Chapter 5 What's the point?

What's the point? To say that Arthur was enthusiastic about this new view of economics would be an understatement.But it didn't take long for him to realize that his enthusiasm lacked charisma, especially among other economists. "I thought if you did something different and important -- and I do think that the rate of increasing returns explains a lot of things in economics and points the discipline in a direction that desperately needs to be pointed -- — people would lift me up in their arms and hoist me up in triumph. My imagination is unbelievably naive." One day at the end of November, he was walking in the park near Habsburg Palace, where the International Institute for Applied Systems Analysis is located, and excitedly explained his compensation to Victor Norman, a visiting economist from Norway. Incremental rate.Suddenly, he was dismayed to find that this prestigious international trade theorist was looking at him in bewilderment: what's the point of all this you talk about?He has been presenting his rate of increasing returns in lectures and seminars since 1980, and has heard similar responses.More often than not, half the audience is clearly interested in the rate of increasing returns, while the other half is either puzzled, skeptical, or even hostile.What's the point of increasing returns?What does it have to do with real economics?

These questions puzzled Arthur deeply.How could they not see it?The problem is that you have to see the world as it is, not from the point of view described by fancy economic theory.It reminded him of the practice of medicine during the European Enlightenment.Doctors at that time only learned medical knowledge theoretically and had very little contact with real patients.To doctors at the time, health was simply a matter of internal balance: if you were a rosy-cheeked person, or an irritable person, or whatever, as long as your fluids were brought back into balance , you will be able to recover your health. "But three hundred years of medical experience, from Harvey's discovery of blood circulation to the emergence of molecular biology, tells us that human organs are extremely complex. This means that doctors have to put a stethoscope on a patient's chest Auscultation, to diagnose each case individually. We are now listening to the doctors who treat us in this way." Indeed, only when medical researchers began to pay attention to the real complexity of the human body, did doctors have Potential to make medical treatments and medications really play a therapeutic role.

He argues that the rate of increasing returns is to economics what the practice of medical diagnosis is to medicine, moving in the same direction."It's important to look at the actual, living economic life out there, which is an interdependent, intricate, evolving, open system, a system that works like a living thing," he said. But it soon became clear to him that what really brought his economic views under attack was his idea that future outcomes were unpredictable.How do you make any predictions about things, people ask, if the world can take an innumerable number of possible forms, and if the particular economic form that ends up being nothing more than an accident of history?And if you can't make predictions about things, how can you say you're doing science?Arthur had to admit it was a good question.Economists decided long ago to make economics as "scientific" as physics.This means that all economic phenomena can be predicted mathematically.It took him a long time to realize that physics was not the only science.Wasn't what Darwin was doing "unscientific" because he couldn't predict how species would evolve over the next million years?Are geologists unscientific in what they do because they cannot predict precisely where the next earthquake will strike, or which mountain range will bulge?Are astronomers unscientific in what they do because they cannot predict exactly which nova will appear in which direction?

of course not.It's nice to be able to predict, if you can.But the essence of science lies in explanation, in revealing the most basic operating mechanism of nature.This is what biologists, geologists, and astronomers do in their respective fields, and that is what his rate of increasing returns is aimed at. Not surprisingly, such arguments fail to convince people who do not want to be persuaded at all.For example, at a lecture held by the International Institute of Applied Systems Analysis in February 1982, when Arthur finished his speech on the rate of increasing returns and answered questions from the audience, an economist from the United States stood up and asked angrily: " Please give an example of a technology that has captured the market and is not more advanced than its competitors!"

Arthur glanced at the clock on the classroom wall, as time was running out for this lecture, and at the same time said without thinking, "Oh, the clock." clock?right.He explained that all clocks we see today have hour and minute hands that move in a "clockwise" direction, but he theorizes that there may have been ancient clock technology as popular as clocks are now , these technologies were buried deep in the dust of history, but it happened that they have not been used until now. "As far as I know, there was a time in history where perhaps the hour and minute hands moved counterclockwise. Such clocks were as common at the time as the clocks we have today where the hour and minute hands moved clockwise."

The questioner was not convinced by him.Another respected American economist then stood up and snapped: "I can't believe that a clock moving clockwise locks the market. I'm wearing an electronically controlled watch." As far as Arthur was concerned, his words were already beside the point.But that day had come for his speech.And the example he gave about the clock is just guesswork.But three weeks later, he received a postcard from Florence, where he was on vacation, from his colleague at the International Institute for Applied Systems Analysis, James Vaupel.This postcard shows a picture of a Florence cathedral clock, designed by Paolo Uccello in 1443.Its hour and minute hands move in a counterclockwise direction. (It also shows 24 hours.) On the reverse side of the image, Vaupel simply wrote: "Congratulations!"

Arthur liked the Ursero clock so much that he made a transparent slide of the picture of the clock so he could put it in a slide projector and show it later when he explained how certain historical events caused certain products to happen to take over the market. Take this as an example.This slideshow of the Othello clock always sparks a buzz in lectures.Once when he was showing this picture on a slide projector during a lecture at Stanford, a graduate student jumped up, took out the slide, put it back in the slide projector so that the direction of the clock was reversed, and then Said triumphantly: "Look, it's a hoax. The clock actually runs clockwise!" Thanks to Arthur, who had done a little research on clocks by this time, he also had a counterclockwise clockwise clock with Latin numerals. A slideshow of moving clocks.So he showed this slide and said: "Unless you assume that the numbers on the clock were written backwards by Leonardo da Vinci, you can only admit that both the clock and the Othello clock are reversed. The clock ticks."

In fact, Arthur was able to give the audience a large number of examples of how historical events caused some products to occupy the market by chance.He has an example of Beta competing with VHS, and of course the QWERTY keyboard design is also an example.But the internal combustion engine is an odd case.Arthur found that in the 1990s, when the auto industry was still an idea, gasoline was considered the least promising power fuel.The main competitor of gasoline at that time, steam engine technology, had developed quite well.The steam engine was both safe and familiar.Gasoline, on the other hand, was not only expensive, but also loud and explosive, difficult to extract in effective grades, and required a complex new engine and mechanism.In addition, gasoline engines are inherently incapable of fully burning gasoline.If things had played out differently then, if the steam engine had developed as fast as the gasoline engine during these ninety years, perhaps the air pollution in our living environment would have been greatly reduced and our dependence on imported oil would have been reduced. greatly reduced.

But it was really gasoline engine technology that got its chance.Arthur found that this was largely caused by a series of historical events.For example, in 1895, the Chicago Times-Herald organized a non-horsepower car race, and the gasoline-powered Duryea won in one fell swoop.The Dejee was one of only two small cars to feature six starters at the time.Perhaps it was this motivation that led Ransom Olds to finally use the patented gasoline engine technology in 1896 to mass-produce Curved-Dash Olds.This technology allows gasoline engines to overcome the slow start.Then, in 1914, there was a sudden outbreak of hoof-mouth disease in North America, and the water troughs for horses were removed, and the mangers were the only places where steam engine vehicles were filled with water.Although by then the Stanley Brothers, the makers of the Stanley steam engine, had developed condensers and boilers that could save steam locomotives from having to refill every thirty or forty miles, it was too late .The steam locomotive never had a chance to turn over, and the gasoline locomotive quickly locked in the market.

Nuclear energy is another example. When the U.S. began civilian nuclear research in 1956, experts came up with a host of designs: using gas, ordinary "light" water, an exotic liquid called "heavy water," and even liquid sodium to cool the reactor.Each design has technical advantages and disadvantages.Looking back at these designs thirty years later, many engineers believe that the high-temperature gas-cooled design would have been safer and more efficient than other alternatives, and would have held up well before public and opposition concerns and objections to the use of nuclear energy arose people's hearts.But the result of the evolution of things at that time is that the technical dispute has almost nothing to do with the final choice.After the Soviet Union launched the first Sputnik in 1957, the Eisenhower administration was suddenly eager to get the reactor up and running immediately—any reactor would do.The only reactors that came closest to being operational at the time were dense, high-efficiency light-water reactors.This reactor is a kind of power equipment developed by the Navy for the manufacture of nuclear submarines.The Navy's design was thus expanded into commercial production and put into service.This allows the light water design to be further developed technically.By the 1960s, this design had largely replaced other designs in the United States.

Arthur recalled giving the example of the light water reactor in a 1984 lecture at the Harvard Kennedy School: "I said at the time that here is a simple When a technically inferior commodity happens to occupy a market, such as the widespread use of light water reactors, a respectable economist stands up and exclaims: 'But in a perfect capitalist market Economically, that can't happen!' He uses a lot of terms, basically saying that a perfect capitalist economy would restore Adam Smith's world if a lot of additional assumptions were included." Well, maybe he's right.But six months later, when Arthur made the same speech in Moscow, a member of the Supreme Soviet who happened to be present in the audience stood up and said: "The things you describe may happen in the Western economy, but when we perfect In a socialist planned economy like this, nothing like this could happen. We always get the best results." Of course, so long as QWERTY keyboard designs, steam locomotives, and light water reactors are only isolated, isolated examples, crowd criticism will always be able to dismiss market lock-in and rates of increasing returns as a mere coincidence of historical events, viewing them as unusual situation.Surely normal economic functioning is not so chaotic and unpredictable, they would say.At first Arthur was skeptical too, and maybe they were right.For the most part, market economies are fairly stable.It wasn't until much later, while preparing for a graduate class on increasing returns, that he suddenly realized why people's criticisms were wrong.The rate of increasing returns is by no means an isolated phenomenon. This law applies to any situation in the high-tech field. Look at software products like Microsoft Windows, he said.The company spent $50 million to develop and market the first disc of the software.But the second software only cost - how much?The materials fee is only $10.In electrical appliances, computers, pharmaceutical industries.The same is true even in aerospace. (The cost of developing the first B2 bomb was $21 billion, and each subsequent bomb cost $500 million.) High technology can almost be defined as "condensed knowledge," Arthur says.Its marginal cost is almost zero.This means that every copy you make makes it cheaper to produce, and more than that, every copy you make is a learning opportunity.There is also the benefit of experience in producing microprocessor chips, and so on.Therefore, increasing production can reap huge rewards.In short, the whole system of production is governed by the law of increasing returns. At the same time, among users of high-tech products, the tendency of groups to use standardized products leads to similarly large increases in compensation.Arthur said: "If my airline buys Boeings, then I will buy many Boeings so that my pilots don't have to re-acclimate to another model." Similarly, if you are an office If you are a manager, you will buy the same model of computer in the office, so that the staff in the office can use the same software.As a result, the market was quickly filled with a handful of relatively standard high-tech products.In microcomputer products, IBM and Macintosh occupy most of the market, and in commercial airliner products, Boeing, McDonnell and Douglas occupy the market. Now let's compare high-tech products with standard commodities such as grain, fertilizer, and cement, whose technology has matured generations ago.Today, the real cost of these goods is the cost of labor, land, and raw materials, and these are areas where the law of diminishing returns easily operates. (Producing more food requires farmers to clear more land that is less fertile.) The economic development of these fixed, mature industries has been described quite well by conventional neoclassical economics. "In this sense, the rate of increasing returns is not a substitute for conventional economic theory. The rate of increasing returns is only applicable to different economic fields." What this means in practice, Arthur said, is that U.S. policymakers have to be very careful about making economic assumptions about a class of issues, such as U.S.-Japan trade, "if you use conventional economics If you assume it theoretically, it will be a thousand miles away.” At a conference he participated in a few years ago, the British economist Christopher Freeman (Christopher Freeman) stood up and said that Japan’s domestic appliances and other high-tech products Success in the marketplace is inevitable.Just look at the country's low-cost capital, its prudently invested banks, its strong alliances and its desperate need for technological development amid a dearth of crude oil and mineral resources, he said. "It was my turn to speak next. So I said, let's imagine if the economies of Thailand and Indonesia had taken off, and Japan's economy was still in recession. The conventional economists would The same rationale would be used to explain why the Japanese economy lags behind. Low cost of capital means low return on capital - so there is no reason to invest; political alliances for common action are seen as inefficient; collective decision-making means sluggish decision-making; banks are not built and exist to take risks. Without crude oil and mineral resources, the country's economy will falter. So, how can Japan's economy grow?" Arthur said that since Japan's economy had clearly grown, he had to use another explanation for its success. "I say that Japanese companies are successful not because they have exotic features that American and European companies do not have, but because the law of increasing returns makes high-tech markets unstable, profitable, and likely to be taken entirely , because Japan understood this earlier and more thoroughly than other countries. The Japanese are very good at learning from other countries, and they know how to target the market. Taking advantage of the regularity, our superior products quickly occupy the market.” Arthur said he was convinced of it.Similarly, he suspects that a serious problem in the "competitiveness" of the United States is that government policymakers and corporate executives realize too late that the winners in the high-tech market can occupy the entire market.He pointed out that throughout the seventies and much of the eighties, the federal government adopted a policy of "hands-off" economics, based on the teachings of conventional economics.However, the dogma of conventional economics does not recognize the importance of launching one's own superior product before the other party captures the market.As a result, high-tech industries are treated exactly the same as low-tech industries and mass-produced commodity industries.Any "industrial policy" that might speed up the development of new industries was ridiculed as a violation of free market economics.It has always been the goal and principle of the United States to implement free and open trade in any field.Under an antitrust rule made in a time when the world was still dominated by commodities, cooperation between companies will still be discouraged.In the nineties, the pattern started to change a little, but only a little.Arthur thus argued that the time had come to rethink the dogma of conventional economics in terms of increasing returns. "We need to adapt to new laws if we are going to continue to generate wealth from our knowledge." While collecting examples of increasing returns from real life, Arthur also tried to analyze the phenomenon of increasing returns in a rigorous mathematical way. "Of course I am not opposed to mathematical methods. I am a person who often uses mathematics. What I am opposed to is the wrong application of mathematics, and I am opposed to turning the use of mathematics into mathematics for the sake of mathematics." He said that when mathematics is correctly used When used, it clarifies your point of view with incredible clarity.It's like an engineer who first has an idea and then builds a practical model.Mathematical formulas can tell you which parts of your theory work and which parts do not work, and which concepts are necessary and which are redundant. "When you use a mathematical formula to derive something, you are actually distilling the essence of this thing." Moreover, he knew that if he did not analyze his rate of increasing returns mathematically, a considerable portion of the economics community would never accept his theory as anything but a collection of events. what.Just look at what happened each time he introduced the concept of increasing returns earlier.In fact, as early as 1891, the great British economist Alfred Marshall (Alfred Marshall) had done a fairly in-depth discussion on the rate of increasing returns in his book (Principles of Economics).He also spends a lot of time in this book on the rate of diminishing returns.Arthur said: "Marshall had thought deeply about the rate of increasing returns, but he did not have the mathematical tools to do a full mathematical analysis of it. In particular, Marshall realized then that in the economy, the rate of increasing returns can lead to many possible This means that the most fundamental problem for economists is to know exactly why this solution was chosen over others. Since then, economists have precisely Got stuck on this question. Wherever there is more than one equilibrium point in the eyes of economists, the outcome of the matter is considered ambiguous. It turns out that no theory can explain a certain equilibrium point how they were selected. And this ignorance prevents economists from accommodating themselves to the concept of increasing returns." Something similar happened in the twenties.Some European economists at the time tried to use the concept of increasing returns to explain why cities grew and concentrated as they did now, and why different cities (and different countries) specialized in certain goods, such as shoes, chocolate, or fine violins .Arthur said that in the 1920s, the basic concepts used by these economists were correct, but what they still lacked was the mathematical tools. "In the absence of clear concepts, economics has entered a dead end of stagnation." So Arthur sharpened his pencil and got to work.What he needs is a mathematical framework that can incorporate the dynamic law of increasing returns into economics.This mathematical framework should be able to clearly and step-by-step show how the market chooses among multiple possible outcomes. "In the real world, the final result does not happen by chance, but is accumulated, and it is amplified by positive feedback from small opportunities." In 1980, after repeated discussions with friends and colleagues, Arthur, Finally, a set of abstract mathematical formulas based on nonlinear stochastic process theory are obtained.The math, he says, is actually fairly general and can be applied to any increasing rate of return.But conceptually, what these formulas imply is this class of situation: Suppose you want to buy a small car (many people at IASA bought Walkers and Fiats at the time), and to make it clear, assume that only Two types of cars are available, let's call them Type A and Type B.Now, you've read the brochures describing the two models, but the descriptions are so similar that you're still not sure which car to buy.What do you do at this time?You'll start consulting your friends, as all sensible people do.And then it just so happened, purely by chance, that the first two, or three people you consulted said they all drove Model A cars.They tell you it's a nice car to drive.So you decide to also buy a Model A. But it must be noted that there is now one more person who drives a Model A car in this world, and that is yourself.That means the next person who wants to ask someone about buying a car has a slightly better chance of running into someone who drives a Model A.So this person is a little more likely than you to choose to buy a Model A car.If the Model A had many of these small chances of success, it might have taken over the market. On the contrary, if such small opportunities are exchanged for B-type cars, then you may choose to buy B-type cars, then B-type cars may have an advantage and eventually occupy the market. In fact, under certain conditions, you can even use mathematical formulas to show that as long as whoever gets lucky a few times at the beginning, the whole process can lead to anything, Arthur says.The end result of a car sale may be that the Model A has 40 percent of the market, the B has 60 percent, or the A has 89 percent and the B has 89 percent. The Model B only made up 11 percent of the market, or it could have been either way, purely by chance."It's the most challenging thing I've ever done to show how chance events accumulate in a random process to choose an equilibrium point out of many possibilities," Arthur said. By 1981, Arthur, through his colleagues at the International Institute for Applied Systems Analysis, Yuri Ermoliev and Yuri Kaniovski from the Skornokhod Institute in Kyiv, — a collaboration of "two of the best probability theorists in the world" — he managed to do it. In 1983, the three of them jointly published the first of a series of papers they wrote on this issue in the Soviet journal Kibernetika. "Now, economists can not only see the whole process of a certain outcome, but also can see mathematically how different sets of historical events led to completely different outcomes." Most importantly, Arthur says, increasing returns are no longer what the Austrian economist Joseph Schumpeter called "an unanalyzable chaos."