Monday, March 7, 2011
Chapter 14: 188-191
In 1980, at the University of Warwick, an economic workshop on international trade was being held. In attendance were top economists as well as up and coming youngsters, one of which was Paul Krugman. Krugman, while presenting a paper on reciprocal dumping, was invited by Elhanan Helpman to help write a textbook on trade. The two eventually became research partners and wrote a book together titled Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition, and the International Economy, which provided “a systematic exposition on the theory of monopolistic competition.” The idea of monopolistic competition was hugely popular and spread rapidly. This new idea of trade gave us a two tiered view of commerce. The first tier has commodities driven by perfect competition and comparative advantage while the upper tier was categorized by governments assaulting other government's markets as well as market size dictating what each government specialized in. This idea caused countries to become more industrial and to be more open to trade. The author ended with the idea that if commodities on the bottom level came about by the distribution of natural resources, then the upper tier was simply who got to the idea first.
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A for Jane.
ReplyDeleteI don't know that I'd characterize it as "government's assaulting other government's markets. First, countries have markets, not governments. But secondly, I think it's more correct to say that it provided a theoretical proof of why government trade policy seemed to work, when earlier trade theories said that it wouldn't.
It's hard to emphasize how path-breaking this was. Krugman is one of the few economists not to have to share his prize, and while he's done a lot of great stuff, the prize is really for that one paper. And it's short and easy (as economics theory papers go) to boot!