Monday, October 13, 2008

Krugman, Institutional Economist

Congratulations to Paul Krugman, another institutional economist to win the Nobel Prize. Why do I say he is an institutionalist? Because his theory is built around economies of scale, that is a key concept in institutional economics.
Standard theory is not comfortable with economies of scale as it conflicts with equilibrium concepts so cherished by the old school. The advantages of countries with econ of scale over smaller economies has no equilibrium, but just evolves.
The information for the public sent out by the Nobel committee tries to soft-pedal the lack of equilibrium by referring to "the basic mechanism specified by Krugman ..." The mechanical metaphor is not apt. At one point the notice states, "Real wages and the supply of goods will then continue to increase even more in that country (the one with econ. of scale), thereby giving rise to further migration, and so on." "and so on" is not an equilibrium concept. You need an evolutionary theory, and that is what institutional economics provides.
Thank you, Paul, there is hope for economics.

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