HOW AN ECONOMIC THEORY BEAT THE ATOMIC BOMB
The most important event of the second half of the 20th century is one that
didnt happen. With those words, Thomas Schelling[1] marked the stunning
achievement of 50 years without a nuclear war. No one person can claim credit,
but Mr Schelling has as much claim as anyone to helping prevent Armageddon. He
helped to prevent war because he understood it and explained it brilliantly to
others, changing the intellectual climate, inspiring a generation of strategic
thinkers and, almost incidentally, saving the young discipline of game theory
from irrelevance.
On Monday, Mr Schelling shared the Nobel Prize in Economics with the
mathematician Robert Aumann. The prize is long overdue, but at the same time it
is a curious reward for a man who did almost no research as such. If you ask
what he does for a living, I have to answer that he lives by his wits, the
sociologist James Coleman once remarked.
If you want to win a Nobel prize without doing technical research, Mr
Schellings winning formula is simple: find hidden patterns or puzzles of
everyday life that nobody else can see, show how they illuminate the biggest
questions of the day and write it all up in the most sparkling prose.
Game theory was - before Mr Schelling - the mathematical analysis of
interdependent decisions: whether a union calls a strike depends on whether the
union leaders think the management will respond with a better pay offer;
whether I bluff at poker depends on whether I think you are likely to call the
bluff. Game theory and the atomic bomb arrived at the same time with the help
of the same mathematician, John von Neumann, and the early game theorists tried
to use the theory to understand nuclear war. But their analysis was weak. Von
Neumann told Life magazine: If you say why not bomb them tomorrow, I say why
not today?
Mr Schellings 1960 book, The Strategy of Conflict, revolutionised both
strategic thinking and game theory. Mr Schelling ditched the mathematics of his
peers and applied the rigorous thinking of game theory to a richer world in
which the superpowers tried to understand the tacit signals behind each others
threats and promises. He showed that even the deadliest wars involved
significant elements of common interest and co-operation between foes. Indeed,
the striking fact that the Cold War never became a hot one is the co-operative
feat of the century.
Alfred Marshall, the great economist, advised other economists to translate
their mathematics into English and illustrate with examples that are important
in real life. We have largely ignored his advice, but Mr Schelling lives it.
Explaining the difference between stable and unstable deterrence, he imagined a
face-off in the wild west, with both men on a hair-trigger, before observing:
If both were assured of living long enough to shoot back with unimpaired aim,
there would be no advantage in jumping the gun and little reason to fear that
the other would try it. Such thinking helped to change the USs stated policy
of massive retaliation for any Soviet transgression, in favour of maintaining a
credible second-strike capability to discourage a surprise attack. The
resulting face-off did indeed prove more stable than anyone dared hope.
Mr Schellings leaps of lateral thinking are so spectacular that his
colleagues sometimes thought he had lost his mind. On a long flight, his
doodles with noughts and crosses convinced him that extreme racial segregation
often seen in modern cities could arise without extreme racial prejudice. As
families try to avoid being surrounded by a different ethnic group, sharp
boundaries can arise in a city full of people who are content with genuinely
mixed neighbourhoods. The outcome is out of all proportion to the motives which
produce it. Thirty years later, Mr Schellings method was being fed into
powerful computers and became a cutting-edge research topic: agent-based
modeling.
Nor is Mr Schelling limited to matters of grave policy: he has studied
efficient ways for criminal gangs to extort money, the problem of
ever-expanding Christmas-card lists and how to find a travelling companion
after being separated in a strange city. That eclectic mix is inseparable from
his ability to find wisdom in unusual analogies.
Mr Schelling is a great communicator of economic ideas; many would say he is
the great communicator. I only wish that more economists would imitate his
methods. Our only defence is that he is inimitable.
Tim Harford is author of The Undercover Economist, to be published on 1st
November.
Financial Times Comment and Analysis, 12th October 2005
http://www.timharford.com/favourites/schelling.htm
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[1] Thomas Crombie Schelling (born 14 April 1921) is an American
economist and professor of foreign affairs, national security, nuclear
strategy, and arms control at the University of Maryland, College Park School
of Public Policy. He was awarded the 2005 Bank of Sweden Prize in Economic
Sciences in Memory of Alfred Nobel (shared with Robert Aumann) for "having
enhanced our understanding of conflict and cooperation through game-theory
analysis."
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