SYNOPSIS: Harsh attack on popular myth that one Economist, working alone, discovered Increasing Returns.
"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 I didn't already know. 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 downplay the idea of increasing returns. 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." "If you are right, capitalism can't work." "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.