Paul Krugman win Nobel in Economics
- Widely anticipated -

Amar Yumnam *

This year I was betting on two names to win the Nobel Prize in Economics; one was Jeffrey Sachs and another is Paul Krugman. Well I have been right on the second.

With three scholars having won the Nobel for their contribution in Institutional Economics, someone from the most competitive alternate school was expected to win. It would have been proper if the Japanese economist and a very strong collaborator of Krugman, Masahisa Fujita, were to share the Nobel with him. This, however, does by no means reduce the claim of Krugman to the Nobel.

The 1953 born Paul Robin Krugman is one of the most respected by the professionals but hugely despised by his adversaries economist-intellectuals of the world. He was earlier at the Massachusetts Institute of Technology but now at Princeton University.

He is widely respected among the professional colleagues for his ability to think innovatively and widely popular among the students for his ability to make difficult concepts easily understandable. He would rank among the top five economists within the United States and one of the best fifty in the world. His most well known text is the one in its eight edition, International Economics: Theory and Policy.

He is widely popular for his regular columns in the New York Times. It is this column which makes him profusely feared and hated by the American administration, but the general public awaits for his regular insights.

Why The Nobel: The theory of location of firms has been around in Economics for quite a long time. But this was mainly a methods based approach rather than a full fledged theory of location. While it could explain the location of a single firm, it could not appropriately do so in the case of multiples of firms, what economists call industry.

In other words, while the location of a firm producing a single product could be explained, it could never satisfactorily account for the existence of more or less similar firms within a single location.

Why there are so many second hand book sellers in the College Street of Kolkata or Flora Fountain area of Mumbai? Or why so many book sellers in Daryaganj in Delhi? Still further the role of transport costs in the location of firms was not properly accounted for before Krugman came to the scene.

The main theoretical contribution of Krugman lies in trying to account for such unexplained phenomena and in the process providing an alternative school of thought, well grounded in theory, to the New Institutional Economics to explain the phenomenon of development.

His 1991 paper, 'Increasing returns and economic geography', Journal of Political Economy, Vol. 99, pp. 483-499, is considered to be the father of New Economic Geography, an active field of research today. For Krugman development is an accidental phenomenon.

As Krugman himself argues 'understanding why small random events can produce large consequences for economic geography is also crucial to understanding why underlying differences in natural geography can have such large effects'. The core periphery model of him is the work-horse of New Economic Geography.

An economy activity at any location and at any moment of time experiences two opposite forces. If the centripetal forces are stronger than the centrifugal ones, we have a core-periphery pattern wherein all the manufacturing activities would take place in a single region.

This would be a particular result if the economy is characterised by low transport costs, highly varied products and lumpy manufacturing expenditure. In fact, the credit for the whole new appreciation of agglomeration (centripetal) forces in Economics literature should go to Krugman and his co-workers.

The theoretical refinement and maturity of his work can be found in Masahisa Fujita, Paul Krugman and Anthony Venables, (1999), The Spatial Economy: Cities, Regions and International Trade, and the Masahisa Fujita and Jacques-Francois Thisse, (2002), Economics of Agglomeration: Cities, Industrial Location, and Regional Growth, Cambridge University Press. The latter book can be treated as the full-fledged exposition of the New Economic Geography.

Well the Asian financial crisis of 1997-1998 was not anticipated by any economist other than Paul Krugman. Again, being a strong critic of the Bush administration, he has been a strong critic of the policies which have led to the present global financial crisis emanating from the housing market in the United States of America.

The Nobel Prize in Economics this year has gone to the most deserving economist- a strong theoretician, outspoken (sometimes agonistic) commentator on US and international issues and a very powerful teacher and at the right time in history.