Krugman is best known for his explicitly liberal NY Times column, arguing for more redistribution, government subsidized (and run) health care, and all manner of government activism in the economy. Policy positions aside, Krugman is a[s] deserving a winner of the prize as any economist the Nobel committee could choose.
The Nobel Prize is awarded for contributions to the academic and research side of economics, not policy positions. Here, Krugman has made lasting, meaningful, and insightful contributions to our understanding of international trade and the growth of cities. If anything, his academic work has strengthened the case for economic freedom on international trade by weakening the hands of central planners….
Krugman's work is now standard in international trade courses and I continue to make his insightful and pathbreaking book Geography and Trade required reading in my classes on urban and regional economics.
I am not an economist, and I only know Krugman's technical work by reputation, so I can't engage this topic on anything approaching a deep level. I can say that back before he had a home at the New York Times, I enjoyed Krugman's 1994 book Peddling Prosperity and several articles he wrote for pop venues like The Wilson Quarterly. There's much more to the man than the standard-issue liberal that manifests itself in his op-eds, and I hope—but doubt—that the broader reaction to his award will go beyond the knee-jerk cheers and jeers from the fans and foes of his column.
Update: Bryan Caplan is happy about Krugman's victory.