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Paul Krugman is the winner of the John Bates Clark Medal, given every two years to "that American economist under forty who is adjudged to have made a significant contribution to economic thought and knowledge. He returned to Yale as Assistant Professor from to , only to double back to M. His career has been thus confined geographically to the northeast corridor, but the imagination and power of his ideas have ranged far more widely.

Although he is being honored by his fellow professionals for his creative contributions to the frontiers of economic knowledge, he is best known outside the profession for a book that disseminates ideas from frontier economics to the general public. Here is Paul's typical modus operandi. He spots an important economic issue coming down the pike months or years before anyone else.

Then he constructs a little model of it, which offers some new and unexpected insight. Soon the issue reaches general attention, and Krugman's model is waiting for other economists to catch up. Their reaction is generally a mixture of admiration and irritation. The model is wonderfully clear and simple. But it leaves out so much, and relies on so many special assumptions including specific functional forms, that they don't think it could possibly do justice to the complexity of the issue.

Armies of well-trained economists go to work on it, and extend and generalize it to the point where it would get some respect from rigorous theorists. In this process they do contribute some new ideas and find some new results. But, as a rule, they find something else. Krugman's special structure was so well chosen that most of its essential insights survive all the extension and generalization.

His special assumptions go to the heart of the problem, like a narrow and sharp stiletto. By contrast the followers' work often resembles thoracic surgery, involving much clumsy breaking of ribs; sometimes it proves to be no more than an autopsy of the issue. Over the years Paul has earned the credit for many such kills: If Krugman is rare among economists in the originality and elegance of his theoretical thinking, he is almost unique in the simplicity and clarity of his expository writing.

His two books with Elhanan Helpman, Market Structure and Foreign Trade and Trade Policy and Market Structure,2 have been admired by professional economists and avidly read by graduate students. Now he has reached the general public with The Age of Diminished Expectations 6]. His clear and simple explanations of quite complex economic issues and ideas in a few sentences have to be read to be believed. How does Krugman maintain such consistently high quality both in his frontier research and in his popular writing?

Inherent talent is surely involved, but equally importantly, he uses theoretical modeling and observation of the real world to discipline and reinforce each other. In the introduction to Currency and Crises [10] , his second collection of articles, he includes a "personal manifesto" of his approach: This methodology brings with it a natural attitude toward modeling style: When the world presents us with a genuinely new problem, "guesswork is all that we have to go on, and those who discipline their guesses with models are more reliable than those who fly by the seat of their pants, no matter how well tailored.

I shall attempt to convey a flavor of Paul's research contributions grouped into some major themes. I will not try to be exhaustive; for reference I have listed his major publications in Table 1. Nor will I try to cover all the links of Paul's work with the small numbers of his precursors and contemporaries, or with the large masses of his followers.

To do so would need half -a-dozen separate review articles. Product Diversity and Monopolistically Competitive Trade. The traditional theory of international trade began with David Ricardo, and reached its peak in the mids.

This theory explained trade in terms of comparative advantage: Comparative advantage in turn was explained in terms of differences among countries. The Heckscher-Ohlin model, based on relative differences of primary factor endowments, came to dominate textbooks as well as research papers.

Here each country had comparative advantage in the good that used relatively more intensively its relatively more abundant factor.

This theory had several further implications. First, we should see the largest volume of trade between countries that are most different in their endowments, for example industrialized and less developed countries. Second, the opening or liberalization of trade should lead to conflict between the owners of different factors of production.

Since exporting a capital-intensive good to import a labor-intensive good is like exporting capital-and importing labor by proxy, trade indirectly faces domestic labor with greater market competition and laborers end up losers. Finally, a group of countries stand to gain most in the aggregate by forming a bloc with more liberal trade within it such as a free trade area or a customs union if they are complementary in their factor endowments, so they can produce different commodities when trade expanded.

Just as the dominance of the Heckscher-Ohlin model became complete, disquieting observations contrary to all of these implications began to accumulate.

Since the second world war, the fastest growing component of trade was between industrial countries with very similar factor endowments. The European Common Market brought together countries that were not complementary in their factor endowments. Much of this trade expansion seemed to occur with relatively little distributive conflict within each country.

Finally, in many emerging industries, one could not point to a clear comparative advantage for any country. Many patterns of production and trade seemed matters of chance; in fact there was a lot of two-way trade in very similar products such as automobiles. Many different explanations for these facts were offered, and new ones are still being attempted. But the approach that Krugman helped pioneer in a pathbreaking series of papers 16], [17] and 18] was the most drastic departure from Ricardian tradition.

The new view in fact went back to an even older tradition, namely Adam Smith's idea that division of labor lowers unit costs. Scale economies internal to firms are incompatible with the perfect competition that was assumed in all traditional models.

Many economists throughout the history of the subject had mentioned scale economies as a cause of trade, but they did not have, and could not develop, the tools that would implement this view in models that could yield its logical implications. Krugman found the necessary techniques, and wielded them with such skill and finesse that led not just to a new paradigm, but to a synthesis of the old and the new views of trade.

The scale economies were internal to firms, but sufficiently moderate to ensure the survival of a large number of firms in the free-entry equilibrium of a group producing close but not perfect substitute products. Thus the market structure was that of Chamberlinian monopolistic competition.

When such a sector expands, it does so through some combination of an increase in the number of firms greater product variety and the size of each firm greater scale economies. Suppose all the products in the group require the same factor proportions.

Let there be another sector, operating under constant returns to scale and perfect competition. When two such countries start to trade, their inter-industry trade exports of the competitive sector against net imports of the Chamberlinian sector are still governed by the factor endowment differences as in Heckscher-Ohlin. But when we examine the Chamberlinian sect or more closely, we see that the two countries produce disjoint sets of varieties; the choice of which ones are produced in which country is arbitrary.

Each supplies the whole world's demand for the ones it produces, so we get two-way intra-industry trade. If the countries have identical factor endowments, there is no inter-industry trade each produces an amount of the competitive good equal to its own consumption of it , but lots of intra-industry trade. All these results fit very well with the observations on the growing pattern of trade among industrial European countries cited above. Even more remarkable is the implication for gains from trade.

The availability of greater variety of goods in the Chamberlinian sector at lower unit costs is a benefit to all income-earners. This can be enough to outweigh the conflict over incomes factor prices themselves.

Then trade liberalization can command general consent. This is more likely the more similar the economies. This again squares with the observation that the formation of the European Economic Community in its initial stage, when the members were very similar economies, generated much less distributional conflict. A similar more recent observation is that the US-Canada free trade agreement produced only minor local complaints of a distributive nature, whereas the expansion of that agreement to include Mexico is proving more controversial.

In all, Krugman's contribution to the development of the monopolistic competition model of intra-industry trade was a remarkable achievement for one so young. The only thing more remarkable is his continued career at the same high level. Writers of detective stories tell us that the first murder is the hardest to commit; the next ones become easier or even inevitable. It took a lot of thought and tenacity to displace from its pedestal the traditional paradigm of trade based on differences among countries, and to establish as a viable alternative or complement the monopolistic competition theory of intra-industry trade among similar countries.

But after that, other market structures became easier targets for analysis. Obviously oligopoly was next. Jointly with James Brander, and building on an earlier attempt of Brander , Krugman developed in [20] a model of international duopoly. Suppose initially there are two identical countries. There are two goods, one produced competitively under constant returns, and the other monopolized by one firm in each country.

Now let trade open up, with some transport cost or other barrier that gives each firm a cost disadvantage in the other's home market. Under perfect competition there would be no trade.

But if the firm's strategies are quantities, there can be a Cournot equilibrium where each firm has the majority market share in its own market. Since a Cournot competitor perceives a demand elasticity equal to the industry elasticity divided by its own market share, each perceives a more elastic demand in its export market, and is therefore willing to accept a lower markup there.

Thus a common price in each market can be compatible with different costs. This simple model has some dramatically new implications. In this respect oligopoly can be even more dramatically different from perfect competition than could monopolistic competition; there at least the two-way intra-industry trade was in varieties that were close but not perfect substitutes. This benefit remains even though some resources are being lost in costly transport, so long as the transport costs are not too large.

This model has several special features that contribute to the results. The assumption of Cournot competition, and the assumption that each firm sets its quantity in each country with no resale or third-party arbitrage that would impose a constraint on the price differential, are particularly important. Later work has re-examined the conclusions in other settings; for example Venables , Ben-Zvi and Helpman But the Brander-Krugman model with its simple structure and dramatic results served a very valuable function; it was a kind of wake-up call to the profession.

Once we were alerted to the potentialities of imperfectly competitive market structures for trade theory, the obvious next question was the role of trade policy in such conditions. Traditional theory based on the perfect competition paradigm had very little good to say about any measures to interfere with free trade.

Tariffs could benefit one country if it was large enough to improve its terms of trade, and even this resulted in a net economic loss to the world as a whole. For any other market failures, for example domestic externalities, trade policies were at most inferior substitutes for other policies more precisely targeted at the problems.

Export subsidies were particularly useless; they just worsened your terms of trade. Might things be different with imperfect competition? Many researchers in different settings soon found new possibilities.