Krugman and Gruen debate world trade, in theory and practice

By Tom Burton

June 30, 2018

Nobel prize winner Professor Paul Krugman has written a detailed critique of Nicholas Gruen’s memorial to the work of eminent Australian economist Max Corden published in the Mandarin this week.

At a time when economists are struggling to understand and predict world trade, Krugman is an exponent of new trade theory and an advocate for the utility of formal models to explain trade and business cycles. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade theory.

Writing in the New York Times, Krugman takes issue with Dr Gruen’s statement: “I think of Krugman as about the most brilliant and useful economist we have. But his most brilliant work wasn’t useful, and his most useful work isn’t brilliant.”

In a column titled Uses and Abuses of Economic Formalism (Wonkish and Self-referential) Krugman asserts his admiration of Corden’s work, but takes issue with Gruen’s thinking around trade theory: “So what’s Gruen’s beef with me? He really, really doesn’t like the formalisation of economies of scale and imperfect competition in trade that went along with the rise of the ‘new trade theory’, and compares it to the excessive faith in formalism that I myself have condemned in much of macroeconomics.”

Responding on Facebook, Gruen says “I think it’s a good high-level explanation of our difference to say that Krugman sees formalisation as the master discourse and practical, discursive reasoning as subsidiary. I think the converse.”

Max Corden is an eminent Melbourne-based economist who recently completed his autobiography titled: Lucky Boy in the Lucky Country. Corden is known for his work on the theory of trade protection, including the development of the Dutch disease model of international trade. His work also covers international monetary systems, macroeconomic policies of developing countries and Australian economics.

The debate about world trade theory comes as US President Donald Trump heavily criticises free trade theory and its impact on US industry. Krugman has been a sharp critic of Trump’s trade policies.

Since the 1980s Australia has trumpeted the benefits of free trade. Corden is part of a group of eminent Australian trade economists who have heavily influenced national economic and international trade policy in the post-war period. Gruen’s father  Fred was a close colleague of Corden’s at the Australian National University. Dr Ross Garnaut also spoke at the launch of Cordon’s autobiography. Garnaut authored the seminal Australia and the Northeast Asian Ascendency in 1989

Nicholas Gruen’s brother David is Deputy Secretary, Economic, in the Department of Prime Minister and Cabinet.

Nicholas Gruen has been a consistent advocate for the application of innovative economic thinking to difficult public policy  problems. He is founder of advisory firm Lateral Economics.

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