Was it all in ohlin

Paul Krugman
October 1999
 
 
WAS IT ALL IN OHLIN?

Let me begin with an embarrassing admission: until I began working on this paper, I had never actually read Ohlin's Interregional and International Trade. I suppose that my case was not that unusual: modern economists, trained to think in terms of crisp formal models, typically have little patience with the sprawling verbal expositionsof a more leisurely epoch. To the extent that we care about intellectual history at all, we tend to rely on translators - on transitional figures like Paul Samuelson, who extracted models from the literary efforts of their predecessors. And let me also admit that reading Ohlin in the original is still not much fun: the MIT-trained economist in me keeps fidgeting impatiently, wondering when hewill get to the point - that is, to the kernel of insight that ended up being grist for the mills of later modelers.
Moreover, one can argue that Ohlin actually gains something in the translation: Samuelson famously found implications in Ohlin's own view of trade that the great thinker himself, due to his "diplomatic style" (in Tjalling Koopman's phrase), had missed. Ohlin seemed to say that whiletrade shifts the distribution of income against scarce factors, it nonetheless probably improves their lot in absolute terms; Stolper and Samuelson showed that in a simple model the stark fact is that scarce factors lose by any measure. Ohlin definitely viewed factor-price equalization as only a tendency, surely incomplete; Samuelson showed that under the assumptions of Ohlin's Part I,"Interregional trade simplified", it was quite possible that trade would in fact fully equalize factor prices. So just as a modern student of evolution might be forgiven for preferring to get his Darwin courtesy of John Maynard Smith, a modern economics student might be forgiven for preferring to get his Ohlin via Samuelson, and indeed via Krugman-Obstfeld.
And yet what Ohlin disparagingly called "modelmania" can lead to a narrowing of vision. Samuelson himself entitled his 1971 article expounding what has since come to be known as the specific-factors model "Ohlin was right", conceding that in a multi-factor model some of Ohlin's skepticism about the full factor-price equalization and strong Stolper-Samuelson effects that arise in a two-by-two model turns out to be justified after all. What elsemight Ohlin have been right about?
Some years back I gave a short series of lectures (the Ohlin lectures, as it happens, written up in my book Development, Geography, and Economic Theory ) on the way that a growing emphasis on formal modeling led economists to "forget" insights about the role of increasing returns in industrialization and economic location, only to rediscover those insights whenmodeling techniques became sufficiently advanced. Was the same true in international trade theory? In particular, did Ohlin's informal exposition of a theory of interregional and international trade contain the essence of what later came to be known as the "new trade theory" and the "new economic geography"?
The answer, it turns out, is yes and no. Ohlin did indeed have a view of internationaltrade that not only gave a surprisingly important role to increasing returns (surprising because in Samuelsonian translation that role disappeared), but also one that suggested a sort of "unified field theory" of factor-based and scale-based trade that is a clear antecedent of the "integrated economy" approach that ended up playing a central role in post-1980 trade theory. On the other hand,despite Ohlin's title and his repeated suggestion that he was offering a unification of trade and location theory, there is little in Interregional and International Trade that seems to point the way to the distinctive features of "new economic geography". And there were a number of insights in modern trade theory that Ohlin did not, as far as I can tell, anticipate at all.
But let me start with my...