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FT Comment: How an economic theory beat the atomic bomb

“The most important event of the second half of the 20th century is one that didn’t happen.” With those words, Thomas Schelling 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.”The most important event of the second half of the 20th century is one that didn’t happen.” With those words, Thomas Schelling 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 Schelling’s 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 Schelling’s 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 US’s 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 Schelling’s 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 Schelling’s 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.

12th of October, 2005Other Writing • Comments off