I am going to have a bunch of trade stuff coming out shortly, but here on the personal blog let me note two things from my recent (re?)-reading of some of Krugman’s 1990s stuff.
(1) In this essay on trade negotiations I’m pretty sure in these throw-away remarks he’s talking about the tax interaction effect, which I have virtually singlehandedly been trying to bring up in the carbon tax debates:
The general theory of the second best tells us that if incentives are distorted in some markets, and for some reason these distortions cannot be directly addressed, policies in other markets should in principle take the distortions into account. For example, environmental economists have become sensitized to the likely interactions between pollution fees – designed to correct one distortion of incentives – with other taxes, which have nothing to do with environmental issues but which, because they distort incentives to work, save, and invest may crucially affect the welfare evaluation of any given environmental policy.
It’s amazing. Krugman knows all about the tax interaction effect and yet I don’t recall him mentioning it in the last 10 years when talking about carbon taxes… Odd…
(2) The other thing I want to note is just how smart Krugman is. The following (from his famous “Ricardo’s Difficult Idea”) shows his familiarity with classical mechanics (and this funny article showed he knows relativity):
In sum, while the concept of comparative advantage may seem utterly simple to economists, in order to achieve that simplicity one must invoke a number of principles and useful simplifying assumptions that seem natural and reasonable only to someone familiar with economic analysis in general. (“What do you mean, objects fall at the same rate regardless of how heavy they are — if I drop a cannonball and a feather … you’re assuming away air resistance? Why would you do that?”) Those principles and simplifying assumptions are indeed reasonable, but they are not obvious.
If you know both economics and physics, the above analogy is simply awesome. He is exactly right: If a physicist told someone that gravity accelerates heavy and light objects the same, and the person brought up obvious counterexamples, and then the physicist said, “Well that’s because of air friction, which I’m assuming away to isolate the real way gravity works, suppose we were on the moon and dropped your feather and cannonball…” then the critic would think he was a charlatan. But of course, that is *exactly* how you proceed, in order to teach Newtonian physics. If you started out worrying about air friction, you’d get all screwed up.
And by the same token, when it comes to understanding the logic of international trade, it makes perfect sense to make unrealistic assumptions to generate simple thought experiments, to isolate particular forces. For example, to really “see” comparative advantage, you use simple examples of either two people or two countries, producing two different goods. And yet, in the real world, “there are more than two goods you charlatan!!”