April 23, 2006
Why Most Things Fail: Evolution, Extinction, and Economics by Paul Ormerod. Pantheon Books, 255 pp., $24.95.
Strategies of Commitment and Other Essays by Thomas Schelling. Harvard University Press, 341 pp., $39.95.
by George Scialabba
John Maynard Keynes once asked Max Planck, the inventor of quantum theory and perhaps the leading theoretical physicist of his time, whether he had ever considered taking up economics. Planck shook his head. “The math is too difficult.”
Maybe Planck was pulling Keynes’s leg. But maybe not: things occasionally get a bit complicated in Why Most Things Fail, even though Paul Ormerod, besides being an original and prolific economist, is a first-rate explainer. This is his third short but very ambitious book in a dozen years. The Death of Economics (1994) proclaimed the bankruptcy of conventional economic theory at a moment of its untrammeled institutional dominance. Butterfly Economics (1998) outlined an alternative based on biology, in which the economy was seen not as a vast mechanism whose workings could be described and predicted, at least in principle, by a system of linear differential equations, but rather as an organism, “a living creature whose behavior can only be understood by looking at the complex interactions of its individual parts.” Why Most Things Fail applies this alternative theory to the business cycle, arguing that it is a life cycle.
The self-confidence of contemporary economists is one of the wonders of the world – “often in error but never in doubt,” as the saying goes. The reason for their ineffable sense of superiority to their fellow social scientists is the theory of competitive market equilibrium. This is a mathematical demonstration that, given certain simplifying assumptions, an unregulated price system – a “free market” – will result in maximum efficiency, or the best possible allocation of resources, or the greatest good of the greatest number. The supply of everything will eventually equal the demand, unemployment will tend toward zero, and any outside – ie, government – interference, however well intentioned, must necessarily bring about a net reduction in welfare.
As Ormerod explains, this theoretical model conquered the economics profession for two reasons. First and most obviously: he who pays the piper calls the tune. Business is the dominant force in the Western democracies, and the free market theory rationalized that dominance. The deregulation of financial markets, the weakening of unions, the privatization of state-owned industries and resources, the reduction of social-welfare spending: orthodox economics appeared to entail all these policies, which were exactly the policies business wanted. This happy coincidence naturally warmed the hearts of businessmen, and opened their wallets. And when business took overt control of government in 1980 (in the US; 1979 in Britain), theoretical orthodoxy became a prerequisite for political influence, always coveted by academic economists.
But beyond this practical reason, free market theory had an undeniable aesthetic and psychological appeal, especially to the soulless. It was neat; it was nifty; it was numerical. As Ormerod says, “the concepts of harmony and equilibrium on which [free-market] economics is based were very much in keeping with the scientific spirit of the times.”
What emerges from reading these three books by Ormerod is that the scientific spirit of the times is changing. Physics no longer reigns; or at least, it now has to share its rule with biology. Formerly physics was “queen of the sciences”; it offered the deepest insight into the essential patterns of Being. In the last few decades, however, biology has revealed some quite different but equally fundamental patterns.
The most general way to formulate the difference is as a contrast between two methodological approaches: individualism vs. interactionism. In physics and free-market economic theory, the world is populated by isolated atoms or agents, whose properties or preferences allow an observer to calculate their behavior, at least in principle. The behavior of the physical or economic system as a whole can then be derived by summing up the actions of the atoms or agents. This is what Margaret Thatcher meant by her famous remark: “There is no such thing as society.” There is only a collection of individuals.
In biology and sociology, however, agents do not have fixed preferences. Very often, they act the way they do from motives of custom, emulation, or solidarity – that is, because they are part of a society. In such cases, there is in principle now way to predict behavior, and correspondingly no single most efficient schedule of prices or allocation of resources. Ormerod illustrates this difference – which also turns out to be the difference, mathematically, between linear and non-linear systems – in a fascinating chapter of Butterfly Economics devoted to the social dynamics of ant colonies. (Actually, Butterfly Economics should probably have been titled Ant Economics.)
That economies are non-linear systems is also the theme, or punch line, of Why Most Things Fail. “It is the structure of the connections between the component parts which gives systems their distinctive and characteristic features.” How this was discovered (in large part by studying rates of extinction among species), and what it implies, are described with clarity, economy (in the stylistic sense), and wit.
One important contribution to the discovery Ormerod narrates was a celebrated paper by Thomas Schelling, professor of economics at Harvard and recipient of last year’s Nobel Prize, called “Dynamic Models of Segregation.” The upshot of Schelling’s essay (reprinted in Strategies of Commitment) is that “small incentives, almost imperceptible differentials, can lead to strikingly polarized results.” Extreme residential segregation, for example, can easily emerge in a highly mobile society, even if not a single member of that society desires it; and in general, the relation between local action and global result is a lot more complex than standard economic theory can account for.
“Dynamic Models of Segregation” is somewhat abstract and technical; the other essays collected here are remarkably wide-ranging and reader-friendly. From environmental economics to euthanasia, smoking to nuclear strategy, vouchers to Vietnam, Schelling meanders along, idiosyncratic but insightful, high-powered but generally humane and often humorous. You might, in fact, call him the Galbraith of game theory.
George Scialabba is a regular contributor to the Books section.