History of the theory's development

The theory was initially associated with Paul Krugman in the early 1970s; Krugman claims that he heard about monopolitistic compeition from Robert Solow. Looking back in 1996 Krugman wrote that International economics a generation earlier had completely ignored returns to scale "The idea that trade might reflect an overlay of increasing-returns specialization on comparative advantage was not there at all: instead, the ruling idea was that increasing returns would simply alter the pattern of comparative advantage." In 1976, however, MIT-trained economist Victor Norman had worked out the central elements of what can to be known as the Helpman-Krugman theory. He wrote it up (by hand) and showed it to the great monopolistic competition innovator, Avinash Dixit, and they both agreed it wasn't very significant. Indeed Norman never had the paper typed, much less published. Norman formal stake in the race comes from the final chapters of the famous Dixit-Norman book (Theory of International Trade : A Dual, General Equilibrium Approach, ISBN 0-521-29969-1). James Brander, a PhD student at Stanford was undertaking similarly innovative work using models from industrial orgainsation theory -- cross-hauling -- to explain two way trade in similar products.

Econometric testing

The econometric evidence for NTT was mixed, and again; highly technical. Due to the time-scales required and the particular nature of production in each 'monopolizable' sector, statistical judgements have been hard to make. In many ways, there is too limited a dataset to produce a reliable test of the hypothesis which doesn't require arbitrary judgements from the researchers.

Japan is cited as evidence of the benefits of "intelligent" protectionism, but critics of NTT have argued that the empirical support post-war Japan offers for beneficial protectionism is unusual, and that the NTT argument is based on a selective sample of historical cases. Although many examples (like Japanese cars) can be cited where a 'protected' industry subsequently grew to world status, regressions on the outcomes of such "industrial policies" (including the failures) have been less conclusive.