Column : Krugmanomics wins

Font Size

Print

Feedback

Email

Discuss

: If one leaves out a fringe group of diehard Marxists and Socialists, there are two types of mainstream economists in the world today: the first group is the free market radicals, who believe that unfeterred lassiez faire is the best economic system. Even regulation ought to be minimal because markets self-correct. This group of economists, with Milton Friedman as its intellectual guru, has dominated policy thinking in the Anglo-Saxon world for much of the last three decades. It has also dominated the thinking of multilateral institutions like the IMF for much of the period, thus influencing policy in developing countries. Not surprisingly this group has cornered a comfortable majority of Nobel Prizes over the last three decades.

There is a second group of mainstream economists who also believe in the good of free market capitalism but who are acutely aware of the possibility of market failure and the need for government intervention when that failure occurs. John Maynard Keynes was perhaps the leader of this pack, which usually catches the public eye—and the eye of the Nobel Prize jury during crises in capitalism. Paul Krugman becomes the latest of these left-of-centre economists to win a Nobel in troubled times for work he did a couple of decades ago. Remember also, how Amartya Sen (known for his work on famine and poverty, not the virtues of unfettered free markets) won the prize in 1998 in the aftermath of the Asian financial crisis and how Joseph Stiglitz, Michael Spence and George Akerlof won the prize in 2001, for their work on market failure in the presence of asymmetric information, just after the dotcom bust.

Paul Krugman won the 2008 Nobel Prize primarily for his work on new trade theory. The new theory modified the old trade theories by relaxing the assumption of constant returns to scale in production (in a perfect market) and incorporating the idea of the existence of increasing returns to scale (in an imperfectly competitive market). New trade theory backed by the rigour of mathematical modeling laid a new foundation for the possibility of government intervention in trade—if economies of scale exist it would be impossible for a newcomer to challenge an existing firm without subsidy or government protection. Yet, it may be necessary to facilitate entry of new firms in the interest of competition: monopoly is a failure of competitive markets.