Saturday, October 18, 2008

Krugman's Mahajanapadas'

This year’s Nobel Prize for Economics has gone to Paul Krugman. I’ve read some of his political commentaries but until this announcement came in, I never knew that he was better known for his work as an original thinker in the field of economics.

This week, the Indian Express published a couple of articles on the Krugman’s work that got me interested in learning more about the award citation – “ for his analysis of trade patterns and locations of economic activity”. The first one was an op-ed piece by Bibek Debroy, linking his work tantalizingly to Indian history, and the second one by Karna Basu, praising Krugman for ‘clarifying complexity’.

First, Debroy. In “Krugman and the Indus”, he begins with a grand sweep of urbanization in ancient India and highlights two major events –the Indus-Ghaggar-Hakra civilization (5500 – 1300 BCE) and the birth of the 16 Mahajanapadas in the pre-Maurya, pre-Gupta period (~ 500 BCE). What are the forces that led to the creation and dissolution of these republics that perhaps had better urban planning, better municipal councils and systems for sewerage, drainage and sanitation, than most cities in ‘modern’ India?

Debroy’s article draws you in with its title and leaves you feeling marooned. Karna Basu, on the other hand, gives you a better perspective of Krugman’s contribution. But you are likely to find the most straightforward explanation in a PDF document at the Swedish Academy’s website.

International trade has a direct impact on billions of people. The dynamics of this have been traditionally explained by Ricardo’s (1800’s) ‘theory of comparative advantage’ and then extended by Heckster & Ohlin (1920’s) who looked at trade in terms of access to factors of production – some countries have relatively abundant labor but a scarcity of money, whereas some countries have lots of money but fewer workers. As a result some countries export industrial products and import agricultural products and vice versa.

This was a neat theory but failed to explain why trade keeps on increasing between identical countries. Krugman covered this by stating the seemingly obvious – consumers like to have choices. Given a choice, folks in Germany, Sweden and Japan would like to have the option of buying a BMW, a Saab or a Toyota.

But what about the cost of transporting a BMW to Japan? This is a topic covered under “Economic Geography”, which deals not only with what goods are produced where, but also with the distribution of capital and labor across countries / regions. Krugman reasoned that the real wages of labor are higher in countries with a larger population. Better economies of scale allow firms to produce a wider range of goods at lower prices, and this, in turn, encourages more people to migrate to urban areas seeking better wages and more choices. So it seems the location of cities and firms is a trade-off between economies of scale and transportation costs.

But I still have not understood how this allegedly path-breaking theory links up with the location of cities in ancient India. I have this sneaking feeling that this was Debroy's ruse to get more people interested in economic theories. He got me hooked for sure.

References / Links:
  • An Absolute Advantage - Karna Basu, Indian Express, 15 Oct., 2008
  • Krugman and the Indus - Bibek Debroy, IE, 15 Oct., 2008
  • International Trade & Economic Geography - The Royal Swedish Academy of Sciences

The 16 Mahajanapada's ('Great Kingdoms' / Republics) of Ancient India:

1. Varanasi (Kashi)
2. Ayodhya
3. Sravasti
4. Saketa (Koshala - Northern Uttar Pradesh)
5. Rajagriha (Magadha -- modern Bihar)
6. Vaishali (Vriji -- Northern Bengal)
7. Kaushambi (Vatsa -- Modern Madhya Pradesh)
8. Indraprasta (Area around modern Delhi)
9. Hastinapura (Kuru)
10. Adhichatra (Panchala - modern Uttaranchal)
11. Mathura (Surasena)
12. Podana (Ashmaka -- modern Maharashtra)
13. Ujjain (Avanti)
14. Purushapura (Modern Peshawar, Pakistan)
15. Taxashila (Gandhara -- modern Khandahar, Afghanistan)
16. Rajapura (Kamboja -- modern Afghanistan)

This list is just one of the many disputed lists. The confirmed ones are highlighted in bold.

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