Why Krugman Won The Nobel

Dixit_smallerThe very brilliant Avinash Dixit (© voxEU.org)in Vox:

The traditional theory of international trade was cast in the traditional framework of microeconomic theory, namely perfect competition. Differences among countries in their endowments of factors of production and in their technologies explained trade. A relatively labour-abundant country would have a comparative advantage in producing goods that required relatively more labour in their production, and would export these goods so long as the country did not have an even greater bias toward consuming exactly the same goods. The outcome, as so often with perfectly competitive markets, was efficient resource allocation; each nation stood to gain from trade.

By the early 1970s, this picture was increasingly thought to be anachronistic. Trade in perfectly competitive markets, where thousands of producers of cloth in England and wine in Portugal traded their goods, seemed a poor model of trade with two or three giant firms making aircraft or computers. Voices for protectionism are always looking for arguments they can voice; they could now claim that traditional theorems on gains from trade did not apply to this modern reality. A new theory for this new world was needed.

Krugman was the undisputed leader of the group that took on this task. To quote and paraphrase Stephen Jay Gould (The Flamingo’s Smile, pp. 335, 345), Krugman has won his just reputation because he grasped the full implication of the ideas that predecessors had expressed with little appreciation of their revolutionary power. He had the vision to make the idea work in two ways, using it to make new discoveries and by recognising its implications as a far-reaching instrument for transforming general attitudes.