In a recent post and knol article I critically discussed the principles of the theory of evolution by natural selection, and of economy based on free trade and free markets, including Ricardo’s principle of comparative advantage. Now, Professor Krugman of Princeton University has received the Nobel prize for his insights into trade patterns between countries, showing that the principle of comparative advantage does not realistically explain trade patterns.
Below are excerpts from a New York Times article about him. Full article here.
“Traditional trade theory assumes that countries are different and will exchange only the kinds of goods that they are comparatively better at producing “…
This model, however, dating from David Ricardo’s writings of the early 19th century, was not reflected in the flow of goods and services that Mr. Krugman saw in the world around him. He set out to explain why worldwide trade was dominated by a few countries that were similar to one another, and why a country might import the same kinds of goods it exported.
Krugman saw that “many companies sell similar goods with slight variations. These companies become more efficient at producing their goods as they sell more, and so they grow. ”
He also examined the effects of transportation costs, explaining “under what conditions trade would lead people or companies to move to a particular region or to move away.”
Professor Krugman is also well known for his New York Times articles criticizing G.W.Bush’s policy and neoliberalism.