How to make an idea credible: a case study of Krugman's New Trade Theory

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Chapter 8 in Theories and Models in Economics, 2024, pp 96-106 from Edward Elgar Publishing

Abstract: A case study of Paul Krugman’s New Trade Theory is presented in Chapter 8, which illustrates how a theory can come to be accepted. The following steps were identified. (1) An anomaly is observed. (2) An idea/hypothesis/theory about what can explain the anomaly is presented. (3) The new idea “seems reasonable” with a clear logic. No obvious counterarguments are presented. (4) The idea can be formalized in a simple general equilibrium model. The results in the simple models are rather robust to changes in assumptions, and no one is able to find any questionable crucial assumption in the models. (5) No one can formulate a competing credible hypothesis that can explain the anomaly. (6) The new theory can be integrated in models that also include earlier explanatory factors. In these more inclusive models, the new theory leads to predictions that can be tested. (7) Different types of empirical studies give support to the implications from new theory.

Keywords: Economics and Finance (search for similar items in EconPapers)
Date: 2024
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