A second brief thought from the coffee shop: Krugman’s Nobel Lecture (which I finally got around to watching while “playing Violet“*) is, in some ways, a story about performativity. Let me briefly summarize his final point and then explain what I mean. Krugman argues that old trade theory, based on competitive advantage between nations with unequal factor endowments, and old economic geography could not explain the intra-nation trade observed in the 1960s, where rich nations traded with each other, nor the concentrations of industries observed within nations (auto in Detroit, glass in Toledo, whatever). Krugman and co-author’s new trade theory and economic geography helped explain those things by invoking the pin factory of Adam Smith and the idea of increasing returns (see Warsh’s Knowledge and the Wealth of Nations for a great analysis of the history of the idea of increasing returns). Krugman then ends his talk by showing how his story has started falling apart – the world is looking more like the one of classical trade theory, where rich countries are trading with poor ones again and forces creating concentrations of industries are somewhat ameliorated.
What happened? Well, in part because of all those old economic ideas, trade barriers have been dramatically reduced, and technologies have been created to eliminate the transaction costs that were getting in the way of the models working. Lower transaction costs is connected to fewer economies of scale for concentration, and thus less rationale for concentration. So, the old economic theory helped make a world in which it was more true.
Uh oh, coffee shop is closing early. That’s all for now.
* This is my new euphemism for not working on a paper I need to finish, with apologies to Jeremy, K.O.A.S.B.