People in Economics
Economist as Crusader
By Arvind Subramanian in interview with economist Paul Krugman
International Monetary Fund
See Box items at:
http://www.imf.org/external/pubs/ft/fandd/2006/06/people.htm
Economics made Paul Krugman famous. Punditry has made him a celebrity, famous
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 ways: through the power of ideas, through the art of public
persuasion, and through 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, 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.
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
several fields. Within international economics, though, specialization has
tended to be the rule. Bertil Ohlin, Eli Hecksher, Jagdish Bhagwati, and
Elhanan Helpman made seminal contributions in the field of international trade.
International macroeconomics has seen many that fall somewhere between the
great and the very good, including Robert Mundell, Rudi Dornbusch, Michael
Mussa, Maurice 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
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."
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
on increasing returnsthe notion that a firm's unit costs decrease as its scale
of production increasesmarking 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).
On the macroeconomic front, Krugman developed the "first generation model" that
locates the causes of currency crises in unsustainable government policies.
Borrowing both the idea and the mathematical technique from the commodity price
stabilization literature, he showed how and when a pegged exchange regime would
be subject to a fatal speculative attack by investors. When the paper was first
written, MIT's Dornbusch did not fully understand itnor, apparently, did
others because it found a home only in a lesser journal. Krugman faults the
paper's craftsmanship and wishes he had written it differently. Still, it has
come to be hailed as a groundbreaking study. Krugman also deserves credit for
outlining the basics of the "third generation model" of currency crises, in
which unhedged foreign currency liabilities play a large role in causing and
transmitting crises.
Krugman's exploration of currency target zones in the late 1980s was considered
clever and published in the prestigious Quarterly Journal of Economics.
History's verdict has, however, been less generous, in part because the study's
key predictionthat currencies stabilize as they approach the extremes of the
target zoneshas not found empirical support.
Similarly, Krugman's pioneering work on trade and geography, which showed a lot
of early promise and continues to spawn an industry of academic papers (it is
his most frequently cited work), has not quite caught fire in the broader
public debate. Again, the key idea about external economiesthe benefits to one
firm of activities by another firmhad been described by the Cambridge
economist and teacher of Keynes, Alfred Marshall. But Krugman found a way of
formalizing this idea and derived some interesting implications, namely, that
spatial patterns of development can be arbitrary and that historical accidents
can have long-lasting effects. Silicon Valley (near San Francisco) and Route
128 (near Boston), both U.S. technological centers, are classic cases of
agglomerations having idiosyncratic origins.
It is one of the ironies of Krugman the economist that for someone who said,
"The point . . . is to wear one's technique lightly," his biggest contribution
may well be that he provided the technique or language for discussing economic
ideas and problems rigorously and sensibly. The contribution was immense
because it allowed powerful ideas such as increasing returns and external
economies, which had been around for some time, to be mainstreamed. It allowed
models to replace metaphors as the basis for analysis. Without models,
"guesswork is all that we have to go on, and those who discipline their guesses
with models are more reliable than those who fly by the seat of their pants, no
matter how well tailored." Krugman's style of building mathematical models is
famously spartan and simple and occasionally even simplistic in its
assumptions. But his sharp wielding of Occam's Razor (the principle that
explanations should be as simple as possible) was so successful that the term
"Krugmanesque" may yet enter the economics lexicon as the standard to which
mathematical models aspire.
Economist as pundit
Krugman's academic output, unlike that of some others, did not head
dramatically south after the John Bates Clark award. But the frenetic pace did
slow down because, as he explains honestly, "You begin to wonder about the
value of yet another paper even if it finds its way into a good journal. You
also begin to doubt your ability to be creative and come up with really big,
lasting ideas." And with his reputation as a communicator starting to soar,
academia perhaps took a natural backseat.
Over the past five years, Krugman the columnist has overshadowed Krugman the
economist. Has it been worth it? Krugman accepted the New York Times offer late
in 1999, very much expecting to continue the vocation he had stumbled into over
the years of writing on economics for the general public. Indeed, his initial
columns were focused largely on such standard economics fare as the new
economy, globalization, and fiscal deficits.
But after 9/11, and especially after the war began in Iraq, Krugman judged that
his comparative advantage had shifted from being an economist to being a
political commentator. He was willing to see things differently because he was
not an insider infected by groupthink or the "contagion of mutual imitation"
(as the Indian poet Rabindranath Tagore put it). The typical insider ("the
commentariat") needs "sources" to get information, becomes compromised, and
hence is less prone to ruffling feathers. Krugman, by contrast, had the
comparative advantage of distance from Washington, D.C., and a full-time job
that gave him the independence to be "unrestrained by deference," he explains.
He could also do the "budget arithmetic" on his own. So, to him, the normal
journalistic ethic of balance and moderation, which he disparagingly dubs
"he-said-she-said journalism," was less a virtue than an intellectual
shortcomingan unwillingness or inability to process information independently
and come to considered conclusions.
Krugman counts a number of successes in his stint as a journalist: revealing
market manipulation by insiders as the real cause of the California energy
crisis some years before anyone else; challenging Alan Greenspan's iconic
status when he appeared to bless the Bush administration's tax cuts ("Et tu,
Alan?" was the title of one of his columns); and exposing weaknesses in the
economic policies and arguments of what he calls the Bush administration's
"fuzzy math." The broader success, in his estimation, is a sense of vindication
because his opinions, considered beyond the pale in the years following 2001,
have now become mainstream. But Krugman thinks he might have paid too high a
personal cost in enduring the personal and professional attacks on his
credibility for his political writings. Gone are the days when his biggest
worry was the state of his basement.
The reaction of some fellow economists to Krugman the columnist is often, "Ah,
when Krugman used to be Krugman," combining a wistfulness for his brilliance
with doubts about his current polemics. Solow calls Krugman's decision to
become a full-time columnist a "big sacrifice" because he believes his former
student has "so much good economics still left in him."
Does Krugman the economist have any regrets? He wishes he had done a greater
amount of serious empirical work. He also wishes he had produced some really
great students, a tribute to his own mentorsincluding Bhagwati, Dornbusch,
Solow, Bill Nordhaus, and James Tobin. At Princeton University, which is his
home after years at MIT, he says he is being a good citizen, taking on a full
load of teaching. But he does not regret missing out on a White House post in
1992 (see Box 3) and doubts he will ever want to be a full-time Washington
policymaker. "I just don't have the right temperament, I don't want to wear a
suit every day, and anyway, I think I do more good on the outside."
Krugman's abiding belief, like that of Keynes, is that ideas matter and matter
a lot. The role of public intellectuals is less to come up with good ideas,
which is fiendishly hard, but more to serve as a watchdog to get rid of bad
ideas and prevent their coming back. There are more bad ideas and more
purveyors of bad ideas than their benign counterparts. And the asymmetry is
further compounded because, in Yeats's words, "The best lack all conviction,
while the worst are full of passionate intensity." In Paul Krugman, we have the
very best, with conviction and passion, rendering the struggle between good and
bad ideas, and between disputation and acceptance,
a little less unequal.
o o o o
Arvind Subramanian is a Division Chief in the IMF's Research
Department.
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