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Paul Krugman Wins the Nobel Economics Prize

By JUSTIN LAHART

The Royal Swedish Academy of Sciences awarded the Nobel prize in economics to Paul Krugman, a Princeton University scholar whose groundbreaking study on trade is less known to the public than his withering assessment of the Bush administration.

In announcing the award Monday, the Nobel committee cited Mr. Krugman's work analyzing trade patterns and the location of economic activity.

• As a columnist and blogger for the New York Times, Mr. Krugman, 55 years old, has taken the Bush administration to task over its waging of the Iraq war and, more recently, its handling of the financial-system bailout. Mr. Krugman also has faulted Republican presidential candidate John McCain, writing earlier this month in his column, "the McCain plan would do for health care what deregulation has done for banking. And I'm terrified."

With the committee's decision coming three weeks before the U.S. presidential election, the news sparked criticism that it was influenced by political considerations as well as academic achievements.

Many academic economists said it has always been a question of when Mr. Krugman would win a Nobel rather than if he would win it.

"Paul has in some sense had at least two distinct careers — one as a stellar and inventive academic economist and researcher and another as a journalist and political commentator," said National Bureau of Economic Research president and Massachusetts Institute of Technology economist James Poterba. "This prize was awarded for the path breaking insights that emerged from his academic research."

2008 Nobel Prizes

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An undated handout photo shows top economist Paul Krugman, who won the 2008 Nobel Economics Prize Monday.

Gregory Mankiw, former chairman of the Council Economic Advisers under President George W. Bush and now an economist at Harvard University said, "I see no evidence that the Nobel committee in economics has been politicized at all. It's been very evenhanded."

For centuries, the economic view on trade was that countries export items that they have a comparative advantage in producing, and import items that they don't. As put forth by English economist David Ricardo in 1817, if in Portugal it takes less labor to produce wine than to produce cloth, and in England the opposite is true, Portugal will export wine to England and import cloth—and it will do this even if it can produce cloth with less labor than England can.

In the modern world, trade hasn't followed the lines of specialization that Ricardo's theory suggests it should. Rather, a handful of countries dominate trade and in many cases both import and export similar goods. Starting in the 1970s, Mr. Krugman was among a number of economists, including Harvard University's Elhanan Helpman and Princeton's Avinash Dixit, who tried to find out why.

"Paul was the undisputed leader of the group," Mr. Dixit said. "He can take quite complex questions and reduce them to the simple essential insight."

In 1979, Mr. Krugman proposed a theory of trade that incorporated consumers' desire for diversity in their purchases. For example, some Americans will want European-made BMW motorcycles while some Europeans want American-made Harley-Davidsons; thus, the U.S. will import and export motorcycles. Both BMW and Harley-Davidson will then be able to take advantage of economies of scale in building their brand of motorcycle, lowering costs so that consumers in both Europe and America will enjoy many choices at lower prices.

Mr. Krugman applied his insights on trade and economies of scale to regional economics, considering how firms face tradeoffs between concentrating in specific locations and high transport costs. His work has piqued new interest in the economics of agglomeration, which studies where people and industries locate, and why.

Mr. Krugman earned his Ph.D. from the Massachusetts Institute of Technology in 1977. From 1982 to 1983 he worked for the Council of Economic Advisers. "It was, in a way, strange for me to be part of the Reagan administration," Mr. Krugman later wrote. "I was then and still am an unabashed defender of the welfare state, which I regard as the most decent social arrangement yet devised."

In 1991, Mr. Krugman won the John Bates Clark medal, awarded every two years to the nation's most promising economist under the age of 40, which is often a precursor to an eventual Nobel. In 2000, Princeton economics department chairman Ben Bernanke, now the Federal Reserve Chairman, recruited Mr. Krugman from MIT.

Mr. Krugman began writing books and articles for general readers during the 1990s. Much of his writing focused on politics in addition to economic and financial crises. A frequent subject was the "liquidity trap" Japan fell into in the late 1990s after its central bank's key interest rate essentially fell to zero.

In 1999, Mr. Krugman became a columnist for the New York Times, where his writing became more overtly political—particularly after President Bush's election in 2000. During the runup to the 2003 invasion of Iraq he wrote: "The members of the Bush team don't seem bothered by the enormous ill will they have generated in the rest of the world. They seem to believe that other countries will change their minds once they see cheering Iraqis welcome our troops, or that our bombs will shock and awe the whole world (not just the Iraqis) or that what the world thinks doesn't matter. They're wrong on all counts."

More recently, Mr. Krugman has been among many economists who criticized the Treasury's plan to buy toxic mortgages from banks, arguing that the government instead should inject capital into institutions.

The prize, which isn't technically a Nobel but the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, comes with a purse of 10 million Swedish kronor, or about $1.4 million.