Monday, October 13, 2008

A Sad Day For Economics

Paul Krugman has won this year's Nobel Prize. Okay, pinch yourself. Never mind the numerous individuals whose work has advanced the profession of economics and contributed to our stock of knowledge (my pick was Alchian and Demsetz).

Is this just one more reason to fear that the Age of Milton Friedman is coming to an end? The worldwide growth experienced over the past decade began with ideas influencing politics. Thacher, Regan and Xiao Peng liberalized markets and trade, insired by the likes of Milton Friedman and F.A. Hayek. Despite public choice problems of reform and good economics (which Friedman and Hayek understood) - ideas matter. What will the results of "strategic trade theory" if protectionism is the mechanism for increasing returns? Since when did an economist when the Nobel Prize for contradicting Adam Smith? Aren't increasing returns realized through the division of labor, the division of labor being limited by the extent of the market!


Thomas said...

Wait, I'm confused - the WSJ articles I'm reading say Krugman was a free trade advocate: ("In his popular writing, Paul Krugman is at his best when defending free trade.")

Emily C. Schaeffer said...

Yes, in his op-eds Krugman did not always outright advocate protectionism. (Notice the article you quote says, when he was at his best.) Krugman did however advocate trade regulation, which to me counts. Moreover, he never gave any credence to public choice problems. For example:

"The president of the United Fresh Produce Association says that the industry’s problems “can’t be solved without strong mandatory federal regulations”: without such regulations, scrupulous growers and processors risk being undercut by competitors more willing to cut corners on food safety. Yet the administration refuses to do more than issue nonbinding guidelines." - Krugman, NYT 2007

But more importantly (for issues of economic science over ideology and politics) in his academic work, this was one implication from his strategic trade theory research on increasing returns and implications of welfare enhancing protectionism.