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People in Economics - Economist as Crusader - Finance & Development, June 2006 Page 1 of 6 A quarterly magazine of the IMF June 2006, Volume 43, Number 2 People in Economics Search Finance & Development Economist as Crusader Search Advanced Search Arvind Subramanian interviews economist Paul Krugman About F&D Economics made Paul Krugman famous. Punditry has made him a celebrity, famous Subscribe for being famous. But Krugman aspires to be long remembered, and, in this respect, John Maynard Keynes is the gold standard. Keynes left his mark in three distinct Back Issues ways: through the power of ideas, through the art of public persuasion, and through Write Us the shaping of historic changes. This last is denied to all but those who find themselves at the right place at an epochal time. But on the first two scores, at least, Copyright Information Krugman may well become the first person outside the field of literature to win both the Nobel and Pulitzer Prizes, the acme of achievement in academics and journalism. Free Notification The dismal science has produced many versatile economists. Other giants of the 20th century, such as John Hicks, Ken Arrow, and Paul Samuelson, sparkled in Receive emails several fields. Within international economics, though, specialization has tended to when we post new be the rule. Bertil Ohlin, Eli Hecksher, Jagdish Bhagwati, and Elhanan Helpman items of interest to you. made seminal contributions in the field of international trade. International macroeconomics has seen many that fall somewhere between the great and the very Subscribe or good, including Robert Mundell, Rudi Dornbusch, Michael Mussa, Maurice Modify your profile Obstfeld, and Kenneth Rogoff. But Krugman, like James Meade, is a rare economist whose accomplishments at the highest level span both of these subfields. He opened up the study of trade under increasing returns and imperfect competition and later resuscitated the study of economic geography. And his work on currency crises and exchange rates has been highly influential. In 1991, he was awarded the John Bates Clark medal in recognition of his "significant contribution to economic thought and knowledge." The cognoscenti know that this honor, which is awarded once every two years to an economist under 40, is a little more difficult to win than the annually awarded Nobel Prize. Then there is Krugman the communicator. From writing "Greek letter" academic papers, he moved on to conveying economic ideas to the wider world (see Box 1). His Age of Diminished Expectations and Peddling Prosperity filled the gap between the boringly descriptive genre of "up-and-down economics" books and sensationalist and shallow "airport economics" books. Age of Diminished Expectations, commissioned by the Washington Post, ended up being not just an http://www.imf.org/external/pubs/ft/fandd/2006/06/people.htm 5/30/2006 People in Economics - Economist as Crusader - Finance & Development, June 2006 Page 2 of 6 analysis of the U.S. economy in the postwar period but also a cracklingly lucid primer on international economics. Peddling Prosperity was an incisive and opinionated account of the history of economic ideas. Both books also worked as parables, illustrating Keynes's nostrum that the use and abuse of ideas are the most "dangerous for good and evil." Box 1 Sharp words Jagdish Bhagwati tells the story of Krugman's first summer job as his research assistant at MIT. "I was in the middle of a paper on international migration. I gave Paul an outline of my thoughts—when he came back, he already had a finished paper, and I could not change even a comma! So I gave him the lead authorship." Princeton's Avinash Dixit has said that if Krugman were not so valuable to academics, "we should appoint him to a permanent position as the translator of economic journals into English." Indeed, Krugman is perhaps without peer among economists in the clarity and sharpness of his prose. Commenting on the changing rationale for the tax cuts of the Bush administration, he called them "an obsession in search of a justification." His recipe for the Japanese deflation of the early 2000s was aggressive monetary expansion, and he called upon the ultraorthodox Bank of Japan to "credibly commit itself to being irresponsible." Keynes's famous remark "In the long run we are all dead" is more widely quoted than understood. Here is how Krugman explains it: "What he meant was recessions may eventually cure themselves. But that's no more a reason to ignore policies that can end them quickly than the fact of eventual mortality is a reason to give up on living." He raised questions about the plausibility of real business cycle theory by asking, "If recessions are a rational response to temporary shocks in productivity, was the Great Depression really just an extended, voluntary holiday?" Krugman as public persuader was so successful that the New York Times offered him an op-ed column, the most prestigious piece of real estate in mainstream U.S. journalism. Almost by accident, he moved from demystifier of arcane economics to hard-hitting political commentator. One of his former teachers, Jagdish Bhagwati, tells F&D, "We were all pleasantly surprised that Krugman has been able to play the Mike Moore of the economics profession." Another teacher, Nobel Laureate Robert Solow, calls his former student "an all-purpose pest to the Bush administration." To many on the right, Krugman has seemed a shrill partisan who makes repetitious whining his stock-in-trade. But to others, he is now a cult figure: a brilliant and prescient analyst and, more important, a man of courage who stepped up to the plate in the aftermath of 9/11, when his fellow journalists became derelict in their duty to question, probe, and dissent. Powerful ideas Born in 1953, Krugman grew up in the New York suburbs, earning an undergraduate degree from Yale and a Ph.D. from the Massachusetts Institute of Technology (MIT). Although initially drawn to history, he soon embraced economics because, as he has put it, while history could answer the how and when, economics could answer the why. A 1978 conversation with his teacher Rudi Dornbusch sparked a decision to work http://www.imf.org/external/pubs/ft/fandd/2006/06/people.htm 5/30/2006 People in Economics - Economist as Crusader - Finance & Development, June 2006 Page 3 of 6 on increasing returns—the notion that a firm's unit costs decrease as its scale of production increases—marking a defining moment in his career. At Boston's Logan Airport a few months later, the eureka moment came when he cracked the mathematical problem of incorporating increasing returns and imperfect competition into trade models. In the summer of 1979, he presented his results at the Summer Institute of the U.S. National Bureau of Economic Research. "It was the happiest 90 minutes of my life," he tells F&D. He knew he had wowed his demanding peers. Krugman believes that this breakthrough is his biggest achievement. The idea of increasing returns has been around in economics at least since Adam Smith, as has the inference that competition and international trade are affected by it: in particular, increasing returns are incompatible with the assumption of perfect competition that forms a basis of traditional trade theory. Krugman was one of the first economists to incorporate increasing returns and imperfect competition explicitly in trade models (he notes that these ideas were developed simultaneously but independently by two other researchers, Victor Norman and Kelvin Lancaster). This move represented a radical departure. Indeed, it was so radical that one of his early papers was rejected by the top journals, but Bhagwati, playing editor as deus ex machina, published it in the Journal of International Economics despite the verdict of two very negative referees. Krugman's increasing returns papers were powerful partly because they explained a simple but uncomfortable fact about international trade: in the postwar period, a large and increasing share of trade occurred not between rich and poor countries but among the rich, and involved countries importing and exporting similar goods like cars, machines, and cereals, the so-called phenomenon of two-way trade. Such trade between countries with similar endowments is difficult to reconcile with traditional trade theory. But increasing returns showed that countries could specialize in different varieties of goods, leading countries to simultaneously export and import different varieties of similar goods. From the confines of positive economics ("what is"), the theory of increasing returns was developed and extended into normative ("what ought to be") terrain by Krugman (along with Helpman, Barbara Spencer, James Brander, and others) as the strategic trade theory. This extension led to controversial policy conclusions that appeared to support government intervention, contributing to perceptions of a certain schizophrenia in Krugman's position on free trade (see Box 2). Box 2 A free trader or a protectionist? It is hard to argue with the perception that Krugman is conflicted on trade policy. His work on strategic trade theory suggested novel and controversial policy conclusions against free trade, which, he now concedes, he was tempted early on to exploit in an effort to showcase the theory. In his 1987 article "Is Free Trade Passé?" he pronounced that free trade had "irretrievably lost its innocence" and that "it can never be asserted as the policy that economic theory tells us is always right." But the very individuals of whom he was so dismissive—Robert Reich, Lester Thurow, and Robert Kuttner—aggressively peddled the interventionist policies legitimized by his work, especially vis-à-vis Japan in the late 1980s, in ways that he thought misguided. Any satisfaction in seeing his work informing the policy debate was replaced by outrage at the appropriation of his ideas by these "policy entrepreneurs" (whom he has described as "intellectually dishonest self-proclaimed experts who tell politicians what they want to hear").