Former MIT economics professor Paul R. Krugman PhD '77 has won the Nobel economics prize for "his analysis of trade patterns and location of economic activity."
In announcing the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel on Monday, the Royal Swedish Academy of Sciences said Krugman had formulated a new theory to address the effects of free trade and globalization and the driving forces behind worldwide urbanization. In doing so, he integrated previously disparate research fields of international trade and economic geography.
Krugman, 55, has a long history with MIT. After graduating from the Institute, he was an assistant professor at Yale for three years before returning to MIT as an associate professor of economics in 1980.Â With the exception of a year as international policy economist for the Council of Economic Advisers and two years as a professor at Stanford University, he was on the faculty at MIT until 2000, when he moved to Princeton. There he is a professor of economics and international affairs. He also writes a column for The New York Times.
Ricardo Caballero, head of MIT's Department of Economics, e-mailed Krugman earlier today when he learned of the news. "In that e-mail I noted to him that when I heard he had won the Nobel I imagined that it was due to his seminal work on crises and exchange rates, but then I learned that the award was given to him for his work in international trade and economic geography.
"The point is that there are very few people in economics who could [win] the Nobel prize for two completely different bodies of work.
"I'm very happy for him and for our department," Caballero said. "Paul is an MIT boy -- he was a star student in the 1970s, and a member of our faculty for many years. His seminal work was done on our premises. It is simply amazing how many Nobel prizes in economics have a strong link to MIT." Including Krugman, 18 MIT professors, former faculty, alumni and instructional staff have won the prize in economics.
Krugman's approach to trade and geography is based on the premise that many goods and services can be produced more cheaply in long series, a concept generally known as economies of scale. Meanwhile, consumers demand a varied supply of goods. As a result, small-scale production for a local market is replaced by large-scale production for the world market, where firms with similar products compete with one another.
Traditional trade theory assumes that countries are different and explains why some countries export agricultural products whereas others export industrial goods. The new theory clarifies why worldwide trade is in fact dominated by countries that not only have similar conditions, but also trade in similar products -- for instance, a country such as Sweden that both exports and imports cars. This kind of trade enables specialization and large-scale production, which result in lower prices and a greater diversity of commodities.
Economies of scale combined with reduced transport costs also help to explain why an increasingly larger share of the world population lives in cities and why similar economic activities are concentrated in the same locations. Lower transport costs can trigger a self-reinforcing process whereby a growing metropolitan population gives rise to increased large-scale production, higher real wages and a more diversified supply of goods. This, in turn, stimulates further migration to cities.
Krugman's theories have shown that the outcome of these processes can well be that regions become divided into a high-technology urbanized core and a less developed "periphery."
Krugman becomes the 73rd MIT-related Nobel prize winner.
A version of this article appeared in MIT Tech Talk on October 22, 2008 (download PDF).