Krugman Rediscovers Small Business International Trade!

I didn't realize I was reading Krugman until I copied the link...  At first, good observation:

My experience in these debates is very much in line with what he says. Younger macroeconomists — and by younger I mean in their 40s or even 50s — don’t know anything about the intellectual history of how the field got to where it is. Worse yet, if they’re trained in freshwater macro they have absorbed a fake history, in which the rise of their style was an inevitable consequence of superiority on all fronts, rather than a questionable methodological choice that involved disregarding a lot of empirical evidence; until 2009 they were generally unaware that there even were other approaches still in use by smart people.

Very true. So here is the state of the art, according to Krugman...

In case you don’t know, New Trade Theory — or, as some people now call it, “the old new trade theory” — was about increasing returns as a driver of international trade and specialization. We know that a lot of trade is driven by things like resources and climate: there are fundamental reasons why Canada exports wheat and Brazil exports coffee. 

No $#*+?  Due to geography and weather, Canada - wheat, Brazil - coffee. Imagine that. And from this profound observation, we go on to:

But a lot of trade, especially among similar countries, arguably reflects the advantages of large-scale production, which creates an incentive even for similar countries to concentrate on producing different things.

Well, with policy laundering, rent-seekers try to copy the moves of their counterparts in other countries.  But in the real world, the only incentive is customers, and only by offering them a solid value does a real economy emerge. What happened in the last forty years is lending EZ credit instead of money at fractional reserve. That gave one country an advantage over another at the large scale.  Sure McD and Starbucks used it to crowd out the small businesses, but that is over.  Krugman may not know what happened the last forty years, but he does know it is over, and he is sensing there may be an alternative he missed.

What the modeling suggested, however, was a very different picture — one in which the broad outlines of world trade were shaped by conventional comparative advantage, but with an overlay of additional, quite possibly random specialization driven by increasing returns. Furthermore, this additional specialization would normally produce gains for everyone, not just the countries producing the increasing-returns goods, because the gains from larger scale would be passed on in lower prices. As you can see, I can now tell this story in fairly plain English — but let me assure you, this story was simply not out there in 1980.

Well, maybe not in academia in 1980, but competing on design, not price, has been universally known in business since Jacob requested the blemished lambs.  Not only is it "specialization", the category has always been known as "specialty."    It surprises no one in business that Krugman and other policy-wonks could not see it clearly, let alone articulate it.  Also, there is no such thing as "comparative advantage" outside of academic theory, because all trade is ultimately impacted by beggar-thy-neighbor Hegemon policies.  It is only a matter of more or less when it comes to peace and prosperity.  The theory helps fill up that empty space professors find in the E-MBA programs.

Finally, the little models suggested possibilities few had noticed before. My most influential early paper in this area laid out the case for scale-driven specialization, then turned to the possibility of a “home market effect”, in which large domestic demand encouraged exports — something that, to the extent people had suggested it before, was a very confused notion at best.

Chuzpah!  This guy discovered the wheel in 1980, no one having ever seen one before 1980. Well, number one rule in exporting is to have a domestic market first.  I think the Phoenicians first mentioned that.  So he means no one in academia or government had noticed before.  (Actually, I cited in my book where a low level official casually mentioned it to me, so it must be a terribly discouraging thing to see complete idiots win nobel prizes and pull down millions writing sheer crock.)

The hegemon wants only bad ideas (from the point of view of free marketers), the ones that supports its powers.  Krugman is backtracking fast, to 1980, to find something he can sell.  He knows all he has written for the last 30 years is going to become rather stale. At the same time he is badmouthing the "younger economists" and their new ideas, before someone decides to give Krugman the boot for some new thinking.

It's getting ugly up there at the top,  the end is near.

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