The outsider to the narrow-minded profession

I have always been a sucker for stories about an outsider tearing down what everyone believes to be true. With that, it’s no surprise that I have fond memories from my first read of M. Mitchell Waldrop’s book Complexity: The Emerging Science at the Edge of Order and Chaos (which must been around 20-years ago).

The book is framed around the coalescence of a group of researchers into the Santa Fe Institute. These researchers were misfits, not quite fitting into their respective fields, but coming together in an interdisciplinary effort to develop a new science of complexity.

Since reading Waldrop’s book, I have devoured an enormous number of papers and publications from the Institute, with titles such as The Economy as an Evolving Complex System II. The Institute is a place where I would love to spend some time.

The book opens with the story of Brian Arthur. He is a major proponent of the idea of increasing returns in economics, with the book telling the story about how the economics profession resisted. Take the following excerpt as an example:

Tom Rothenberg, one of his former professors, had asked the inevitable question: “So, Brian, what are you working on these days?” Arthur had given him the two-word answer just to get started: “Increasing returns.” And the economics department chairman, Al Fishlow, had stared at him with a kind of deadpan look. “But—we know increasing returns don’t exist.” “Besides,” jumped in Rothenberg with a grin, “if they did, we’d have to outlaw them!”

And then they’d laughed. Not unkindly. It was just an insider’s joke. Arthur knew it was a joke. It was trivial. Yet that one sound had somehow shattered his whole bubble of anticipation. He’d sat there, struck speechless. Here were two of the economists he respected most, and they just—couldn’t listen. Suddenly Arthur had felt naive. Stupid. Like someone who didn’t know enough not to believe in increasing returns. Somehow, it had been the last straw.

I recently picked the book up again for some light reading before bed. And with the benefit of having now studied some economics, the first chapter jarred. Increasing returns is a topic with some history. Paul Krugman earned his Nobel Memorial Prize for his work in the area. Increasing returns wasn’t exactly, as the book seemed to implied, a concept that no-one in economics believed.

A google search to test my fresh instinct quickly struck gold, in the form of Paul Krugman himself and a 1998 article in Slate titled The Legend of Arthur: A tale of gullibility at The New Yorker. Krugman’s article was triggered by a (paywalled) article by John Cassidy in The New Yorker, but presented an opportunity for Krugman to get his thoughts about Waldrop’s book off his chest too. Here are some snippets:

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.

On a conversation with Victor Norman:

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?

On people paying attention to Arthur’s work:

E 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.

All rather funny, but it doesn’t end here. The debate continued in Slate, including letters from Cassidy, Waldrop, Kenneth Arrow! and a response from Krugman. Most of the letters defend Brian Arthur and his contribution. They point out that Arthur was always willing to give credit where it was due and to place his work in historical context. Fair enough.

But the impression that lingers from Waldrop and Cassidy is that economics is a narrow-minded profession unwilling to consider ideas that don’t fit with its cherished tenets. I have some sympathy for that argument. But this story of increasing returns provides little support for it.

As a final note, it amuses me who gets painted as (or paints themselves as) the outsider. Here we have Brian Arthur, the youngest endowed chair holder at Stanford when he gained his position at 37 (admittedly not for his work on increasing returns). He was introduced into the Santa Fe Institute by Kenneth Arrow. Tough ride.

It’s similar to Steven Levitt’s adoption of the “rogue economist” label in Freakonomics, if you can truly be rogue when you’re a Distinguished Service Professor of Economics at the University of Chicago. Or Richard Thaler’s complaints about being ignored by the profession, despite also being a Distinguished Service Professor at the University of Chicago and elevated to president of the American Economic Association.

To top if off, all three of these outsiders have multiple papers published in the top economics journals. That is a privilege never experienced by most members of the profession. If these guys are outsiders, what do you call Ole Peters?