I’m late coming in on the Tirole Nobel – busy with real life – and many people have already weighed in on his contribution. But I though I might still have something useful to say about what the New Industrial Organization, of which he was the most important figure, actually did – namely, it made it safe to be strategically silly, to the great benefit of economics.

What do I mean by that? Before the new IO, economists wrote about perfect competition and monopoly, then acknowledged (if they were honest) that most of the real economy seemed to consist of oligopoly – competition among the few – but did little there except some hand-waving. Why? Because there was no general model of oligopoly.

And there still isn’t. When you have a small number of players, each able to have a significant effect on prices, lots of things can happen. They can collude – maybe implicitly, if there is an effectively enforced antitrust law; but what are the limits of collusion, and why and when does it sometimes break down? We like to assume that firms maximize profits, but what does that even mean when there are small-group interactions that create prisoners’-dilemma-type situations?

And yet you do want to model the economy, to think about stuff – and sometimes that stuff can’t be modeled without addressing imperfect competition. That was very much the case in my home field of trade, where even trying to model the role of increasing returns meant dealing with the fact that increasing returns internal to firms must cause perfect competition to break down.

Before the new IO came along, the way economics dealt with such issues was to assume them away. Increasing returns as a cause of trade? Hey, you can’t deal with that because we don’t have a theory of imperfect competition, so we have to assume that it’s all comparative advantage. (Harry Johnson once wrote a more or less triumphant paper to that effect.) Investment in R&D, and the temporary market power that results, as a source of technological progress? No can do.

What new IO brought was not so much a solution as an attitude. No, we don’t have a general model of oligopoly – but why not tell some stories and see where they lead? We can simply assume noncooperative price (or quantity) setting; yes, real firms are probably going to find ways to collude, but we might learn interesting things by working through the case where they don’t. We can make absurd assumptions about tastes and technology that lead to a tractable version of monopolistic competition; no, real markets don’t look like that, but why not use this funny version to think about increasing returns in trade and growth?

Basically, the new IO made it OK to tell stories rather than proving theorems, and thereby made it possible to talk about and model issues that had been ruled out by the limits of perfect competition. It was, I can tell you from experience, profoundly liberating.

Of course, there came a later phase when things were too liberated – when a smart grad student could produce a model to justify anything. Time for empirical work! But by then a lot had been achieved.