By Paul Krugman
(posted Wednesday, Jan. 14) From Slate
http://www.slate.com by paid subscription
"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.
t 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.
et'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?
hen 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.
conLit, 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?
uppose 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.
hat 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.
Links
Mudslingers, pause: Here's a short
increasing-returns chronology. John Cassidy
has written for Slate, although not about
economics. Here's the Slate piece that
inspired the Rauch-Reich test. In 1996
Fortune carried a slightly less gullible but still
somewhat misinformed view of the rise of
increasing returns in economics. The Cato
Institute publication Regulation offered a
skeptical take on the whole idea of increasing
returns. Read Brian Arthur's manifesto, with
his version of intellectual history. And
Krugman was asked to write a piece on his
"life philosophy" for the American Economist
in 1993, of which he says, "I didn't exactly
follow instructions, but did along the way
describe my role in the increasing-returns
revolution."
Paul Krugman is a professor of economics at
MIT whose books include The Age of
Diminished Expectations and Peddling
Prosperity. His home page contains links to
many of his other articles and essays.
Illustrations by Robert Neubecker.