12 results
Preface
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- By Paul Krugman
- Simon Wren-Lewis, University of Oxford
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- Book:
- The Lies We Were Told
- Published by:
- Bristol University Press
- Published online:
- 14 April 2023
- Print publication:
- 07 November 2018, pp ix-x
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Summary
In the years since the financial crisis, Simon Wren-Lewis has arguably been Britain’s leading economic Cassandra. And I say this both in praise and in sorrow.
In the original Greek myth, after all, Apollo gave Cassandra the gift of true prophecy, but then cursed her by ensuring that nobody would ever believe her dire warnings. And so it has been with macroeconomics.
It’s not widely appreciated, but basic, textbook macroeconomics – the kind of economics Wren-Lewis has been applying and trying to explain – has worked remarkably well since the crisis.
Thus, where many people were warning that central banks like the Bank of England or the Fed were courting runaway inflation by ‘printing money’, economists argued that this was no danger in a depressed economy; they were right. When many pundits warned that debt and deficits would send interest rates skyrocketing, economists argued that this wouldn’t happen; they were right. And when politicians called for fiscal austerity to increase ‘confidence’, economists warned that this would deepen and prolong the slump; yet again, they were right.
And nobody would believe them.
On both sides of the Atlantic, the torch of economic truth was largely held aloft not by regular journalists – although there were a few, like Martin Wolf and, I hope, yours truly – but by economics bloggers. In America that meant people like Berkeley’s Brad DeLong. In the UK it meant, above all, Wren-Lewis and his blog, mainly macro.
I’ve been following Simon’s blog faithfully since he started it in 2012, both because of the depth and clarity of his analysis and because economic debate in the UK has provided an illuminating counterpoint to debate in the US. We had a broadly sensible administration hamstrung by divided government and a bizarre Beltway consensus that deficits were a more important problem than mass unemployment; you had unified government committed to bad ideas, cheered on by what Simon calls ‘mediamacro’. Media malfeasance helped us stumble into the nightmare of Trump; it helped you stumble out of the European Union.
In this book Wren-Lewis collects a number of his plain-English blog posts in which he tried to debunk the myths driving UK economic policy – like the pervasive, utterly false myth that Labour profligacy made austerity necessary and inevitable.
Masahisa Fujita and The Transformation of Urban Economics
- Paul Krugman
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- Journal:
- Recherches Économiques de Louvain/ Louvain Economic Review / Volume 77 / Issue 2-3 / September 2011
- Published online by Cambridge University Press:
- 09 January 2015, pp. 9-10
- Print publication:
- September 2011
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Masa Fujita is a quiet economist – articulate and funny in person, but never one for dramatic gestures or flashy presentations. His work and influence over the years have built gradually, without at first attracting widespread notice beyond urban economists. But over time he, more than anyone else, has transformed the field.
If there is an overarching theme in Masa's work, it is “escape from von Thiinen.” Let me explain.
The von Thünen model of land use and land rent has, justifiably, exerted a powerful influence on how economists think about location, especially within cities. The basic idea is that of a single urban center, with costly transportation of goods to that center; given varying costs of transportation, this leads to a predictable relationship between land rents, land use, and distance from the center. Once Alonso realized that the same basic framework could be applied to commuting to a city center rather than transporting goods to a central city, we had a ready-made way to think about urban structure – and this way of thinking remains useful to this day.
1 - Crises: The Next Generation?
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- By Paul Krugman
- Edited by Elhanan Helpman, Harvard University, Massachusetts, Efraim Sadka, Tel-Aviv University
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- Book:
- Economic Policy in the International Economy
- Published online:
- 03 November 2009
- Print publication:
- 27 March 2003, pp 15-32
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Summary
When I first began working on the theory of currency crises in 1977, I imagined that it was a subject mainly of historical interest. The motivating events were the speculative attacks that brought down the Bretton Woods system in 1971 and the Smithsonian system in 1973. Given the end of fixed rates for major economies, it seemed unlikely that such events would recur.
Of course, that's not how it turned out. The fixed rates of Latin American nations offered a target for large speculative attacks in the runup to the debt crisis of the 1980s; the fixed rates of the European Monetary System offered targets for a wave of speculative attacks in 1992–93; and the more or less fixed rates of Asian and other developing nations offered targets for yet another round of attacks in 1997–98.
Yet while the continuing relevance of the general idea of speculative attacks has justified the original theoretical interest in the subject, the actual models have not fared as well. When Eichengreen, Rose, and Wyplosz (1995) introduced the terminology of “first-generation” and “second-generation” crisis models, they also highlighted the somewhat disheartening fact that each wave of crises seems to elicit a new style of model, one that makes sense of the crisis after the fact. And sure enough, the Asian crisis led to a proliferation of “third-generation” models, quite different from either the first or the second generation.
1 - The practical theorist: Peter Kenen's contribution to international economics
- Edited by Benjamin J. Cohen, University of California, Santa Barbara
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- Book:
- International Trade and Finance
- Published online:
- 11 September 2009
- Print publication:
- 13 November 1997, pp 7-28
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Summary
Academic economists can achieve distinction in many ways. Some become innovative theorists, who re-imagine the world and give us a new language to discuss how it works. Some become sage advisers to the powerful, shaping policies and institutions by the force of their intellect. Some become servants to the profession – great teachers, or those invaluable academic statesmen who edit journals and guide centers of research. And a few masochistic economists even become academic administrators – a job somebody once described as being like trying to herd cats.
The extraordinary thing about Peter Kenen's career is that he has filled all these roles, and filled them all so very well. The theorist who wrote “Nature, Capital, and Trade” and “The Theory of Optimum Currency Areas” was also a key member of the famed Bellagio Group, which brought together policy-minded academics and intellectually inclined policymakers to discuss international monetary institutions with a depth and cogency that have never been matched. It goes without saying that Kenen's combination of analytical force and real-world acumen has made him one of the most influential teachers of his generation. But not content with these accomplishments, he has also directed the International Finance Section, which under his leadership has maintained to this day a unique role as a center for and publisher of policy-relevant research in international economics.
1 - Trade and wages
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- By Paul Krugman
- Edited by David M. Kreps, Kenneth F. Wallis, University of Warwick
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- Book:
- Advances in Economics and Econometrics: Theory and Applications
- Published online:
- 05 January 2013
- Print publication:
- 20 February 1997, pp 1-18
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Summary
Many influential people are firmly convinced that the growth of the world trade and especially the growing exports of manufactured goods from developing countries are the main cause of declining wages and rising unemployment in the west. Widely quoted publications, like the World Economic Forum's World Competitiveness Report, state flatly that western prosperity is no longer sustainable in the face of increased global competition; even the European Commission's 1993 White Paper Growth, Competitiveness, Employment asserts that the most important cause of rising European unemployment is the fact that “other countries are becoming industrialized and competing with us - even on our own markets - at cost levels which we simply cannot match.”
It is not surprising that the idea of a close link between growing trade and declining wages has become widely accepted. The image of global competition - for markets and for capital - that undermines the position of labor is a simple and compelling one, which makes intuitive sense to businessmen and politicians. Moreover, the attribution of domestic woes to international competition appeals strongly to what one might call the fashion sense of policy intellectuals. Not only does the mere use of the world “global” help to convey an image of worldly sophistication; a story that links together the growth of world trade, the rise of Asia, the fall of Communism (which has opened up new outlets for capital and converted new nations to capitalism), and the decline of the west has a sweep and glamour that ordinary economic analyses lack.
8 - Lessons of Massachusetts for EMU
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- By Paul Krugman
- Edited by Francisco Torres, Francesco Giavazzi
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- Book:
- Adjustment and Growth in the European Monetary Union
- Published online:
- 29 January 2010
- Print publication:
- 21 October 1993, pp 241-266
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Summary
Introduction
Over the past decade the European Community has made great strides towards becoming a fully unified economic entity. Border obstacles and regulatory barriers to an integrated market for goods and services have been removed in the drive towards 1992; now, as the economic and monetary union (EMU) moves forward, an integrated capital market and eventually a common currency seem all but assured. By the end of the twentieth century Europe should, in many respects, constitute as unified and integrated an economy as the United States of America.
Most economists (myself included) view this as a generally good thing. Yet at any given time not everyone in the USA is entirely happy to be part of such a unified, integrated economy. In particular, over the past decade several regional economies within the United States have been subject to large adverse shocks — shocks which have arguably been so large precisely because the US economy is so integrated — for which they have had essentially no policy recourse simply because the US already has the common currency that EMU is supposed to produce for Europe.
The most intellectually influential of the regional crises in the US has been the recent slump in New England — the events are dramatic enough to be worth noting in any case, but proximity to certain univerisities has not hurt their academic visibility! The New England story is by now familiar in the US, but may be worth reviewing for Europeans.
7 - The current case for industrial policy
- Edited by Dominick Salvatore, Fordham University, New York
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- Book:
- Protectionism and World Welfare
- Published online:
- 18 September 2009
- Print publication:
- 23 September 1993, pp 160-179
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Summary
On the whole, economists have been highly critical of government efforts to target particular industries for protection or promotion. The actual policies of governments have, of course, been criticized for their clumsiness, their responsiveness to special interest groups, and often their sheer corruption. Beyond this critique of practice, however, economists have been extremely negative about the idea of industrial policy even in principle. The general presumption of most economic theory is that the best industrial policy is to let the market work – that the decentralized incentives of the market place will push resources to the places with the highest expected return, and that no second-guessing of market decisions is necessary or desirable.
The purpose of this chapter is to argue that whatever the failings of industrial policy in practice, there is in fact a pretty good case for such a policy in principle – and that recent developments in economics give us a reasonable set of criteria for thinking about which industries to promote.
This represents a change in position on my part. Like other economists, I have written a number of critiques of proposals for industrial policy (Krugman, 1983, 1984). These critiques reacted (correctly) against the crude misconceptions that seemed to underlie most proposed criteria for industrial targeting. They went on, however, to argue that, while there might be potential reasons for an active industrial policy based on more sophisticated criteria, it was unlikely that such a policy could actually do much good.
3 - The hub effect: or, threeness in interregional trade
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- By Paul Krugman
- Edited by Wilfred J. Ethier, University of Pennsylvania, Elhanan Helpman, Harvard University, Massachusetts, J. Peter Neary, University College Dublin
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- Book:
- Theory, Policy and Dynamics in International Trade
- Published online:
- 16 March 2010
- Print publication:
- 26 August 1993, pp 29-37
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Summary
In his delightful Graham lecture Ron Jones mounted a spirited defense of “two-ness” in trade models. So it is with some trepidation that I offer in this paper a model where one cannot even discuss the subject without counting up to three! In justification I can only claim that what Ron meant was not that two is a magic number, but that it is useful to study small models – and in that sense this paper is a (small!) addition to the lovely house that Jones built.
The subject of the paper is that of the role of transportation “hubs” in the pattern of interregional and perhaps international trade. By this I do not mean anything very profound; I simply mean a situation in which the costs of transportation between locations differ in such a way that one location can reasonably be described as a transport “hub.” One cannot have a hub in this sense with only two locations, but one can with three, as illustrated in Figure 3.1. In that figure, we suppose that consumption and production take place at the three locations 1, 2, 3. There are some costs of transportation between these locations. Transport costs are, however, lower between 1 and either 2 or 3 than between 2 and 3. Thus 1 is the “hub” of this network. What I want to argue is that (i) transportation hubs are especially desirable places to locate the production of goods and services subject to increasing returns, and (ii) the interaction between increasing returns in production and in transportation leads to the endogenous formation of such transportation hubs.
3 - Regionalism versus multilateralism: analytical notes
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- By Paul Krugman
- Edited by Jaime De Melo, Université de Genève, Arvind Panagariya, The World Bank
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- Book:
- New Dimensions in Regional Integration
- Published online:
- 04 May 2010
- Print publication:
- 29 July 1993, pp 58-79
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Summary
With the Uruguay Round still (at the time of writing) on the brink, with growing tensions between the United States and Japan, and with growing support in the United States for a more or less aggressive industrial policy, it is evident that the GATT-centred system of multilateral trade relations is in considerable trouble. At the same time, regional trading arrangements such as ‘EC 1992’ and the North American Free-Trade Area (NAFTA) have appeared to be the cutting edge of whatever successful international negotiations have taken place. This apparent shift away from globalism to localism has created severe ambivalence among policy intellectuals. Should the rise of regional trading arrangements be welcomed, as a step on the road that will ultimately reinforce global free trade? Or should regional trading blocs be condemned, as institutions that undermine the multilateral system? Or, yet again, should they perhaps be accepted more or less grudgingly, as the best option we are likely to get in an age of diminished expectations?
This ambivalence, and the striking extent to which reasonable analysts find themselves in sharp disagreement, are not surprising. The issue of multilateralism versus regionalism is a difficult one to get one's arms around, on at least two levels. First, even in narrowly economic terms it is a tricky area: after all, it was precisely in the context of preferential trading arrangements that the byzantine complexities of the second best were first discovered.
Second, the real issues cannot be viewed as narrowly economic. International trading regimes are essentially devices of political economy; they are intended at least as much to protect nations from their own interest groups as they are to protect nations from each other.
2 - International finance and economic development
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- By Paul Krugman, MIT and CEPR, Richard E. Baldwin, Institut Universitaire des Hautes Etudes Internationales, Genève and CEPR, William H. Branson, Princeton University and CEPR
- Edited by Alberto Giovannini, Columbia University, New York
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- Book:
- Finance and Development
- Published online:
- 05 November 2011
- Print publication:
- 25 March 1993, pp 11-28
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Summary
Although the 1980s was a decade of enormous activity in international financial markets, little of this activity translated into net resource transfers from capital-rich to capital-scarce countries. Indeed, as a result of the debt crisis resource transfers generally went from South to North. As the 1990s begin, however, the prospects for substantial external finance for development seems brighter, at least in some areas. In Europe, Portugal and Spain have recently attracted substantial inflows of external capital; it is widely believed, although some are sceptical, that reforming Eastern European nations may also be able to attract considerable external finance. In North America, Mexican economic reforms and the prospect of a free trade agreement have enabled that nation to resume voluntary access to the world capital market, with large inflows of direct investment in particular. In both the European and North American context, capital inflows have been widely seen both as a vote of confidence in the future economic growth of the recipients and as a key force propelling those growth prospects.
Some observers (e.g. Hale, 1991) have gone further and suggested that with the victory of the West in the Cold War, the stage is now set for a second golden age of capitalism. In this new golden age, the optimists suggest, international net capital flows may again rise to levels as a share of world product comparable to those in the pre- World War I era, and a worldwide convergence of per capita income will be the result.
3 - Is the Japan problem over?
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- By Paul Krugman, Massachusetts Institute of Technology, Shunichi Tsutsui, University of Georgia, Harry P. Bowen, New York University
- Edited by Ryuzo Sato, Paul Wachtel
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- Book:
- Trade Friction and Economic Policy
- Published online:
- 05 February 2012
- Print publication:
- 30 October 1987, pp 16-44
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Summary
For most of the U.S. public, trade relations with Japan are the dominant issue of international economic policy. International debt is the problem of the bankers and may even serve them right; agricultural trade and the European Economic Community (EEC) is a farmers' problem; but the Japanese issue touches not only our sense of national pride but also our jobs. The future growth of world trade depends more on how the United States comes to perceive its trade with Japan than on any other issue.
The question of how to manage U.S.–Japanese trade relations comes on at least two levels. The first level is one of ascertaining the facts. Does Japan take unfair advantage of our open market while closing its own? Many, perhaps most, Americans believe this, though few economists would agree. I will take it as a working assumption in this that the perception of Japan as a villain is at least 95% wrong. Even a brief review of the evidence explodes most of the myths that continue to circulate in U.S. discussion. While there is room to criticize Japan, the idea that Japan is pursuing beggar-my-neighbor policies on a grand scale is essentially preposterous. Nonetheless, many influential Americans believe it.
8 - Increasing returns and the theory of international trade
- Edited by Truman Fassett Bewley
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- Book:
- Advances in Economic Theory
- Published online:
- 05 January 2013
- Print publication:
- 26 June 1987, pp 301-328
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Summary
Abstract: Increasing returns are as fundamental a cause of international trade as comparative advantage, but their role has until recently been neglected because of the problem of modeling market structure. Recently, substantial theoretical progress has been made using three different approaches. These are the Marshallian approach, where economies are assumed external to firms; the Chamberlinian approach, where imperfect competition takes the relatively tractable form of monopolistic competition; and the Cournot approach of noncooperative quantity-setting firms. This chapter surveys the basic concepts and results of each approach. It shows that some basic insights are not too sensitive to the particular model of market structure. Although much remains to be done, we have made more progress toward a general analysis of increasing returns and trade than anyone would have thought possible even a few years ago.
Since the beginnings of analytical economics, the concept of comparative advantage has been the starting point for virtually all theoretical discussion of international trade. Comparative advantage is a marvelous insight: simple yet profound, indisputable yet still (more than ever?) misunderstood by most people, lending itself both to theoretical elaboration and practical policy analysis. What international economist, finding himself in yet another confused debate about U.S. “competitiveness,” has not wondered whether anything useful has been said since Ricardo?