Modern Economical Thinkers: Paul
Krugman
Paul Krugman [10] (1953 - ) is an American economist. He won a Nobel Prize in
Economics for his theories in International Trade and Economic Geography. He
theorizes on how much trade there is and how integrated the world really is. Since
the 1970s, he has produced a set of revolutionary ideas that change the way
economists look at the world. In 1979 he published a paper that would come to be
known as “The New Trade Theory”. International Trade at that moment did not
explain why there was so much international trade between countries that were
similar. Why would countries like France, Japan or Germany, with similar
economies and no “comparative advantage”, all build cars and trade with each
other? He approaches the issue addressing economies of scale: if you increase the
amount of goods you produce, the costs don’t rise in proportion. Double the scale
of production and your cost won’t double. That means that once you are in the
business of producing something you can produce extra at relatively low cost. You
are likely to sell it to markets similar to your own because what the marketplace
really wants is choice: people benefit from variety. This works for consumer goods,
but also for machine, steel and virtually anything that can be traded. Once there is
this kind of variety, add the economies of scale and you will find that different countries are going to produce different varieties.
His work also led him to think about economic geography. This can help to explain
why population gather in certain places. Companies want to produce goods were
the market is large, and people want to move where goods are being produced. A
circular process develops in regions that have a head-start, since things keep on
building upon that head-start. People go where people are. Paul Krugman has
specialized in writing so as the general public could understand it.
Krugman identifies as a Keynesian and a saltwater economist, and he has criticized
the freshwater school on macroeconomics. Though he applies New
Keynesian theory in some of his work, he has also criticized it for lacking
predictive power and for hewing to ideas like the efficient-market
hypothesis and rational expectations. Since the 1990s, he has promoted the ISLM
model as invented by John Hicks, pointing out its relative simplicity compared
to New Keynesianism and continued currency in practical economic policy.
In the wake of the 2007–2009 financial crisis he has remarked that he is
"gravitating towards a Keynes-Fisher-Minsky view of macroeconomics." PostKeynesian
observers cite commonalities between Krugman's views and those of
the Post-Keynesian school. In recent academic work, he has collaborated with
Gauti Eggertsson on a New Keynesian model of debt-overhang and debt-driven
slumps, inspired by the writings of Irving Fisher, Hyman Minsky, and Richard
Koo. Their work argues that during a debt-driven slump, the "paradox of toil",
together with the paradox of flexibility, can exacerbate a liquidity trap, reducing
demand and employment.
Paul Krugman has been very critical of the US government, and is a recurrent
writer on US and World Economy in his column in the New York Times [11] .
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