How to achieve scientific excellence

W. Brian Arthur from the Santa Fe Institute (SFI), and a former IIASA researcher, talks about increasing returns and the magic formula to get really great science.

Recently, Brian stopped in at the Complexity Science Hub Vienna, of which IIASA is a member institution, and spoke to Verena Ahne about his work.

Brian Arthur (© Complexity Science Hub)

Brian Arthur (© Complexity Science Hub)

Brian, now 71, is one of the most influential early thinkers of the SFI, a place that without exaggeration could be called the cradle of complexity science.

Brian became famous with his theory of increasing returns. An idea that has been developed in Vienna, by the way, where Brian was part of a theoretical group at the IIASA in the early days of his career: from 1978 to 1982.

“I was very lucky,” he recalls. “I was allowed to work on what I wanted, so I worked on increasing returns.”

The paper he wrote at that time introduced the concept of positive feedbacks into economy.

The concept of “increasing returns”

Increasing returns are the tendency for that which is ahead to get further ahead, for that which loses advantage to lose further advantage. They are mechanisms of positive feedback that operate—within markets, businesses, and industries—to reinforce that which gains success or aggravate that which suffers loss. Increasing returns generate not equilibrium but instability: If a product or a company or a technology—one of many competing in a market—gets ahead by chance or clever strategy, increasing returns can magnify this advantage, and the product or company or technology can go on to lock in the market.”

(W Brian Arthur, Harvard Business Review 1996)

This was a slap in the face of orthodox theories which saw–and some still see–economy in a state of equilibrium. “Kind of like a spiders web,” Brian explains me in our short conversation last Friday, “each part of the economy holding the others in an equalization of forces.”

The answer to heresy in science is that it does not get published. Brian’s article was turned down for six years. Today it counts more than 10.000 citations.

At the latest it was the development and triumphant advance of Silicon Valley’s tech firms that proved the concept true. “In fact, that’s now the way how Silicon Valley runs,” Brian says.

The youngest man on a Stanford chair

William Brian Arthur is Irish. He was born and raised in Belfast and first studied in England. But soon he moved to the US. After the PhD and his five years in Vienna he returned to California where he became the youngest chair holder in Stanford with 37 years.

Five years later he changed again – to Santa Fe, to an institute that had been set up around 1983 but had been quite quiet so far.

Q: From one of the most prestigious universities in the world to an unknown little place in the desert. Why did you do that? 

A: In 1987 Kenneth Arrow, an economics Nobel Prize winner and mentor of mine, said to me at Stanford: We’re holding a small conference in September in a place in the Rockies, in Santa Fe, would you go?

When a Nobel Prize winner asks you such a question, you say yes of course. So I went to Santa Fe.

We were about ten scientists and ten economists at that conference, all chosen by Nobel Prize winners. We talked about the economy as an evolving complex system.

Veni, vidi, vici

Brian came – and stayed: The unorthodox ideas discussed at the meeting and the “wild” and free atmosphere of thinking at “the Institute”, as he calls the Santa Fe Institute (SFI), thrilled him right away.

In 1988 Brian dared to leave Stanford and started to set up the first research program at Santa Fe. Subject was the economy treated as a complex system.

Q: What was so special about SF?

A: The idea of complexity was quite new at that time. But people began to see certain patterns in all sorts of fields, whether it was chemistry or the economy or parts of physics, that interacting elements would together create these patterns…To investigate this in universities with their particular disciplines, with their fixed theories, fixed orthodoxies–where it is all fixed how to do things–turned out to be difficult.

Take the economy for example. Until then people thought it was in an equilibrium. And there we came and proved, no, economics is no equilibrium! The Stanford department would immediately say: You can’t do that! Don’t do that! Or they would consider you to be very eccentric…

So a bunch of senior fellows at Los Alamos in the 1980s thought it would be a good idea if there was an independent institute to research these common questions that came to be called complexity.

At Santa Fe you could talk about any science and any basic assumptions you wanted without anybody saying you couldn’t or shouldn’t do that.

Our group as the first there set a lot of this wild style of research. There were lots of discussions, lots of open questions, without particular disciplines… In the beginning there were no students, there was no teaching. It was all very free.

This wild style became more or less the pattern that has been followed ever since. I think the Hub is following this model too.

The magic formula for excellence

Q: Was this just a lucky concurrence: the right people and atmosphere at the right time? Or is there a pattern behind it that possibly could be repeated?

A: I am sure: If you want to do interdisciplinary science – which complexity is: It is a different way of looking at things! – you need an atmosphere where people aren’t reinforced into all the assumptions of the different disciplines.

This freedom is crucial to excellent science altogether. It worked out not only for Santa Fe. Take the Rand Corporation for instance, that invented a lot of things including the architecture of the internet, or the Bell Labs in the Fifties that invented the transistor. The Cavendish Lab in Cambridge is another one, with the DNA or nuclear astronomy…

The magic formula seems to be this:

  • First get some first rate people. It must be absolutely top-notch people, maybe ten or twenty of them.
  • Make sure they interact a lot.
  • Allow them to do what they want – be confident that they will do something important.
  • And then when you protect them and see that they are well funded, you are off and running.

Probably in seven cases out of ten that will not produce much. But quite a few times you will get something spectacular – game changing things like quantum theory or the internet.

Don’t choose programs, choose people

Q: This does not seem to be the way officials are funding science…

A: Yes, in many places you have officials telling people what they need to research. Or where people insist on performance and indices… especially in Europe, I have the impression, you have a tradition of funding science by insisting on all these things like indices and performance and publications or citation numbers. But that’s not a very good formula.

Excellence is not measurable by performance indicators. In fact that’s the opposite of doing science.

I notice at places where everybody emphasize all this they are not on the forefront. Maybe it works for standard science; and to get out the really bad science. But it doesn’t work if you want to push boundaries.

Many officials don’t understand that.

In Singapore the authorities once asked me: How did you decide on the research projects in Santa Fe? I said, I didn’t decide on the research projects. They repeated their question. I said again, I did not decide on the research projects. I only decided on people. I got absolutely first rate people, we discussed vaguely the direction we wanted things to be in, and they decided on their research projects.

That answer did not compute with them. They are the civil service, they are extraordinarily bright, they’ve got a lot of money. So they think they should decide what needs to be researched.

I should have told them – I regret I didn’t: This is fine if you want to find solutions for certain things, like getting the traffic running or fixing the health care system. Surely with taxpayer’s money you have to figure such things out. But you will never get great science with that. All you get is mediocrity.

Of course now they asked, how do we decide which people should be funded? And I said: “You don’t! Just allow top people to bring in top people. Give them funding and the task of being daring.”

Any other way of managing top science doesn’t seem to work.

I think the Hub could be such a place – all the ingredients are here. Just make sure to attract some more absolutely first rate people. If they are well funded the Hub will put itself on the map very quickly.

This interview was originally published on https://www.csh.ac.at/brian-arthurs-magic-formula-for-excellence/

Are all types of foreign investment driven by the same factors? The case for Mexico

By Isela-Elizabeth Tellez-Leon, IIASA-CONACYT postdoc in the Advanced Systems Analysis, Evolution and Ecology, and Risk and Resilience programs.

The rise of foreign investment in emerging economies after the global financial crisis of 2008-2009 has renewed interest in what drives such investment. My colleague at the Central Bank of Mexico and I examined the determinants of foreign investment, known as capital flows, into Mexico in 1995-2015, a period characterized by a free-floating exchange rate, that is, the authorities did not set an exchange rate.

Our research has useful findings for the design of economic policies because it provides measures that authorities can take to direct proper functioning of the economy. It also contributes to improved understanding of what influences capital flows into Mexico. We analyzed the determinants of each type of foreign investment separately, because different financial flows respond differently to the various external and internal factors. Mexico is an interesting case study because it experienced a large volume of capital investment after the commercial opening in the 1990s and more recently in the aftermath of the 2008-2009 financial crisis, as international investors were searching for high yields and security. In addition, the trading volume of Mexican government securities is one of the highest among emerging markets.

Capital flows are incorporated into financial accounts where foreign transactions are noted—including investments by foreign residents into Mexican public and private sector securities and by domestic residents in foreign securities. Mexico’s financial accounts (Figure 1) are composed of the following three components: portfolio investment (in terms of liquidity—i.e., the extent to which a market allows assets to be bought and sold at stable prices—this is a short-term investment, Figure 2), other investment (Figure 3), and foreign direct investment (in terms of liquidity this is a long-term investment, Figure 4).

The financial account is divided into three main areas: foreign direct investment (FDI), portfolio investment (PI) and other investment (OI). Figure 1 shows the net flows of foreign investment. Figure 2 displays portfolio investment (PI) and its components of domestic and foreign investors. Figure 3 and 4 show OI and FDI split into their different components. The figures show moving averages over 4 quarters adjusted for seasonality. Source: Elizabeth Tellez and the Central Bank of Mexico.

Portfolio and other investments tend to leave and enter a country quicker than foreign direct investment; thus, they are likely to respond faster to shocks. In particular, portfolio investment by foreign agents might have a different response compared to portfolio investment by domestic agents. For example, if foreign investors have timely information about the external economic conditions, they will likely respond faster to foreign shocks.

In general, foreign investment has an impact on developing economies in at least two ways. On the one hand, international borrowing allows a country to increase investment in the private sector, without sacrificing consumption. On the other hand, large foreign investment flows may be followed by increases in the prices of goods and services because of the strength of the exchange rate. In turn, this increases purchases of foreign products (imports), but exports decrease. In this way, a country’s foreign trade may become more vulnerable to external shocks and reversals of foreign investment.

Central Bank of Mexico © Elizabeth Tellez.

To analyze what determines capital flows in the short and medium term for Mexico, we used an econometric model known as Vector Autoregression. This model allows us to examine the impacts of different shocks on capital flows. We studied two sets of factors that can encourage investors to shift resources to emerging markets. The first set considers external shocks (push factors), which are beyond the control of developing countries, such as foreign interest rates or economic activity in advanced countries.

The push factors we examined were global risk, US liquidity, US GDP, and US interest rates. The second set of factors are the prevailing economic conditions in the emerging economy (pull factors). For these we considered Mexican GDP, interest rates, inflation, and exchange rates.

One of our main findings is that investors are risk averse and prefer to invest abroad when foreign interest rates are higher. Portfolio investment (PI) and other investment (OI) seem more responsive to short-term shocks than foreign direct investment (FDI), possibly because they tend to be more liquid than FDI. We also found that domestic conditions play a role in explaining capital flows. For instance, we found that higher GDP growth leads to higher portfolio investment, while higher interest rates and lower inflation generate higher inflows of other investment. Our work underlines the benefits of separately analyzing the components of capital flows. For instance, a shock to the federal funds rate has important effects on portfolio investment in public-sector securities by foreign residents. This is because public securities are the closest substitutes to US government bonds found in the Mexican financial market.

Reference:

Raul IR & Tellez Leon E (2017). Are all types of capital flows driven by the same factors? Evidence from Mexico. Banco de Mexico, Mexico.

This article gives the views of the author, and not the position of the Nexus blog, nor of the International Institute for Applied Systems Analysis.