The winners of the 2008 Nobel Prizes

First, there are the reasons why Krugman would have earned such an award, just as he previously won the John Bates Clark Medal (1991) in his youth. And second, there are reasons why awarding him this prize is particularly problematic.

Krugman is far more politically partisan than any of the recent award winners. Joe Stiglitz became more ideological and partisan after he won the prize, Ned Phelps used the platform of the prize to think "big" thoughts about the capitalist system, but Krugman became ideological and partisan more than a decade prior to the announcement of his prize. And he has not really written serious academic papers or books in economics during that time span. Krugman more or less abandoned scientific economics when he decided to start writing for a broader audience in the 1990s.

The first-best theorems of free trade that Krugman reacted to were a consequence of attempts to translate traditional and time-honored arguments among economists into the formalistic model of general competitive equilibrium by Paul Samuelson. By reducing the multiplicity of arguments one found in thinkers from David Hume and Adam Smith to James Mill and David Ricardo--let alone economic journalistic arguments as found in Frederic Bastiat--to the formalistic model of competitive equilibrium, the theorists of mid-20th century economics set up a rather fragile argument for the defense of free trade as the best policy. Bastiat, in perhaps the greatest economic satire every written, exposes the silliness embodied in business interest groups lobbying the government for protectionism--in this case the candlestick makers petitioning the government for protection from the unfair competition from the sun. We now refer to this behavior of petitioning as "rent-seeking" costs in the academic economics literature, but these sort of broader arguments were not accounted for in the formalistic models of trade. Instead, as I have said, we had first-best theorems derived in a vacuum devoid of any political structure or realistic examination of the processes of public policy decision making.

Krugman demonstrated more thoroughly than any of his peers the fragility of those first-best theorems. Deviations from the core assumptions of perfect market structure and decreasing returns, resulted in theorems that challenge the free-trade position and apparently justified protectionism. A major result was that trade patterns often emerged in attempts to realize gains from increasing returns rather than comparative advantage, and thus strategic trade subsidization and protectionism can, in theory, outperform the results that would emerge under a strict interpretation of free trade.

Krugman himself admitted that these results were model artifacts rather than practical policy conclusions. He has on multiple occasions admitted that when we get down to practical public policy we ought to look at the costs associated with political action, and the fundamental truth of thinkers such as Hume and Ricardo that trade deficits are self-correcting and that the gains from trade do not depend on countries possessing an absolute advantage over its rivals. Unfortunately, rather than Krugman's demonstration of the fragility of the first-best theorems forcing economists to rethink the enterprise of formalism--since it results in clouding our understanding of the broader arguments made by the mainline of political economist from the classics to the neoclassic--these broader points are restricted to mere afterthoughts and footnotes.

To put this very simply, the formal tools used by economists for most of the 20th century required smooth and continuous functions that are twice differentiable. Lumpy and discrete phenomena defy such representation, and it is arguably the lumpy and discrete things in our world that make the economic world worthy of study--and provide alternative arguments about the power of markets and the problems of politics that are missed in the formal exercises of economic theory. They are not missed, however, in the "appreciative theory" exercises we employ in our classrooms and lunchroom conversations, and are evident in the literary economics of classical political economists such as Adam Smith or modern political economists such as F. A. Hayek and James Buchanan.

The economist Paul Krugman used to warn his readers in afterthoughts and footnotes that we should never allow the best to be the enemy of the good, and that while his work has blown up the first-best theorems of equilibrium economics the core ideas of the classics should not be thrown away. But the political pundit Paul Krugman does not warn his readers about the pitfalls. Instead, he rails against the unworkable laissez faire model at the same time as blaming the current administration for pursuing a laissez faire philosophy. Markets and unscrupulous businessmen and conservative politicians come under assault, while enlightened political leaders and insightful thinkers working together are seen as the solution to the social ills that free market fundamentalism has supposedly wrought. This is why Krugman can claim to be the liberal conscience of the intellectual crowd in the U.S. today.