Monday, October 13, 2008

The Nobel Prize: It's All About President Bush

You have to wonder what's going on in the minds of the American press when you read something like this:

President George W. Bush, whose approval ratings are at historic lows as the U.S. veers toward a recession or worse, got yet another thumb in the eye when one of his most vociferous critics was awarded the Nobel Prize in economics.

While Princeton University Professor Paul Krugman was honored ``for his analysis of trade patterns of and locations of economic activity,'' he's more widely known for twice-weekly columns in the New York Times and appearances on television, in which he regularly attacks the president on the war in Iraq, his tax cuts and other issues.

Nobel Prize to Arch-Critic Krugman Is Blow to Bush

As we've noted following Al Gore's Nobel Peace Prize last year, if one were to take these headlines seriously, the Nobel committee, which is made up of people from all over the world, have nothing better to do than honk off the ignoramus who runs our country.

The Bloomberg article finally goes on to note that Prof. Krugman was awarded the prize for a ground breaking model of how nations trade with each other. As his colleague Arvind Panagariya explains:

Until the end of the 1970s, the Heckscher-Ohlin theory for which Bertil Ohlin won the prize--Eli Heckscher died before the Nobel Prize in economics was instituted--dominated the field. This theory explained well why labor-abundant countries such as South Korea and Taiwan would export labor-intensive products such apparel, toys and footwear and capital-abundant countries such as the United States would export machinery and aircraft.

But it could not satisfactorily explain the two-way trade that was widely known to exist: Many countries exported automobiles and televisions, but they also imported them. The Heckscher-Ohlin theory also did not adequately explain why rich entities such as Europe and the United States, which had very similar endowments of capital and labor, traded more intensively than those with very dissimilar endowments. While descriptive explanations of these phenomena existed, a tight theory explaining them was lacking.

Starting in 1979, Krugman published a series of papers that successfully tackled these and many other related questions. He postulated that consumers like variety in what they consume. For the same expenditure, their satisfaction is greater if they have a larger variety of products available. This creates the incentive for firms to produce a large variety of products. But the production of a new variety has setup costs. This leads to declining per-unit costs as a larger quantity of the variety is produced and places a limit on the number of varieties the market can profitably supply. A firm produces a new variety only if it can capture a large enough market to allow profitable sales.

This seemingly simple structure gives rise to a tight theory that leads to rich implications: Countries gain from trade not only because larger market allows them to better exploit scale economies, but also because consumers can access a larger variety of products. And even identical economies can gain from trade through scale economies and a larger variety of products. The theory also brought imperfect competition into a formal trade model.

Commentary: Paul Krugman, Nobel

The emphasis in this quote is mine. I don't know much about how national or international economies work. In fact, I may know even less about this subject than President Bush does. Nevertheless, I do recognize the obvious point here - Krugman's work clearly advances our understanding of how international economies work. That has important implications both for the financial industry, companies that depend on international markets, and government policy. That, despite the penultimate importance of embarrassing our lame assduck President, is probably why the scientists on the Nobel committee awarded the prize to him.

I've expressed admiration before for elegance, at least in the design of machines. It should come as no surprise, then, that the mention of elegance would catch my attention. Prof. Panagariya's description of Krugman's theory implies a similar elegance:

A hallmark of Krugman's work is parsimony. His models are among the most elegant: lean and thin and transparent. They have all the required parts but no unnecessary fat. It is quite remarkable that while other scholars in the field handsomely incorporated the Krugman model into their research, perhaps the most insightful and elegant applications still came from Krugman[.]

Commentary: Paul Krugman, Nobel

That kind of parsimony usually results from repeated re-evaluations and refinements, not from some chance inspiration. Another colleague of Krugman's explains what makes the theory better than the old ones:

“Krugman’s trade models became the standard in the economics profession both because they fit the world a bit better and because they were masterpieces of mathematical modeling,” said Edward L. Glaeser, a professor at Harvard University who also studies economic geography. “His models’ combination of realism, elegance and tractability meant that they could provide the underpinnings for thousands of subsequent papers on trade, economic growth, political economy and especially economic geography.”

Krugman Wins Economics Nobel

The part of that quote I emphasized explains far more about why Krugman won the Nobel than any political considerations. His theory added to the knowledge of economics, and has been the basis of much subsequent work on the topic. That's what really important theories do.

The implication that this award had more to do with politics is insulting both to the awardees and the committee. In fact, politics seems to have more importance to the critics of this award than it does to the awardee:

The committee that chose Krugman cited his "trade" theories that once made him famous for actually doing economics. (Krugman contends that nations can create comparative advantages by subsidizing certain industries, something the ancients once called Mercantilism.) However, Krugman has become a well-known public intellectual not because of his work on trade, but because of his twice-weekly op-ed column in The New York Times, where outright partisanship is substituted for economic analysis.

Paul Krugman is an unabashed liberal, and there is no crime in an economist having such persuasions. For that matter, many economists have a bit of that streak, too. Furthermore, many of us are in agreement that some of the economic policies of the Bush administration have been bad, if not downright disastrous.

However, the agreements end where Krugman begins to view U.S. economic history from a distorted lens, one in which all administrations run by Democrats are Good and Virtuous, and all Republican administrations are governed by Beelzebub himself.

Krugman In Wonderland

The remainder of the article, by Prof. William L. Anderson, is a rhetorical nightmare of labeling, strawmen, and ad hominem. Not to be outdone, long time Krugman nemesis Donald Luskin is quoted by Bloomberg:

"Paul Krugman the economist died a long time ago; the man named Paul Krugman is a public intellectual," Luskin, a contributing editor for National Review Online, said in an interview. "He is not in the same category as John Maynard Keynes, he is in the same category as Oprah Winfrey. To give it to him is to dishonor the Nobel Prize."

Princeton's Paul Krugman Wins Nobel Economics Prize

I don't recall Mr. Luskin predicting the current economic mess with the accuracy that Krugman has, but perhaps someone can point out such an article.

Prof. Peter J. Boettke writes a more thoughtful critique, but comes to this conclusion:

Unfortunately, and unlike both [Milton] Friedman and [John Kenneth] Galbraith, Krugman's work devolved from science to ideology and finally to political partisanship. Friedman and Galbraith had always kept (though from differing perspectives) on the scientific to ideological spectrum, but neither became overtly partisan in their writings. This cannot be said for Krugman and the way he has used his platform as an economist and as a columnist for the New York Times for his Democratic partisanship purposes.

This would be innocent enough if Krugman were just another political pundit, but now the prize has given him an enhanced platform from which to pronounce his partisan positions as if they are grounded in economic science.

Commentary: Political Economist

Friedman's almost religious devotion to the "free market" ideology makes this conclusion seem ironic, to say the least. Galbraith was a product of an earlier time, in which both politics and science were viewed differently, and more positively in many ways. Comparisons to either strike me as somewhere between hazardous and ludicrous. Certainly, Krugman isn't the only one who has difficulty determining the difference between his political views and his scientific ones.

So, congratulations to Paul Krugman. He earned the prize. If it pisses off the President, that's just a bonus.


Bustednuckles said...

Bush is so fucking stupid someone probably had to explain Krugmans theory with crayons and construction paper.
I certainly can't begin to believe the Nobel committee even thought about Bush but for us liberals, it does add just a dash of sweetness.

Cujo359 said...

Bush did manage to earn an MBA, which probably means he's slept through more economics classes than I've ever taken, but considering how little he uses the mind he has, you may be right.

One of the reasons I think you see all this kvetching about how politically motivated this award is may be that it serves to erode the authority it confers on Krugman. It's an obvious motivation, anyway. This Nobel ought to confer some authority to Krugman, at least when he's discussing international and national economic issues. To the extent his critics can instill questions about the motivations for the award, they can limit his ability to persuade people who aren't economists.

Of course, there's also another motivation, which I think Boettke's essay represents. Many scientists argue that science shouldn't be involved in politics. At least, it shouldn't be involved to the extent that Krugman is. There's some validity to that assertion, but I also think that expecting scientists to remain objective when there are so many problems with our country is absurd. American scientists live here, too. Their analysis should be based on the facts, but point of view inevitably enters into any discussion of how those facts should affect public policy.