Paul Krugman is a Neo-Keynesian economist, Nobel laureate, academic, author, and media columnist, known for his work on international trade theory and economic geography. Considered one of the world's most influential economists, Krugman is renowned for redefining existing theories of international trade and either founding or co-founding several new disciplines in international economics, from New Trade Theory (NTT) and New Economic Geography (NEG) to models of financial crises and exchange rate movements. In 2008, Krugman was the sole recipient of the Nobel Memorial Prize in Economic Sciences "for his analysis of trade patterns and location of economic activity."
Krugman has taught on the faculties of Yale, Massachusetts Institute of Technology (MIT), Princeton, Stanford, and the London School of Economics. At the Graduate Center of the City University of New York (CUNY), he has served since 2015 as both Distinguished Professor of Economics and Distinguished Scholar in the Stone Center on Socio-Economic Inequality.
As an Op-Ed columnist for The New York Times since 2000, Krugman’s blog, The Conscience of a Liberal, has made him well known to a broad audience for his outspoken views on economic and political issues. Throughout his career, he has been a prolific and diverse author, with a long list of publications ranging from best-sellers on economics and politics for a general audience to textbooks and academic papers on macroeconomics, exchange rate theory, international development, international trade, and economic geography. As of March 2022, he is the author or editor of 27 books and over 200 academic papers in professional journals.
- Krugman is a U.S. economist, Nobel laureate, academic, author, and media columnist, known for his work on international trade theory and economic geography.
- In 1979, Krugman wrote a paper that earned him the 2008 Nobel Prize in Economic Sciences for introducing an entirely new theory of international trade.
- The significance of Krugman’s New Trade Theory (NTT) and New Economic Geography (NEG) is that—unlike older theories—they successfully predicted patterns of international trade in the 20th century.
- Considered one of the world's most influential economists, Krugman is also a popular columnist and the author of best-sellers on economic and political issues for a general audience.
Education and Early Career
Born in 1953 to a middle-class family in Albany, N.Y., Krugman earned a B.A. in Economics (summa cum laude) from Yale University in 1974 and a Ph.D. in Economics from the Massachusetts Institute of Technology (MIT) in 1977. At MIT, his advisor for his thesis, Essays on Flexible Exchange Rates, was Rudiger (Rudi) Dornbusch, a German economist who played a critical role in defining the field of international economics in the 20th century.
Early academic roles included Assistant Professor of Economics at Yale University (1975 to 1980) and Associate Professor of Economics at the Massachusetts Institute of Technology (MIT) (1980 to 1984). From 1984 to 2000, he served as Professor at both MIT and Stanford University and taught at the London School of Economics, where he holds the title of Centenary Professor. After MIT and Stanford, Krugman spent 15 years (2000 to 2015) as Professor of Economics and International Aﬀairs at Princeton University; upon his retirement in 2015, he was given the title of Professor Emeritus. In 2015, he joined the faculty of the City University of New York as Distinguished Professor of Economics and Distinguished Scholar in the Stone Center on Socio-Economic Inequality.
Of note, during his tenure at MIT, he left for one year (1982 to 1983) to work as the Chief Staffer for International Economics on President Ronald Reagan’s Council of Economic Advisers.
Nobel Prize for New Model of International Trade
When Krugman received the 2008 Nobel Prize for “his research on international trade and economic geography,” the Nobel Committee cited his early work that “introduced an entirely new theory of international trade.” The Nobel announcement continued: “By having shown the effects of economies of scale on trade patterns and on the location of economic activity, his ideas have given rise to an extensive reorientation of the research on these issues.”
New Trade Theory
In the late 1970s, at the beginning of his tenure at Yale, Krugman was still considering which direction to take in his research. During a conversation with Rudi Dornbusch, his former Ph.D. advisor at MIT, he started to construct New Trade Theory (NTT) as an alternative to older theories that explain international trade patterns as based on comparative advantage: the ability of a country to produce a particular product at a lower opportunity cost than its trading partners, due to different natural resources and other factors.
In the Journal of International Economics in 1979, Krugman published “Increasing Returns, Monopolistic Competition, and International Trade,” an article that presented his arguments and models for New Trade Theory (NTT) for the first time. The 2008 Nobel Committee cited this 1979 article as representative of the significance of Krugman’s contribution to the analysis of foreign trade, as follows: “The basic idea is rather self-evident, but the step from speculation to a stringent and cohesive theory is substantial—and this was precisely the step Krugman took.”
As Krugman explained it, earlier models of international trade predicted trade between countries with quite different comparative advantages, such as a country with a high agricultural output trading with a country with a high industrial output to exchange very different products. However, Krugman and his fellow economists had been observing real-world trade patterns with growing deviations from the patterns predicted by these traditional models—particularly the fact that, since World War II, more and more international trade was happening between similar countries with similar comparative advantages to exchange similar products. For example, the U.S. and Germany have been trading vehicles, pharmaceuticals, medical equipment, and industrial machinery with each other for decades.
The trigger for Krugman’s New Trade Theory was his insight that there are critical factors that determine international patterns of trade in the modern era that the old economic models missed: 1) that consumers prefer brand diversity and 2) that production favors economies of scale, i.e., cost advantages that enterprises gain by scaling up to efficient, high-yield production. (The higher the output, the lower the fixed cost per unit.)
According to Krugman’s NTT, when the consumer preference for diverse brands is factored into the model, the fact that multiple similar products are traded back and forth between similar countries becomes a predictable outcome.
An additional argument that Krugman makes in NTT is that the preference for economies of scale explains another outcome that economists had been unable to predict with traditional models: the fact that countries with a high domestic demand for a particular product also tend to increase their foreign sales of the same product.
According to NTT, the source of this home market effect is that the preference for economies of scale not only drives specialization on specific products that are in high demand in the home market, where economies of scale can be attained, but also results in surpluses that drive higher sales of those products in foreign markets. Although the home market effect had first been hypothesized by Swedish economist Staffan Linder, Krugman’s NTT model was the first to formalize a pattern that trade models based only on comparative advantage had never predicted: the crucial link between domestic market size and export growth.
In his NTT model, Krugman’s addition of transportation costs as a key component of the home market effect demonstrated that it made sense not only to concentrate production in one location but also to locate production in an area with a high demand for the products. These observations would contribute to his subsequent work on New Economic Geography (NEG).
New Economic Geography
In the decade after the 1979 publication of his research on New Trade Theory, Krugman began to expand his original model to predict not only what goods are produced where but also why labor and capital tend to concentrate in certain countries and regions and not in others.
In "Increasing Returns and Economic Geography", published in the Journal of Political Economy in 1991, Krugman synthesized this later research into a second theory: New Economic Geography (NEG), which explains why—rather than spread evenly around the world—industries that have achieved economies of scale in manufacturing tend to be clustered in specific regions and countries, for example, Silicon Valley.
In addition to the home market effect that Krugman had modeled earlier, NEG identified another geographic phenomenon—agglomeration—as one of the major benefits of achieving economies of scale. Agglomeration effects are all the benefits of having companies and people in different (but related) businesses located near each other in industrial clusters with strong local markets for the products.
Because the benefits are at the regional level—for example, large labor pools, lower transportation costs, and opportunities for knowledge sharing—agglomeration can be thought of as economies of scale that are external to any one company but internal to a geographic area. The home market effect, agglomeration, and all related positive effects then interact to create a positive feedback loop that drives further economic growth within those specific regions or countries.
Finance and Macroeconomics
Since the 2008-2009 financial crisis and the Great Recession, the research Krugman has done throughout his career on international currency crises, exchange rate instability, and the transition of financial shocks has been highly influential. For example, as a graduate student at MIT, Krugman built a model for the foreign exchange market and published a frequently cited paper on currency crises that is considered one of the main contributions to the first generation of currency crisis models,
In response to the global financial crisis of 2008, Krugman wrote an informal paper called International Finance Multiplier, in which he said that the reason for the unexpected speed and rapid contagion of the crisis was that highly leveraged financial institutions (HLIs) engaged in cross-border investment lost heavily in one market and became undercapitalized, which forced them to sell off assets across the board—driving down prices and putting pressure on other HLIs in a cascade effect. As soon as Krugman announced this article on his blog, it was discussed on economics blogs and cited in academic papers almost immediately.
Krugman has frequently been cited for his description of Japan's Lost Decade as an example of the dangers of liquidity traps that spread financial crises into the real economy.
Krugman is a leading advocate of expansionary monetary policy to boost inflation and aggressive fiscal policy to boost aggregate demand. In 2016, he said: “Everything about recent experience suggests that the world desperately needs fiscal expansion to boost demand and—that our sole reliance on central banks isn’t working.” For example, on his blog in 2015, Krugman pointed to a positive correlation between government expenditure and economic growth from 2010 to 2013.
Media Influencer and Political Commentator
Throughout his career, one of Krugman’s most significant accomplishments has been his ability to write and speak about economics in clear, accessible language designed to reach a wide audience. Despite his impressive academic pedigree, he excels at communicating complex ideas without using “equations, illegible diagrams, and economic jargon that only people with PhDs in economics could understand.” In this regard, he has received high praise for “his combination of analytic brilliance and linguistic facility” that “recalls Milton Friedman or John Maynard Keynes.”
Although Krugman has stated that he is a liberal on political issues, prior to 2000, he was described in the media as “not a partisan” and “ideologically colorblind” based on the fact that “he savages the supply-siders of the Reagan-Bush era with the same glee as he does the strategic traders of the Clinton administration.” However, as the political climate in the U.S. grew increasingly partisan after 2000, Krugman has been criticized for “push(ing) the boundaries” of dispassionate journalism with blatantly derisive attacks on his conservative political foes.
In 2020, even a fellow economist and journalist who described him as “a dazzling academic” who has been “thunderingly right” on “the big questions of the past 15 years” criticized him for “merely demonizing adversaries” and stated that, as “a supremely gifted commentator,” Krugman “should at least try to unite citizens around common understandings."
What Are Krugman’s Politics?
When asked about his politics, Krugman said: “I consider myself both… liberal and progressive. It’s not too different from what would be called a social democrat in Europe—you believe in a decent-sized welfare state, you believe that we are our brothers’ keepers.”
What Books Inspired Krugman?
When asked which five books have inspired him the most, Krugman cited a science fiction novel, Foundation Trilogy (by Isaac Asimov), and a philosophical treatise, An Enquiry Concerning Human Understanding (by David Hume) as well as three classics in the field of Economics: The General Theory of Employment, Interest and Money (by John Maynard Keynes), Essays in Persuasion (by John Maynard Keynes), and Essays in Economics (by James Tobin).
What Are Krugman’s Global Affiliations?
Early in his tenure at Princeton, Krugman joined the Group of Thirty (G30), an independent, international body of corporate, financial, and academic leaders who meet twice a year to discuss global economic and financial issues and the consequences of decisions made in the public and private sectors.
In addition to the G30, Krugman is a Fellow of the Econometric Society and a Research Associate of the National Bureau of Economic Research.
As one of the most well-respected economists in the world, he has served as a consultant to the Federal Reserve Bank of New York, the World Bank, the International Monetary Fund, and the United Nations as well as to several countries, including Portugal and the Philippines.
The Bottom Line
The 2008 Nobel Prize Committee cited Krugman's early work that “introduced an entirely new theory of international trade (and economic geography}" and gave "rise to an extensive reorientation of the research on these issues."
The trigger for Krugman’s New Trade Theory was his insight that there are critical factors that determine international patterns of trade in the modern era that old economic models missed: 1) that consumers prefer brand diversity and 2) that production favors economies of scale,
Throughout his career, Krugman has received high praise for his ability to write and speak about economics in clear, accessible language designed to reach a wide audience.
Krugman played a prominent role in the resurgence of Keynesian economics in the wake of the Great Recession.