Krugman on Krugman

Krugman took a few moments yesterday to tell us what his Nobel-prize winning work was all about. A far better summary than mine (especially as I completely ignored the geography part), available here.
I’m also putting the whole thing below a cut, for future reference.

About the Work

Really, I don’t want to talk about me when the world is melting down, but I have had a number of requests for an informal explanation of what I got you-know-what for. So here’s an attempt.

It’s really about two related things: the “new trade theory” and the “new economic geography.”

OK, so what was the “old” trade theory? It’s what you probably learned if you took intro economics. Countries are different – they have different levels of productivity in particular industries, they have different resources, and those differences drive trade. Tropical countries grow and export bananas, temperate countries grow and export wheat. Countries with highly educated workers export high-tech goods, countries with less educated workers export shirts and pajamas.

The new trade theory starts with the observation that while this explains a lot of world trade, it also misses a lot. France and Germany sell lots of stuff to each other, even though they have similar climates and resources; so do the United States and Canada. What’s that about?

The answer is that there are many goods that aren’t like wheat or bananas, but are instead like wide-bodied jet aircraft. There are only a few places in which wide-bodied jets are produced, because of the enormous economies of scale – you only want a couple of factories worldwide. Those factories have to be somewhere, and those countries that get the factories export jets, while everyone else imports them.

But who gets the aircraft factories, or the factory producing a specialized kind of machine tool, or the plant producing a particular model of car that selected consumers all over the world want? The answer of new trade theory – and it was a tremendously liberating answer – is that it doesn’t matter. There are many economies-of-scale goods; everyone gets some of them; and the details, which may be largely a story of historical accident, aren’t important.

What matters, instead, is the overall pattern of trade: the broad pattern of what countries produce is determined by things like resources and climate, but there’s a lot of additional specialization due to economies of scale, and there’s much more trade, especially between similar countries, than you would expect from a purely resource-based theory.

You may think all this is obvious, and it is – now. But it was totally not obvious before 1980 or so – except for some prescient quotes from Paul Samuelson, you really can’t find anyone describing trade this way until after the theory had been laid out in mathematical models. The plain English version came later.

And you should bear in mind that economists have been thinking and writing about international trade for a couple of centuries; to come along and say, “Hey, we’ve been missing half the story” was a pretty big thing.

Now, on to geography. A decade after the original new trade stuff, I started thinking about what happens when some (but not all) economic resources, especially labor and capital, can move. In the world of the old trade theory, “factor mobility” was a substitute for trade: if factories and industrial workers can move freely, they’ll spread out to be close to the farmers, and neither food nor manufactured goods will have to be shipped long distances. But in the economies-of-scale world I had been studying, the “centrifugal” effect of widely dispersed resources, which tends to push economic activity into spreading out, would be opposed by the “centripetal” pull of access to large markets, which tend to promote concentration of economic activity.

Think of Henry Ford and his Model T. He could have established many factories, spread across the country, to be close to his customers. Instead, however, he found that it was worth incurring extra shipping costs to achieve the economies of scale of one big factory in Michigan.

And once you’re concentrating production in a limited number of locations, which locations will you choose? Locations where there’s a large market – which will be locations where lots of other producers have also chosen to concentrate their production. If the centripetal forces are strong enough, you’ll get a cumulative process: regions that for historical reason have a head start as centers of production will attract even more producers, becoming the economic “core” while other areas become the “periphery.” Thus for about a century, until the rise of the Sunbelt, the great bulk of U.S. manufacturing was crammed into a fairly narrow belt from New England to the inner Midwest; today, 60 million people live along a narrow stretch of the East Coast. Those 60 million people aren’t there because of the scenery; each of them is there because the other 60 million people are also there.

The same sort of logic explains why particular industries concentrate in certain locations, except that in such cases the logic involves things like a deep labor market for specialized skills and a good market for suppliers of specialized inputs. What determines which industry locates where? Often, accident: Silicon Valley owes its existence in large part to a couple of guys named Hewlett and Packard, who started some stuff in their garage, New York is New York because of a canal that only pleasure boaters use today.

Again, this may seem obvious, and it is now – but it wasn’t before 1991 or so. As with trade, the plain English version was possible only after the mathematical models had been worked out.

You may ask, where’s the policy implication of all this? Actually, the policy morals are fairly subtle – for example new trade theory does suggest a possible role for government interventions, but also suggests bigger gains from trade liberalization. Mainly my work in trade and geography was about understanding the world, not driving a political agenda.

So that’s what it was all about.

Add: Requests for public domain copies of the key papers cited. Here’s the 1980 paper; here’s the 1991 paper. Both pdf.

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9 Comments

  1. Adam

     /  October 18, 2008

    A few quick thoughts.

    First, “the details, which may be largely a story of historical accident, aren’t important.”

    As a historian , ouch.

    I read the two papers Krugman linked. I’m amazed that economists are able to convince themselves they are actually producing knowledge. They use so many stupefyingly ridiculous assumptions that their models and theories can’t possibly correspond to the real world. Human agency? What’s that?

    Second, “But who gets the . . . factories . . . doesn’t matter.”

    I’d like to see Krugman go to a downriver UAW meeting hall and say that. Of course it matters.

    Third, I think the driving force behind the location of manufacturing (agricultural or industrial) is better described by labor and resource arbitrage (aka exploitation) and greed. See Stavrianos, Global Rift: The Third World Comes of Age (William Morrow & Co., 1981).

  2. Ok, of course the locations matter. But they don’t matter to the story Krugman was telling. Krugman was showing, in some sense, that all you need to get concentration and intraindustry, international trade was a few modest and tractable assumptions about preferences for variety and economies of scale. And his models seem to do a very nice job of that.

    What he misses, in an annoying and uncharacteristically callous way, in this piece is that things change. Economies of scale change, technological change happens, factors of production may not stay constant. And then who had what industry starts to matter a lot. If you bet heavily on producing airplanes instead of cars, you might do very poorly over the next few years because of other systemic changes (or maybe not, but you get the point).

    His point is that from a particularly theoretical vantage point, in an equilibrium way, it doesn’t matter who gets which thing does not matter: “There are many economies-of-scale goods; everyone gets some of them; and the details, which may be largely a story of historical accident, aren’t important.” That’s of course exactly what went wrong downriver – they got one particular kind of factory by historical accident, that kind of factory no longer makes sense, and nothing has replaced it. Humans, unfortunately, are not as painlessly mobile as capital, and we care much more about the short-run. And that’s one of many places economics runs into real problems.

  3. Adam

     /  October 19, 2008

    I fail to see how his models (as evidenced by those two papers) actually explain anything. To be clear I should point out that I don’t think theoretical vantage points are particularly useful. A theory which helps to explain or organize actual facts, I think, has utility. I don’t see anything like that in those papers.

    I care more about what actually happened (or happens) in the world. Human agency should be at or near the center of the story. But then that is why I’m a historian and not an economist, I suppose. I’m interested in humans not theories.*

    The reason I suggested exploitation provides a better explanation for why the Dutch settled in New Amsterdam (there was yet no canal) or the English took over and renamed it New York was because they said exploitation was the reason. They were consciously trying to exploit the resources of the New World to enrich their home country.

    “everyone gets some of them” Wrong! Africa? The fact is, certain places get the things and others don’t. There are actual historical reasons why a particular location got the thing (and some other location didn’t get the thing and doesn’t have the, or any, thing). For example, New York surpassed Boston as the major Northern seaport during the colonial period, in part, because of a shorter turnaround time to the Caribbean. New York also had a more productive, easier to exploit, hinterland than Boston.** Thus, the return leg to England was more profitable when leaving from New York because the hinterland provided returns to England with which to pay for imports.** Nor had New York been obliged to engage in massive deficit spending as Massachusetts had during Queen Anne’s War (1702–1713); this spared New York a period of ruinous price inflation which washed over Massachusetts following the end of the war.*** Nor had a significant portion of New York’s male population been killed in the war. I could go on. There are many actual reasons why New York (and not Boston) became the main Northern port and commercial hub. And none of those actual reasons has anything to do with Krugman’s models. His models don’t tell us anything about what actually happened. In a real sense they don’t actually model anything.

    * I was flabbergasted a little while back when you posted about sociologists wringing their hands over “70s organizational theory and why we haven’t moved past it”. I think a little theory can be useful but I’m glad I’m not in sociology because obsessing over lack of phenomena to theorize about sounds ridiculous.

    ** Gary Nash, The Urban Crucible: The Northern Seaports and the Origins of the American Revolution, abridged edition (Harvard, 1986), 47, 71.

    *** Nash, 85.

  4. Ok, let me try again, because I think you’ve misunderstood what Krugman’s models are trying to do. He’s not trying to explain why a particular place got a particular industry. He’s trying to explain the space of possible outcomes. The space of possible outcomes in older models of trade, that concentrated on differences in factors of production* (land, labor, education, etc.) can’t explain patterns of trade between similarly endowed countries (France and Germany in 1970). The differences are small, and the products traded are similar. His theory lays out one set of assumptions which generates a space of possible outcomes that includes the actual observed patterns of trade. So, no, he hasn’t explained the existing pattern of trade, but he has offered a possible explanation for trade that looks more or less like that pattern (lots of intraindustry trade between similarly endowed countries). His point about historical accident, if I understand it right, is that history decided which particular point we ended up in the space of models, but very basic features could have determined the space of models from which history could choose.

    Now, you can ask, what’s the point of trying to find the space of models from which history selected if you can’t actually explain the observed one? Krugman would be quick to note how good other disciplines (history, sociology, etc.) are at that later task, and he does not think it’s one for economics to engage in lightly (see, for example, this post at Scatterplot). But these models, Krugman might say, could help governments trying to figure out what development plans are even possible. If Krugman is right, trying to be self-sufficient simply won’t work, and specializing is essential, even if it seems like you are specializing in something in which you have no particular advantage to start off, or only a very tiny one. I haven’t read any of the work that followed it, but economists seem to have found it very productive for those lines of inquiry.

    Also, agency is overrated. Foucault, Callon, Marx >> Durkheim. We should talk about that some other time…

    * Note, Africa is not a counterexample because Africa does not count here as ‘similarly endowed’ in their system. The thing Krugman is trying to get at is why most international trade is between the US and Canada or France and Britain (similarly endowed, close), etc. and not between, say, France and Africa (differently endowed, far apart). So when he says everyone gets something, he means everyone who is equally well off already.

  5. Adam

     /  October 19, 2008

    I still don’t think they really explain anything. The trade patterns we see now are themselves historically contingent. For example, during the colonial period adjacent colonies DID NOT trade much with each other (similarly endowed, close). Instead they all traded with England or the Caribbean (differently endowed, far apart). Indeed, British imperial policy in the 17th and 18th centuries operated the colony-homeland system as closed trade system. Colonies were required to ship most raw materials to England (on English ships) and buy finished goods from England. I’m simplifying the story quite a bit but the point is that during the colonial period the pattern of trade was the opposite of what Krugman is modeling. Can his models explain why the pattern of trade looked the way it did during the 17th and 18th centuries? Why the patterns changed?

    I’ve read Foucault, Marx, and Durkheim (though not Callon) and I find most of their work goes over the deep end. I remember rolling my eyes a lot while reading it. There was one class session of a history methods and theory class I took a couple years ago where we spent the entire 3 hours ripping Marx to shreds. There is a kernel of truth in Marx and the rest is bunk. Some amount of the social is useful but Agency is really the name of the game. And don’t get me started on Foucault. I’ve come to learn that he developed much of his work upon his own profoundly flawed history. That is, he did really bad history and then proceeded to draw (deeply flawed) conclusions from it.

  6. I don’t think Krugman is talking about anything before the 20th century, possibly not even the mid-20th century. The puzzle he was trying to explain was a puzzle of that time period, not an earlier one. Krugman is not, by any means, doing economic history (and few economists do). So… no, his models don’t explain that, but they aren’t trying to either. Though, I admit, I don’t know much about trade patterns from before the end of the 19th century (except that they were, relatively speaking, smaller).

    Agency may be the name of the game, but if so I’m not playing. Or, perhaps we should back up, what do you mean by Agency? That word has a number of meanings, many of which revert back to Free Will, but some (e.g. Callon’s “mode of action”) do not.

  7. Adam

     /  October 19, 2008

    I’m stealing this from Wikipedia, god help me, but it does capture what I mean pretty well: “Human agency is the capacity for human beings to make choices and to impose those choices on the world. It is normally contrasted to natural forces, which are causes involving only unthinking deterministic processes. In this respect, agency is subtly distinct from the concept of free will, the philosophical doctrine that our choices are not the product of causal chains, but are significantly free or undetermined. Human agency entails the uncontroversial, weaker claim that humans do in fact make decisions and enact them on the world. How humans come to make decisions, by free choice or other processes, is another issue.”

    Now, I DO believe those choices are made within, constrained by, even created by, social systems. (E.g, Berger and Luckmann).

    Heck, in a paper I’m working on for publication I wrote: A strict adherence to methodological individualism, explanation of social institutions and social change which relies only on results produced by individuals and interaction of individuals, “can impoverish our explanations of collective behavior by blinding us to its social aspects.” (45) Førland’s reasons for rejecting “the explanatory imperialism of methodological individualism” are threefold: first, epistemologically, historians “often have information about a collectivity or a structure” while lacking information about individuals within the group or structure. Second, methodologically, we should not be compelled to only offer explanations at the lowest level of description. Just as science ranges from quantum mechanics to ecology, so should historical explanation encompass multiple levels of explanation. Third, “causality is not the only entity worthy of explanatory status.” Moreover, we should recognize “that there can be more than one legitimate (kind of) explanation of one and the same phenomenon, even under one and the same description.” (51-52) Førland’s description of zeitgeist is similar to Joyce Appleby’s formulation of ideology: “a system of meaning shared by members of a society. Infused into every social act, the common system of meaning supplies information, gives direction, and provides justifications for behavior.” Joyce Oldham Appleby, Economic Thought and Ideology in Seventeenth-Century England (Princeton: Princeton University Press, 1978), 5. Zeitgeist (or ideology) in this view, is not a separate entity which causally acts upon individuals. Rather, the individuals themselves, by virtue of being within the group, conform and structure their own beliefs using the schemas, structures and ideas provided by the zeitgeist (or ideology).

    Still, I believe it it wrong-headed to ignore individual agency, however wound up in a social system those individual choices may be.

  8. While most scholars may define agency as you did, I fear that underneath most of their work is really Free Will lurking by another name. When they ask at a job talk, “what about agency?” They do not mean, “what about the concrete actions of individuals?” But rather, “Is this model deterministic?” See, for example, Haskell’s The Emergence of Professional Social Science for an interesting take on how modern social science developed as a middle-ground between Spencerian positivism and older, more humanistic ‘voluntaristic’ understanding of behavior (represented in the book by the core members of the American Social Science Association, from which the AHA, AEA, ASA, and APSA are descended). Also, Durkheim, at least, is honest about calling it a debate between free will and social structure. It’s one of the things I respect him for, even as I am frustrated by the fact that he helped invent this whole structure/agency debate in its current form.

    You might like Callon’s reformulation of Agency in Actor-Network Theory (e.g. Callon 1986). I know it best through his formulation in “The Laws of the Markets”, where he defines agency as a “mode of action” and he is interested there in how economics and related disciplines construct calculative agencies. That is, humans act within systems. So, when we decide whether to take out a loan by comparing interest rates, etc. we are acting as calculative agents by engaging in a mode of action made possible by a particular kind of knowledge. Action is foregrounded, but action is understood as inseparable from the networks (of things, ideas and people) it is embedded in. See, Introduction: The Embeddedneess of Economic Markets in Economics”.

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