Paul Krugman, Nobel laureate in Economics in 2008, is considered by many peers to be a “brilliant mind”. There are many reasons for this, but his concern for pointing out ways to resolve serious and prolonged economic crises, as well as his ability to bring governments to their senses, will surely carry special weight
“End This Depression Now!”, a bestseller by US economist Paul Krugman, published in 2012, is a real call to arms for the Nobel laureate in economics in the face of the deep recession that had begun in 2008 and was still going on. As the author pointed out in this book, nations rich in resources, talent and knowledge, which have all the conditions to generate prosperity and a decent standard of living for all, had reached a state where their citizens were suffering immensely. And the questions were: “How did we get to this point? How did we get bogged down in what can now only be considered one of the greatest depressions since 1929? And, above all, how can we get out of it?”
Krugman answered these questions with his characteristic insight: a quick and strong recovery was only a step away, if our leaders found the “intellectual clarity and political will” to end the depression.
How does Krugman think?
One of Paul Krugman’s admirers is Portuguese economist Avelino de Jesus, who is also a university professor at the Lisbon Institute of Economics and Management (ISEG). In an article describing Krugman’s thinking, Avelino de Jesus says that his economic work is of remarkable rigour and intellectual honesty. He highlights his role in re-analysing the traditional theory of international trade. He led a group of economists who, in the late 1970s and 1980s, showed that protectionist measures can be an important measure for developing countries to build an industrial base.
Among economists, Krugman sharply criticises those who are resigned to the situation of a depressed economy with high levels of unemployment and unbearable social costs
For Avelino de Jesus, the political consequences of the new theory of international trade quickly became clear: free trade is no longer the natural solution, now giving way to protectionism capable of generating and developing economies of scale. “In this sense, Krugman, as well as most of the economists who have contributed to perfecting the models of the new theory.”
What does Krugman’s economic geography essentially say?
Before Krugman, international trade was explained by the theory of comparative advantage, according to which countries have the advantage of specialising in their most productive activities, as long as they can obtain the other products through trade. Thus, all countries win, because specialisation allows them to make productivity gains and trade allows them to obtain the products they haven’t specialised in at a cheaper price.
But this theory doesn’t explain why very similar countries trade very similar products with each other (for example, why Mozambique sells maize to Malawi and vice versa). Paul Krugman explained what is happening: the increase in the global market for each product allows for gains in scale and consumer access to a greater variety of origins. For example, Mozambicans can produce a large quantity of maize (and therefore cheaper) because it is also sold to Malawi, and the reverse is also true. Trade allows both peoples to choose between maize from one country or the other.
Krugman’s work on economic geography also tries to explain the concentration of the world’s population in cities and why similar economic activities are concentrated in the same places. This can be explained precisely by economies of scale and low transport costs. Low transport costs encourage the concentration of several industries in the same place, producing more and more, creating jobs, promoting higher wages and a greater diversification of products. This phenomenon attracts population. The increase in population makes the region more attractive for the installation of new industries, which in turn attracts even more population, in a cycle that feeds and grows.
Focus on solving crises
Another of Krugman’s admirers is Portuguese economist Emanuel Augusto dos Santos, who was Deputy Secretary of State for the Budget between 2005 and 2011 and is currently a consultant for the Bank of Portugal. “His vast body of work, his lectures on economics at renowned institutes and universities such as MIT, Yale, Standford, Berkeley, Princeton and the London School of Economics, and his many public speeches make Paul Krugman an unavoidable economist of our time.”
For the Banco de Portugal consultant, throughout the 13 chapters that make up the book “End This Depression Now!”, Krugman seeks to find, rather than identify, the causes of the 2008 crisis and the way out of it. “And what is shocking, almost revolting, is that the solutions are within our reach. All that’s needed is foresight, intellectual honesty and the political will to put them into practice. We have the knowledge, a legacy of many generations of economists, and the instruments of monetary policy and budgetary policy to tackle and end the depression into which the international financial crisis has plunged us, but, for lack of action by our politicians, we are not doing it,” the Portuguese economist says.
Among economists, Krugman sharply criticises those who resign themselves to the situation of a depressed economy with high levels of unemployment and unbearable social costs, taking refuge in doctrinal prejudice and ignoring the lessons of economic history.
One of the most striking episodes of the last century was the Great Depression of 1930, the response to which in terms of economic theory gave rise to John Maynard Keynes’ “The General Theory of Employment, Interest and Money”. Krugman has no doubts about the timeliness of Keynes’ considerations regarding the state of the economy at that time and also about the correctness of his policy recommendations for tackling the serious problems caused by the depression. By using pithy quotes, the author challenged economists and people with influence and power in the economy and politics to take a stand and act quickly to get out of the 2008 crisis.
