The Monday Interview: Paul Krugman; Keeping the barbarians at bay

A superstar professor fights a lone crusade against the onslaught of fashionable economic notions. He spoke to Diane Coyle

Most people, if they have an image of an economics professor at all, will probably think of some shambling chap who is marked above all by his inability to communicate with normal folk.

Paul Krugman, one of the world's superstar economics professors, is a researcher in the field of economic geography. But he is utterly unable to give me directions to his office: he does not know where it is exactly. So far, so good for the stereotype.

However, Professor Krugman is overwhelmingly able to communicate. His conversation is fast and funny, refreshing in a profession still recycling jokes that date back to Adam Smith. He expresses superbly trenchant opinions about economics - and economists.

Some of the latter are a mite unflattering. For example, he has taken to task Lester Thurow, whom he will be joining as a colleague at the Massachusetts Institute of Technology in the autumn, for not being very good with numbers and stumbling over economic basics. In an essay criticising one of Professor Thurow's books on America's competitive struggle, he said: "Everyone makes mistakes, although it is surprising when men who are supposed to be experts on international competition do not have even a rough idea of the size of the US trade deficit."

The contretemps stems from Professor Krugman's rejection of Thurow's pessimistic views about the "globalisation" of the world economy - "globaloney" as he describes it. For the past three years, Paul Krugman has waged war against the fashionable notions that countries are engaged in a competitive fight to the finish (countries do not go out of business, he points out) and that trade is somehow bad for the Western industrial nations.

"I had to turn from advancing the frontier to fighting a rearguard action," is how he describes his diversion from the academic ivory tower to the rough and tumble of public policy. "I now have a lot more respect for the policy wonks who say the same sensible things again and again. I am tired of having to defend the basics of logic against well-funded barbarians."

The barbarians are those who blame foreigners - it used to be the Japanese, now any other productive Asians - for America's economic woes. These are, variously, the shrinking manufacturing base, the trade deficit, downsizing and unemployment, and falling wages at the bottom end of the income scale. Professor Krugman points out that the manufacturing sector has been in decline for half a century, as in all the industrial countries. The US unemployment rate is one of the lowest in the West.

He goes on to calculate how big a part the trade deficit could have played in destroying jobs in manufacturing and reducing blue collar wages. The figures suggest it cannot have been very much as the US has not traded enough with cheap labour countries for them to account for more than a small fraction of the losses. He agrees about the direction of the effects the fashionable pessimists worry about, but not the size. "The big questions about trade and technology are a bit like global warming," he says. "The principle is not in doubt, but it is a question of scale." This makes getting the numbers wrong the height of irresponsibility.

He is still frequently invited to business conferences to represent the voice of reason against the barbarian tide - and usually finds himself in a minority of one, he adds. However, welcome as this work is as a supplement to an academic salary, his interest now is economic geography. This is a once-defunct subject that Professor Krugman has resuscitated almost single-handedly. It is even described as the New Economic Geography these days.

Understanding regional economies is an extension of his interest in international trade. The difference between a region and a country lies in the absence of barriers between regions.

Barriers between nations do not have to be very high to alter economic behaviour. For instance, there is at least 10 times as much trade between Canadian provinces as between a Canadian province and a US state, despite the cultural similarities between the two countries and the near-complete freedom to trade across the border. "In a place where a border ought not to matter it clearly does," he says.

Economic theory predicts that regions will develop specialisations once the process is started by accidents of history and location. The reason is that economies of scale, along with spillover effects such as the exchange of technical know-how and creation of a skilled labour pool, tend to favour clusters of very similar businesses. The phenomenon is well-documented, especially by management experts such as Michael Porter.

These clusters become self-sustaining and very specialised. For example, Silicon Valley in California and Route 128 in Massachusetts are both important centres for information technology businesses. But Silicon Valley specialises in stand-alone PCs, while Route 128 focuses on mainframes running dumb terminals and the very similar network technology.

Professor Krugman observes that because of the absence of internal barriers, US regions are much more specialised than European ones. The US has Hollywood; each European country has its own movie industry. As barriers to trade and movement in Europe are removed, there will be economic pressure to concentrate movie-making in one location, he predicts. "If Europe goes that way we are talking about massive industrial restructuring. And if Europe becomes as integrated in economics as the US but not as politically integrated there will be some obvious things to worry about."

What's more, European cities are smaller than they would be if the Continent were all one country. "Europe ought to have a city of 30 million people. What would the French do if it turned out not to be Paris?" he ponders.

Cardiff and Edinburgh, he points out, are smaller than they ought to be for the size of the Welsh and Scottish economies, mainly because Britain is such a centralised country with an out-of-proportion capital.

"Devolution could be bad for London," he warns. But would it be good or bad for Welsh and Scottish bids to attract inward investment?

Professor Krugman replies with an anecdote. "I have given the southernmost economics lecture in history, in Tierra del Fuego - although it was on the north side of town, so somebody could still give one on the south side of town."

Visiting the end of the earth to lecture Argentine businessmen, he expected to find that fishing was the dominant local industry. Not at all. It turned out to be electronics, thanks to investment incentives provided by the Argentine government.

The moral is that tax breaks can temper the strongest economic forces. It looks a safe bet that research into the apparently abstract field of economic geography will not keep the crusading Professor Krugman out of policy controversies for very long. And economic policy will be the better for it.