This week’s econtalk is a monologue by Russ Roberts on the topic of trade. My one quibble is that he brings up increasing returns as a source of specialization and trade without mentioning Paul Krugman’s work on the topic. That is, after all, the work for which he received his Nobel Prize.
Overall, Russ does a really good job of explaining how important trade is to wealth.
Feb 8 2010
Megan McArdle writes, One estimate is that the cheapest iPad costs $270 to manufacture. Throw in advertising, transportation, distribution, and so forth, and maybe they can cut the price $100 if they're willing to make a slim profit in order to establish a market. Of course, there's probably more room on the high-en...
Feb 8 2010
In a post a few weeks ago, I stated that I had coined a term in 1994 to describe the effects of a ban on pre-existing conditions clauses in health insurance: adverse selection by law. This weekend, I was going through some old files and found the 1994 op/ed. I hadn't used that term. Instead, I had used the term "adv...
Feb 8 2010
This week's econtalk is a monologue by Russ Roberts on the topic of trade. My one quibble is that he brings up increasing returns as a source of specialization and trade without mentioning Paul Krugman's work on the topic. That is, after all, the work for which he received his Nobel Prize. Overall, Russ does a reall...
READER COMMENTS
Doc Merlin
Feb 8 2010 at 3:05pm
Actually its not just increasing returns to scale from trade. Advanced countries also have increasing returns to scale from population growth for much the same reasons.
Daniel Kuehn
Feb 8 2010 at 3:48pm
It’s a very Smithian story, and unfortunately both Russ and his colleague Don at Cafe Hayek have trouble sharing ownership of Smith – particularly with someone like Krugman.
Russ Roberts
Feb 8 2010 at 4:26pm
Arnold (and Daniel Kuehn):
My understanding of Krugman’s work is that it’s about external economies that arise from concentration of an industry in one location or place. It’s also my understanding that while some have used this work to justify various subsidies to particular industries, Krugman did not support those efforts.
Don’t know much about Krugman’s work. Happy to learn what is Smithian about it or how it relates to the micro story that I understand Smith to be telling.
Greg Ransom
Feb 8 2010 at 9:53pm
Arnold Kling, meet Avinash Dixit and Masahisa Fujita, economists produced much of the original theoretical work for which Paul Krugman was awarded the the Nobel Prize — as explained by Barkley Rosser:
“Avinash Dixit [is the] 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 [person of special note in this literature] 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.”
Greg Ransom
Feb 8 2010 at 9:59pm
Alternatively, as I understand him, Barkley Rosser is saying that Avinash Dixit and Masahisa Fujita produced the pure theory that stands at the center of the economic reasoning that won Krugman the Nobel Prize.
If this is not what Rosser is saying, I would happily stand corrected.
Norman
Feb 8 2010 at 10:23pm
It’s true that Krugman built his model based on the work of some eminent economists. However, Krugman’s application (which did consider economic geography, although his earliest work was more general and served as the foundation of modern gravity models) was novel and ill-respected at the time. The models were viewed as too simple, despite the fact that they led to real insight and fit the trade data better than any alternatives. To this day, gravity models are the only trade models that fit the international trade data well.
Which is to say, Krugman was incredibly talented and insightful back when he was an economist. Credit where credit is due.
Christian
Feb 8 2010 at 11:02pm
In response to R. Roberts:
1) I think Krugman has said that he supports free trade, but not for Ricardian reasons. That the theory of welfare gains of trade depend on full domestic employment. There is a theoretical case to be made for protectionism, but he still thinks free trade is ultimately the better choice.
2) In his Nobel lecture, I think Krugman said that the old trade theory might fit the world now better than the new trade theory, although new trade theory explained postwar patterns better.
3) What is Smithian is the increasing returns similar to the division of labor. I think Krugman would support the interventions that Smith does to promote non-economic values.
Daniel Kuehn
Feb 9 2010 at 7:36am
Russ –
It’s been a couple years since I’ve read any of Krugman’s work on trade, but my understanding is the concentration of industry is the impetus for the Smithian insight – for Krugman it’s mostly a story about specialization and the division of labor. There’s also a great deal of emphasis on spillovers, which I suppose is more of a Marshallian insight – but even those spillovers are often attributed to things like local expertise of a skilled labor force. So even the spillovers get back to a specialization and division of labor story.
I think this was connection between concentration and division of labor was very common in early works on political economy. They really felt like they were explaining the entire process of modernization and industrialization: not just economic development, but also urbanization and the concentration of populations (which is obviously still an important facet of the economic development literature). In an urbanized economy, this connection between urbanization, specialization, and the division of labor is often ignored, but I think it was a very central point for earlier writers.
I also understand his views on subsidies the way you do. I do recall he remarked on the ability of developing countries to leverage these scale economies by jump starting an industry (I seem to recall a discussion of the South Korean shipbuilding industry, in that regard), but that’s obviously not a blanket approval of subsidies. I think there’s a small case for an infant industry sort of approach for developing countries, or perhaps for an emerging industry – but I don’t think you can justify much beyond that (if you can even successfully justify that).
Daniel Kuehn
Feb 9 2010 at 7:41am
Christian –
On your #2, he makes this point in his Nobel lecture if anyone is interested – that ironically it was as he was doing his work in trade theory that the trade patterns began to shift back to older trade patterns.
I really don’t know much about trade theory – does this have something to do with floating exchange rates? Does anyone know the reasons for the shift?
AHBritton
Feb 10 2010 at 3:31am
Greg Ransom,
I’m not sure if you are trying to cast aspersions on Krugman’s award, but I have read Barkley Rosser talk about Krugman being deserving, saying that it should have maybe been awarded jointly with others, and thinking maybe other research (such as Krugman’s Research on modeling Foreign exchange rates) might be more deserving. It seems like since his first statements he’s gotten more peeved. Although personally it seems like because of things Krugman has recently said in the nyTimes and that he’s attacking the Nobel Prize thing out of spite. For instance he wrote a blog “Revoke Krugman’s Nobel Prize, because of an argument he makes for protectionism in the Times. That’s just my, albeit limited, interpretation and a lot of ow guys would probably know better than me.
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