Who is Paul Krugman? - Economic Theory & Overview

Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

Modern economic theory began with Adam Smith nearly 300 years ago. While many of his theories still apply, the field of economics has changed. Thanks to new economists like Paul Krugman, our understanding of economics can develop with the discipline.

Brief Biography of Paul Krugman

Paul Krugman was born in 1953 in Albany, New York. Inspired by the idea of 'psychohistory,' as described in the novels by Isaac Asimov, Krugman took to economics as the field of study closest to psychohistory, at least in the sphere of time and space we occupy. Krugman attended Yale University to study economics at the undergraduate level, and a few years later received his PhD in economics from the Massachusetts Institute of Technology (MIT).

Krugman has made a career as a professor of economics and the author of many articles and books. While he has written about economics for all levels of understanding, he is probably best known for his frequent editorials in The New York Times.

Paul Krugman

Krugman's New Trade Theory

While Krugman has written textbooks on both general economics and specific economic concepts for all levels of economic education, he is most known for his theories on international trade.

Both Adam Smith and David Ricardo believed that international trade is optimized when nations focus on producing the goods they are able to produce the most efficiently. Nations should then trade the excess for the other things they need from nations that efficiently produced them.

The idea of comparative advantage made economic sense and was generally accepted until Paul Krugman challenged that idea with his new trade theory. New trade theory was Krugman's explanation for why countries continued to produce things that they did not have a comparative advantage to produce.

Krugman suggested there are two reasons that the idea of comparative advantage didn't represent reality. First, consumers prefer to have choices between brands or variations of products. This variation and diversification could come from production of similar goods in different countries, even if it means a country producing a good that isn't the most efficient for them to produce.

The second reason comparative advantage theory didn't reflect reality was that production efficiency increases with economies of scale. Economies of scale refer to the efficiencies gained as production increases. So, even if a country didn't have an original comparative advantage in producing something, if they produced enough of it they could essentially lower their cost of production to be competitive with a nation that did have a comparative advantage.

Krugman won the 2008 Nobel Prize in Economic Sciences for the work he did researching international trade and the reasons nations focused productions on certain industries.

Krugman's Other Theories

New trade theory wasn't Krugman's only contribution to the field of economics. Krugman researched exchange rate economics and suggested that market efficiencies rarely resolved discrepancies in foreign exchange rates and that instead, when inefficiencies created arbitrage opportunities, they would be resolved by a crash after a speculative bubble.

Krugman also had much to say about the best way to handle economic slowdowns, such as Japan's recession in the 1990s and the worldwide 'Great Recession' in the late 2000s. He suggested that the best monetary policy in these situations was for the government to be an active market participant by using inflation targeting to encourage or discourage the flow of funds through the economy. This Keynesian approach was challenged by many although it eventually became the way the United States dealt with the 'Great Recession.'

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