7 - Dixit–Stiglitz, trade and growth

Summary

Introduction

Great papers come in two flavours. Some are idea-papers, providing new and fruitful ways to look at the world. Others are tool-papers, giving us new and useful techniques or models with which to exploit the ideas. Dixit–Stiglitz (1977) is a truly great tool-paper.

The basic idea of monopolistic competition had been around for decades. Everyone (almost) knew that it was very important, so important that it had become standard fare in undergraduate microeconomics courses at even the most introductory level. So important that it was usually not mentioned at all in graduate theory courses. No one had been able to express the idea in a formal model that could both endow the theory with professional respectability and also apply it to significant problems in a professional way. As a result it was widely regarded as an idea – inherently important though it might be – that had simply not proven to be useful. Any professor iconoclastic enough to discuss monopolistic competition in his or her graduate course would be ignored by students preoccupied with mastering the formal models crucial to passing qualifying examinations and to gaining future employment. Graduate students typically learned about monopolistic competition only when they became teaching assistants for the first undergraduate course and so were forced to learn about it; those graduate students fortunate enough to get by on fellowships often never encountered the concept at all.