Wolfgang Kerler

Paul Krugman, a professor at Princeton University who is best known for his New York Times columns — frequently involving scathing assaults on the policies of the George W. Bush administration — was awarded the 2008 Nobel Memorial Prize in Economic Sciences for his research on international trade and economic geography.

The Royal Swedish Academy of Sciences, which administers the award, said it was bestowed on Krugman “for his analysis of trade patterns and location of economic activity”. “This was definitely a ‘real world’ pick and a nod in the direction of economists who are engaged in policy analysis and writing for the broader public,” Tyler Cowen, professor of economics at George Mason University, commented on his weblog “Marginal Revolution”. Krugman found new ways to explain what goods are produced where, and how capital and labour are distributed over countries and regions.

Most of the discussion going on on the Internet after the announcement of the prize, however, was not about Krugman’s scientific achievement, but strong positions he took as a columnist, author and blogger.

Back in 2000, a year after he joined The New York Times, Krugman spent a great deal of effort “trying to alert readers to the blatant dishonesty of the Bush campaign’s claims about taxes, spending and Social Security”, as he wrote in a column this year. A staunch critic of the Iraq war, he has repeatedly cautioned against a potential victory for John McCain in Nov. 4 US elections.

Just recently, Krugman stressed that “the Obama campaign is wrong to suggest that a McCain-Palin administration would just be a continuation of Bush-Cheney. If the way John McCain and Sarah Palin are campaigning is any indication, it would be much, much worse.” Many observers are now wondering if the decision of the Swedish commitee is sending a political message.

Starting with a short article published in the Journal of International Economics in 1979, Krugman has lifted the theory of international trade to a new level. While traditional theories were based on differences among countries that make them specialise and trade with other countries, Krugman found an explanation why a car-producing country is not only exporting cars but also importing them.

First, it is about economies of scale: Because mass production diminishes the per unit price of production, it is lucrative for companies to produce many units of a specific good — and therefore develop their own brand. Second, it is about consumers’ lust for diversity, especially in highly industrialised rich countries: They simply want to chose between a large number of brands. So while one country may produce luxury cars, another one may build smaller vehicles. And due to lower prices and greater product diversity, wealth and prosperity are increasing for people in both countries.

With his “new economic geography”, Krugman showed the distribution of work and capital across regions depends on the trade-off between utilising economies of scale and saving on transport costs. Today’s process of urbanisation can be explained with Krugman’s theory. The domination of successful, large countries can also be explained through his findings as economics of scale, lower prices and diversity of products are easier to achieve there.