Tuesday, December 4, 2018

22 Days in Paul Krugman's Masterclass (Day 15) (Just Why Exactly Was Paul Krugman Awarded the Nobel Prize?)

Lesson 15 in Paul Krugman's Masterclass is 13 minutes and 11 seconds long.

It is probably Krugman's best lesson to date.

In it, he discusses international trade and makes a number of sound points.

An early point he makes, which is also a Rothbardian type point, is that unlike most people think, "history is not always going in one direction." There can be advances and fallbacks.

Krugman uses the period from World War 1 to the end of World War 2 as an example of a period when world trade declined from the period before World War 1. The decline he correctly notes was because of tariffs and various import quotas.

He then goes on to discuss comparative advantage and gets it all correct but I thought his presentation could have been clearer.

Next, he discusses New Trade Theory, which was developed by him and what he received the Noble Prize for. It is a kind of a tangential observation to the law of comparative advantage that explains why factors such as economies of scale limit the production of goods to certain areas even though many countries could efficiently produce such products.

He uses the airline manufacturing industry as an example of a product that could be produced in many areas but is limited to a few because of the benefits in having all the factors of airplane production nearby in a limited area.

Krugman also comments on a Ricardo model which failed to indicate how land properties might fall in free markets. Krugman attributes Ricardo's failure to include this as part of his model to perhaps the fact that Ricardo didn't like landlords.

Krugman then states with a grin:
It's okay to have a model where you leave stuff out even if the choice of what you leave out is somewhat affected by your politics.  
Perhaps this is where Krugman gets his inspiration to leave stuff out of some of his models.

Links to discussions of all Krugman's Masterclass lessons are here.


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