Global Strategy - blog

Paul Krugman was awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel "for his analysis of trade patterns and location of economic activity". While this prize is in each year given for an economist due to her/his notable earlier achievements, this tribute has also wider implications on the field. First of all, we may see it as recognition for the specific area of scholarly research; it pinpoints the topics and research results that are seen as providing significant advancement for our understanding of the economic activity. By so doing it also underlines the importance of related questions in the future research. One may even say that the prize helps to institutionalize certain research topics, approaches and theories both in- and outside of the academy. Thus, let us briefly consider some of such implications that Krugman's Nobel Prize could have.

Krugman's early studies in the 1970s were focused on modeling balance of payments crises and international trade. These contributions have had significant impact on the subsequent research. The theory of international trade, one of the core topics in international economics, continued to be Krugman's focus areas also in subsequent research. However, in the early 1990s he realized that what he was actually studying could be better defined as economic geography-the study of where economic activity take place and why. As Krugman considerers in his book ‘Geography and Trade' published in 1991, "If you had never looked at the theory of international trade, you might have supposed that international economics would also be largely treated as a special case of economic geography, one in which borders and the actions sovereign governments play a special role in shaping the location of production... that is how international economics ought to be done... But is almost never the way that it is done at the present".

Thus, Krugman's point was that countries are not dimensionless points within which factors of production can be costlessly moved and the trade among countries is not without transportation costs as normally modeled in international economy. According to Krugman "countries both occupy and exist in space". Building on this standpoint, he has published widely cited articles considering, for example, how a country can endogenously become differentiated into an industrialized core and an agricultural periphery and how globalization affects the location of manufacturing and gains from trade. In other words, he has showed that also in abstract modeling the location of economic activity deserves explicit attention.

This is a straightforward suggestion for future research that after his Nobel Prize will surely receive even more interest. But also more generally, it is likely to emphasize the importance of spatial aspects (locations among and within countries) in theorization of firms, exchange, and organization of economic activity in general. That is, topics that are also examined by several other disciplines than international economics. In fact, the approach advocated by Krugman, to link geography and economics, is likely to encourage future social scientific research to use more interdisciplinary perspectives.

In addition to modeling trade and locations of economic activity, Krugman has published several essays that have created widespread discussion, and also implications for future research. In an essay "Competitiveness: A Dangerous Obsession" (Foreign Affairs, March/April 1994) he points the problems related to the widely used analogy between firms and countries in terms of competiveness. According to Krugman, the core problem of this analogy is that firms and countries are very different kind of entities with different aims and goals. Thus, seeing competition between countries in similar terms as competition between firms is likely to lead bad economic policies. Today, as the term ‘protectionism' has returned to the financial news, this essay is surely topical.

Yet Krugman's essay "The Return of Depression Economics" (Foreign Affairs, January/February 1999) can be seen even more newsworthy amid the current finance crisis. Indeed, by recalling the lessons of the great depression of the 1930s, Krugman concludes that "sooner or later we will have to turn the clock at least part of the way back: to limit capital flows for countries that are unsuitable for either currency unions or free floating; to reregulate financial markets to some extent; and to seek low but not too low inflation rather than price stability". Certainly, the Nobel Prize is not going to silence the voice of these thoughts.