The Legend of Arthur
"In a
way, Bill Gates's current troubles with the Justice Department grew out of an
economics seminar that took place thirteen years ago, at Harvard's John F.
Kennedy School of Government." So begins an article by John Cassidy in the Jan.
12 issue of The New Yorker , titled "The Force of an Idea." The idea that
Cassidy refers to is that of "increasing returns"--which says that goods become
cheaper the more of them you produce (and the closely related idea of "network
externalities," which says that some products, like fax machines, become more
useful the more people use them). Cassidy's article tells the story of how
Stanford Professor Brian Arthur came up with the idea of increasing returns,
held fast to that idea despite the obstinate opposition of mainstream
economists and, after many years as an academic pariah, finally managed to
change the way people think about the economy. That story has been told before,
most notably in M. Mitchell Waldrop's popular 1992 book Complexity: The
Emerging Science at the Edge of Order and Chaos , and a good story it
certainly is.
It is also pure fiction. Increasing returns wasn't a new
idea, it wasn't obstinately opposed--and if increasing returns play a larger
role in mainstream economic theory now than they did 20 years ago, Arthur
didn't have much to do with that change. Indeed, the spread of the Arthurian
legend is a better story than the legend itself: an object lesson in
journalistic gullibility.
So what,
you may ask. What could be less interesting than squabbling among professors
over who deserves the credit for some theory? Well, I could say that this bogus
version of intellectual history has metastasized to the point where it may
begin to do real harm--to discredit good economics and to promote dubious
policies. But the real truth is that I'm just pissed off.
Let's start with the legend. Here's how it all
began, according to Waldrop. On Nov. 5, 1979, Brian Arthur wrote in his
notebook a manifesto describing his project to develop a New Economics based on
increasing returns. In a park in Vienna, he tried to explain it to a
"distinguished international trade theorist" from Norway, who was baffled. So
were other establishment economists. Thus began Arthur's years in the
wilderness. In 1983, he completed his seminal paper, but not until 1989, after
14 rewrites, was he able to publish it. "Gradually," writes Cassidy, "a number
of economists"--such as Georgetown University's Steve Salop--"began to take
Arthur's conclusions seriously."
Great
story. Now let's do a reality check, starting with that walk in the park. It
is, indeed, truly astonishing that the Norwegian, Victor Norman, did not
understand what Arthur was driving at. After all, there is a long tradition of
increasing returns in international trade theory. If nothing else, Norman
should have been familiar with his own co-authored book, Theory of
International Trade , which was in galleys at the time. It contained a whole
chapter devoted to increasing returns, based largely on a paper Norman himself
had written three years before. Is it possible that Arthur misinterpreted
Norman's bafflement--that what Norman really couldn't understand was why Arthur
thought he was saying anything new?
When I first saw Arthur's work, probably sometime in the
mid-to-late 1980s, I thought it didn't tell me anything . His mathematical
models were basically similar to those developed in the 1970s by the game
theorist Thomas Schelling. Moreover, Arthur seemed unaware of the conceptual
difficulties that had led economists not to ignore but to . His paper simply
ignored them. During the course of the 1980s those conceptual difficulties were
partly resolved, leading to a burst of theorizing about increasing returns. But
Arthur's work played no role in that resolution.
I wasn't
at that 1984 Harvard seminar that Cassidy describes. I was down the road at
MIT, finishing with a co-author a book titled Market Structure and Foreign
Trade: Increasing Returns, Imperfect Competition, and the International
Economy . But it would surprise me if the Harvard audience were unwilling to
accept the notion of increasing returns, as Cassidy says. After all, at the
time the Harvard economics department included A. Michael Spence, who had won
the Clark Medal (the highest award of the American Economic Association)
largely for his work on--you guessed it--increasing returns.
EconLit, the database of professional
literature since 1970, reveals that by 1987--the moment Waldrop's book claims
that Arthur's theories about increasing returns began to be
accepted--mainstream journals had published about 140 papers on the subject.
Salop, the Georgetown professor Cassidy presents as an early convert to
Arthur's ideas, was early indeed. He wrote one of his own best-known papers on
increasing returns in 1978--a year before Arthur, by his own account, even
began to think about the subject.
Brian
Arthur is a nice guy, who I think sincerely believes that it happened the way
he tells it. But how can an experienced journalist like Cassidy be so
credulous? Perhaps a journalist cannot be expected to be an expert on the ins
and outs of an academic discipline--although Cassidy is The New Yorker 's
economics correspondent. But even if we accept that Cassidy doesn't know much
about the discipline he currently covers, what happened to basic journalistic
instincts?
Suppose that someone tells you that, years ago, he made a
fundamental discovery that an entire profession, out of sheer
narrow-mindedness, refused to listen to and prevented him from publishing.
Wouldn't you have at least a slight suspicion that this version of events might
be a bit, well, self-serving--a suspicion strong enough to send you to a
college library to see whether the facts check out?
And what
about what we might call the Rauch-Reich test (so named for Jonathan Rauch's
Slate
article exposing fabricated quotes in the memoirs of
former Labor Secretary Robert Reich)? Throughout the story of Brian Arthur's
travails, people make the kind of dramatic, pithy remarks that almost never get
uttered in real life. "To admit that increasing returns exist would destroy
economic theory." "" "We know increasing returns can't exist. Besides, if they
did, we'd have to outlaw them." "Your theory may be theoretically valid, but
there's no evidence of it in the real world." These sound like the kind of
thing that The New Yorker might put at the bottom of a page, under the
headline "Pronouncements We Doubt Really Got Pronounced." And as Jonathan Rauch
taught us, when someone tells us that his world is populated by remarkably
eloquent people who always happen to say exactly what makes the storyteller
look good, we are well advised to ask whether that world exists only in his,
er, perceptions.
What could have caused Cassidy to suspend his
critical faculties? Perhaps he has an ideological ax to grind--after all, a few
months back he proclaimed Marx the "thinker of the future." He argues that the
theory of increasing returns is crucial to the case against Microsoft--which is
true, although even so it is unclear why he couldn't just present the theory
without the dubious intellectual history. Anyway, increasing returns are
equally crucial to the case for Microsoft--as a reason why trying to
break it up would be a bad thing. Perhaps more to the point, Cassidy has made
it clear in earlier writing that he does not like mainstream economists, and he
may have been overly eager to accept a story that puts them in a bad light.
But this may be looking too
hard for a motive. When Waldrop's book came out, I wrote him as politely as I
could, asking exactly how he had managed to come up with his version of events.
He did, to his credit, write back. He explained that while he had become aware
of some other people working on increasing returns, trying to put them in would
have pulled his story line out of shape. My guess is that Cassidy reached the
same conclusion. So what we really learn from the legend of Arthur is that some
journalists like a good story too much to find out whether it is really
true.
