Congratulations, Paul Krugman
By Arnold Kling
He wins this year’s Nobel in economics. Tyler Cowen has an excellent commentary and links.
Before Krugman, the only explanatory variable in international trade was factor endowments. You produced stuff because you happened to have the right type of land, or the right type of labor, or what have you. Moreover, there were diminishing returns, which meant that once location A had a large capacity to produce something, at the margin the next increase in production capacity for that product would likely be in location B.
Krugman suggested that there are increasing returns in an industry. That theory explains why movies are done in Hollywood, fashion is done in New York, autos are done in Detroit, and so forth. International trade patterns may owe more to historical accidents and path dependence than to factor endowments.
It is a classic contribution. In retrospect, it seems sensible and obvious. But until Krugman developed the argument, the rest of the economics profession was on a completely different wavelength.
UPDATE: I have a slightly longer tribute at Reason Online. I did NOT write the headline.