a lot of times, the big losers were indeed the small corn farmers on the former collective farms, the ejidos, who lost their subsidies and their protection under Salinas, while US corn farmers got to keep theirs, since goosed up by the ethanol subsidies. That was the industry hurt worse than any other in any country in NAFTA, and its victims were the poorest people in all three countries.

The downward pressure on wages came more from trade and outsourcing with China and India than with Mexico.