Paul Robin Krugman is a distinguished American economist who not only wrote for The New York Times but also received a Nobel Memorial Prize in Economic Science for his contributions to New Trade Theory and New Economic Geography. His most popular works included international economics, liquidity traps, and currency crisis. In addition, he was a professor, an author, and considered as one of the most influential economist based on the contributions that he made in the academics.
Krugman was of Jewish ancestry. His grandparent first set foot in America in 1922 when they migrated from Brest, Belarus. He was born in Albany, New York but he stayed most in Merrick in Nassau County while growing up. He finished secondary school in John F. Kennedy High School in Bellmore.
His first wife was the award winning designer and artist Robin L. Bergman while his second and current wife is Robin Wells, an academic economist.
KRUGMAN’S ACADEMIC DEVELOPMENT
Krugman’s interest in economics was inspired by Isaac Asimov’s Foundation novels. He pursued the study of economics and graduated as summa cum laude in economics in Yale University in 1974. He next took up his PhD at the Massachusetts Institute of Technology. While in MIT, he was able to spend some time working for the Central Bank of Portugal.
After finishing his studies, Krugman caught the attention of Dornbusch with his monopolistically competitive trade model. He was persuaded to further enhance his work and later on, Krugman came up with The Theory of Interstellar Trade, an essay about calculating the rate of goods almost the same as the speed of light.
Krugman became a Professor of Economics at Princeton University in 2000. He also worked as a research associated at the National Bureau of Economic Research, the president of the Eastern Economic Associations, and the current Centenary Professor at the London School of Economics. In 2014, Krugman announced the end of his tenure at Princeton and his new career at the Graduate Center of the City University of New York.
As an author, Krugman became very influential in the field of economics because of his publications regarding the topics of international trade, economic geography, and international finance. His works earned him the first place in the world’s most influential economists. Some of his books have also been widely used as references and were read by a number of people.
KRUGMAN’S NEW TRADE THEORY
Krugman shared his insights about the trade between similar countries in a paper that was published in the Journal of International Economics in 1979. He presented two key assumptions: one being that consumers have preference for more diverse brands and the other being production is in favor of economies of scale. The choice for diversity manifested by consumers can be exemplified by the brands of cars that they buy. On the other hand, the economies of scale limit the profits that will be gained if the manufacturers of a certain car brand are spread out. Therefore, companies have no choice but to concentrate production on specific areas and countries.
This theory, which combines the economies of scale in the production and the preference for diversity in consumption is now known as the New Trade Theory.
KRUGMAN’S NEW ECONOMIC GEOGRAPHY
After eleven years, Krugman’s New Trade Theory evolved and became the “new economic geography.” The development of the concept started with Krugman’s paper entitled, “Increasing Returns and Economic Geography,” which was published in the Journal of Political Economy in 1991. The paper was set to become Krugman’s most cited work.
In NEG, the concept of the “home market effect” which was originally featured in the new trade theory, pointed out that agglomeration is “the outcome of interaction of increased returns, trade costs, and factor price differences.” This only means that a trade largely dictated by economies of scale come with economic regions that will profit the most if the production is also at the maximum. In short, production that is concentrated in just a few areas will cause increased population density but with also a higher level of income.
KRUGMANS’ INFLUENCE ON INTERNATIONAL FINANCE
In the field of international finance, Krugman’s influence started making waves when he adapted a model formulated by Stephen Salant and Dale Henderson. Afterwards, he published a paper regarding currency crises in the Journal of Money, Credit, and Banking where he presented how misaligned fixed exchange rate regimes will not end in a good way. Instead, such conditions could cause sudden speculative attacks.
During the global financial crisis of 2008, Krugman introduced an “international finance multiplier” which aimed to clearly expound on the causes of the global crisis. He pointed out how high leveraged financial institutions lost greatly in the market and were forced to sell their assets overseas. The consequences of such actions was that the prices of the assets lowered down, causing some pressure on the balance sheets of the said institutions.
KRUGMAN’S VIEWS ON MACROECOMICS AND FISCAL POLICY
One of the topics that Krugman liked to discuss about was liquidity trap. He suggested that aggressive fiscal policy partnered with unconventional monetary policy should be used to negate what happened in Japan’s lost decade during the 1990s. Krugman firmly believed that the country was set in a Keynesian liquidity trap.
Krugman’s belief in the liquidity trap enveloping Japan was brought about by the fact that the central bank was not able to lower its interest rates in order to be free from economic stagnation. He proposed to use inflation targeting to aid Japan’s economic situation aimed at providing the country with enough demand that will not distort the allocation of its resources.
Later on, he compared Japan’s lost decade with the late 2000s recession where he again proposed the necessity of using expansionary fiscal policy to help the industries being dragged down by liquidity traps.
Krugman had also been an avid supporter of the 2008-2009 Keynesian resurgence. In 2012, he launched Richard Layard a manifesto for economic sense, where they argued that fiscal stimulus policy must be employed in a wider range and degree in order to eliminate unemployment and promote economic growth.