What does Paul Krugman really think about trade theory?

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Last week, I attended the Intelligence Squared debate on Buy American/Hire American provisions. It pitted Jagdish Bhagwati, Doug Irwin, and Susan Schwab against Leo Gerard, Rick MacArthur, and Jeff Madrick; the transcript is available online (pdf).

Rick MacArthur, who wrote The Selling of Free Trade and called his debate team “the protectionist side”, opened his speech with an attack on the credibility of international economics. He said Thomas Carlyle labeled economics “the dismal science” because it was not a hard science (not even close), and that free traders cling to David Ricardo “with Marxist fervor.” He then quoted a paragraph from Paul Krugman’s Geography and Trade (1991), which says:

[T]he tendency of international economists to turn a blind eye to the fact that countries both occupy and exist in space — a tendency so deeply entrenched that we rarely even realize we are doing it — has, I would submit, had some serious costs. These lie not so much in lack of realism — all economic analysis is more or less unrealistic — as in the exclusion of important issues and, above all, important sources of evidence.

It’s immediately obvious to anyone familiar with Krugman’s body of work or who notices the link between the phrase “occupy and exist in space” and the word Geography in the title that MacArthur has pulled this quotation out of context. Paul Krugman would likely be one of the last people on earth to say that trade theorists don’t have useful contributions to make. In fact, he says so on the very same page of Geography and Trade:

There is nothing wrong with simplifying assumptions — on the contrary, it is only through strategic simplification that we can hope to make any sense of the buzzing complexity of the real world. The particular simplifying assumptions of conventional trade theory have led to an impressive and very useful intellectual construct. For some purposes it does no harm to ignore the fact that countries are not points and that some pairs of countries are much closer than others — that California is farther from New York than any place in the European Community is from any place else, or that London and Paris are much closer to each other than are New York and Chicago, or for that matter that Canada is essentially closer to the United States than it is to itself.

Yet the tendency of international economists to turn a blind eye to the fact that countries both occupy and exist in space — a tendency so deeply entrenched that we rarely even realize we are doing it — has, I would submit, had some serious costs. These lie not so much in lack of realism — all economic analysis is more or less unrealistic — as in the exclusion of important issues and, above all, important sources of evidence. As I hope I will be able to show, one of the best way to understand how the international economy works is to start by looking at what happens inside nations. If we want to understand difference in national growth rates, a good place to start is by examining differences in regional growth; if we want to understand international specialization, a good place to start is with local specialization. The data will be better and pose fewer problems of compatibility, and the underlying economic forces will be less distorted by government policies.

No intellectually honest person would claim that these paragraphs are ammunition for protectionists against unscientific trade theory. Shame on whomever provided the quotation to MacArthur — he’s been using it out of context for almost a decade now.

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