Paul Krugman: Uses and Abuses of Economic Formalism: "Gruen... really, really doesn’t like the formalization of economies of scale and imperfect competition in trade that went along with the rise of the 'new trade theory'...
...compares it to the excessive faith in formalism that I myself have condemned in much of macroeconomics. Obviously I don’t think that’s fair.... What the freshwater school did was to take the actual experience of business cycles and say, “We don’t see how to formalize this experience in terms of maximizing equilibrium models; therefore it doesn’t exist.” It only looks as if recessions result from inadequate demand and that monetary or fiscal expansion can create jobs; our models tell us that can’t happen, so it’s all an optical illusion. This attitude, I’ve argued, had major negative consequences, not just for research, but for policy: it helped cultivate a sense of learned helplessness in the face of mass unemployment.
What about new trade theory? What us new trade theorists did was say, “It looks as if there’s a lot going on in world trade that can’t be explained in existing formal models. So let’s see if there’s a different approach to modeling that can make sense of what we see.” In other words, the attitude toward formalization was almost the opposite of the macro wrong turn: it was there to help clarify our reality sense, not deny it. Now, we can argue about how much good this formalization did. I still believe that the formal models provided a level of clarity and legitimacy to trade discussion that wasn’t there before; your mileage may differ.... One thing new trade theory certainly didn’t do was lend support to really bad idea... [or] divert trade economists away from studying the real world....
The important point shouldn’t be “don’t formalize”; it should be that formalism is there to open your mind, not close it, and if the real world seems to be telling you something inconsistent with your model, the problem lies in the model, not the world...
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