The World Today
March 1999

A Life of Its Own: “Butterfly Economics”
By: Paul Ormerod
Reviewed by: Paulo S. Wrobel

 

In his most recent work, Paul Ormerod continues the criticism of conventional economic thought begun with the publication in 1994 of The Death of Economics. His witty and ambitious book is a new attempt to move beyond criticising the current state of the 'dismal science', and offer an alternative approach to understand economic and social issues.

The clever and appealing title refers to an idea popularised by chaos theory. This is the notion of complex systems, where everything interacts with everything else, hence the poetic image of a butterfly's wings beating in one corner of the globe which might cause an earthquake in another corner.

With this poetic license, the author wishes to convey the idea that social and economic affairs are complex systems, the behaviour of an agent properly understood only in connection with the behaviour of others. Contrary then to the tenet of conventional economics, that individuals and companies behave according to their own preferences, social and economic behaviour are social in the most profound sense.

 

Living Organism

The author suggests that instead of following the conventional understanding of economics as akin to mechanics, using the mathematical models of nineteenth century engineers, our view of social and economic affairs should be inspired by biology - the economy is a living organism, constantly changing. Therefore it is impossible to predict social and economic behaviour. According to Ormerod, 'economics and social affairs are complex systems which hover on the brink of chaos'.

Nevertheless, complex systems might be understood, because there are patterns of regularities in human affairs. Experiments conducted by entomologists observing the behaviour of a colony of ants are the prime inspiration behind the author's intuitions on human economic and social behaviour. Entomologists have shown that it is impossible to predict the behaviour of ants, but some regularities were observed and understood. The most important was that the behaviour of a single ant was influenced by that of others. Applying the theory of probability, it is possible to understand the regularity of the ants' behaviour; even if not to predict the behaviour of every single ant.

In an analogy with the ant colony, Ormerod develops a model to understand current economic and social issues, based on the idea that individual and company actions are influenced by how others behave. The author suggests that this simple model has tremendous consequences for economic thought.

Applying it, he analyses current economic and social issues such as consumer's preference for certain products, the volatility of international financial markets, crime, western family structures, economic theory and economic policy, and lastly economic growth and the business cycle.

 

Unpredictable

In witty observations, the author succeeds in exposing the shortcomings of conventional economics, and its consequences for policy making.

He convincingly shows why, in spite of the inprovement in computer modelling and hc time and money spent building sophisticated models for macro-economic forcasting, the record in predicting rates of growth, inflation or trends in the business cycle is quite appaling. This is because social and economic affairs are intrinsically unpredictable. Actually, unpredictability is an inherent part of complex systems.

His analysis of current social and economic issues is more suggestive than exhaustive, but it makes an awful lot of sense as a first approximation to complex phenomena. His most interesting conclusion, as far as public policy is concerned, is that governments should think more about the whole picture and do less.

Governments do make a difference. But because of the nature of complex systems, the impossibility of accurate prediction and the Law of Unintended Consequences, more and more governmental intervention in social and economic affairs is wrong and misleading. Therefore, governments should focus on creating the right conditions for long-term growth without interfering too much in the day to day affairs of individuals and businesses.

Ormerod recognises his debt to the great tradition of political economists who, from Adam Smith onwards, have sought to understand complex economic and social issues as part of the great endeavour of the social sciences, not as applied mechanics. With good prose, witty observations and stimulating ideas, he has written a book which spares the reader of yet another arid, soulless treatise on orthodox economics.