Posted 9:31 PM by Robert

The Bad Economist? III: Of Hype And Hyperbole

As noted in a prior post, the most striking result of Herr Doktorprofessor Paul Von Krugman's entire academic career - his theory of the so-called "home market effect" - was dealt a severe but not fatal blow by Donald Davis, now the Chair of the Columbia economics department. Worse, the blow depended on Prof. Davis pointing out a serious problem that should and would have been disclosed by standard "sensitivity analysis" testing how much Herr Doktorprofessor's results would be affected by a failure of one or more of the "simplifying hypotheses" on which they were based. Herr Doktorprofessor appears to have conducted no such sensitivity analysis - or at least he does not disclose any prior to Prof. Davis' paper.

But Herr Doktorprofessor's status as a world class self promoter was cemented by his and his supporters (dependents?) recharacterization of this development as a great vindication of his work. Indeed, he went on to write a book with two co-authors: The Spatial Economy by Fujita, Krugman and Venables ("FKV"), a book that was, in turn, reviewed in a paper OF HYPE AND HYPERBOLAS: INTRODUCING THE NEW ECONOMIC GEOGRAPHY by J. Peter Neary of University College Dublin and CEPR. Some of the paper is rather technical - but many of his comments constitute interesting commentary on Herr Doktorprofessor's self-promotion and hyperbolic claims of his own importance:

[A]t times the authors risk getting carried away by their heady prose style. They find the predictions of one model so plausible that they call it "History of the World, Part I" (p. 253); they describe the pattern of world industrialisation implied by another as "a story of breathtaking scope" (p. 277); and on his website Krugman expresses the hope that economic geography will one day become as important a field as international trade. This sort of hype, even if tongue-in-cheek, is not to everyone?’s taste, especially when the results rely on special functional forms and all too often can only be derived by numerical methods. What next, the unconvinced reader may be tempted to ask? the tee-shirt? the movie?

Donald Davis (1998) criticize[d] [Krugman's original results] on two counts. He makes the empirical point that real-world transport costs appear to be at least as high for the latter, and he shows theoretically that this neutralises the home-market effect. Chapter 7 of the book derives similar results (without referring to Davis) but gives them a totally different spin. Whereas Davis concludes that there is "no compelling argument [...] that market size will matter for industrial structure", FKV note that a reduction of agricultural transport costs may trigger agglomeration. So, relatively low agricultural transport costs are either a necessary and implausible condition for agglomeration, or a source of yet more "stories of breathtaking scope": take your pick.

I have taken the appearance of FKV as an opportunity to review the "new" economic geography. It is not the only approach to location and agglomeration which economists have taken. Many authors such as Brian Arthur (1986) and Robert Lucas (1988) have theorised about the role of regions and cities in economic development. But no other body of work does quite the same thing as the new economic geography: explain agglomeration in a theoretical framework which is tractable, has solid micro foundations, and makes testable empirical predictions. So, to paraphrase Robert Solow (1962), everyone should read this book, or at least encourage their students to do so! Remember though that Solow?’s remark was made about the two-sector growth model, as emblematic of the 1960s as mini-skirts or the Beatles, though not as long-lasting. Will the new economic geography prove more durable? I suspect that it will, though maybe not as a distinct field. Instead, I am tempted to suggest that it will survive as "merely" another simple general equilibrium model, supplementing the trade theorist's tool-kit, to quote Solow 27 again, another "general equilibrium model of matchbox size" (since even a continuum of identical matchboxes arranged symmetrically around a circle is, well, just a matchbox). Saying this risks sounding disparaging (and falls short of the authors' ambitions). But it is high praise in my view. ... ([A]s Krugman (1999) notes, Ohlin himself gave an important role to increasing returns as a determinant of trade patterns.) In stressing the relevance to regional issues of models derived from trade theory, Krugman has not so much created a new sub-field as extended the applicability of an old one. So, hold on the tee-shirt, skip the movie, but do read this book, possibly the best on interregional and international trade and location since Ohlin.

So, Herr Doktorprofessor Paul Von Krugman's work will survive as "merely" another simple general equilibrium model, supplementing the trade theorist's tool-kit, and constitutes another "general equilibrium model of matchbox size" (since even a continuum of identical matchboxes arranged symmetrically around a circle is, well, just a matchbox) and Herr Doktorprofessor not so much creates a new sub-field as extended the applicability of an old one!

Does that read like the kind of summary of the work of an economist that might be found, for example, in the press release attendant to his winning the Nobel Prize?

Or the John Bates Clark Medal?

Ah! Immortality!