Butterfly Economics: A New General Theory of Social and Economic Behavior, by Paul Ormerod
You might think from the misleading title that this book is about the fabulous economics of flitting from blossom to blossom drinking nectar all day. Instead, the author, a British economist, presents an “ants model,” which is about the economics of dragging cheesecake crumbs six times one’s own body mass back to the nest.
Ants have two foraging strategies. 1) Follow some other ant’s pheromone trail until you randomly stumble across a crumb. 2) Wander off on your own until you randomly stumble upon a crumb. These simple rules result in strange mass hysterias among the ant colony as a whole. For instance, faced with two identical pieces of cheesecake equidistant from the nest, ants will first swarm over one, then suddenly abandon it to swarm over the other.
When applied to the human world, claims Ormerod, this model explains many puzzling socio-economic phenomena, like crime waves, divorce rates, the triumph of VHS over Betamax, and the rise of Britney Spears. Computer simulations based on ant rules – in which people interact unpredictably with each other, sometimes following the herd, sometimes striking out on their own – eerily mimic sudden, inexplicable shifts in collective behavior. Tiny variations in taste or habits on the part of a few individuals can be amplified, thanks to word-of-mouth, status competition, media reports and other human equivalents of pheromone-sniffing. The result is an unstoppable mania for some new fashion, catchphrase, lifestyle or investment vehicle, carrying everyone along until a few contrarians send the unstable internal dynamics of the swarm off in a different direction.
Ormerod offers the man-as-insect model of the economy as an alternative to the even more reductionist rational-actor hypothesis of conventional economics, in which people are calculating machines relentlessly optimizing their utility in complete isolation from the other people around them. According to Ormerod, faulty assumptions about the micro-behavior of humans result in patently ridiculous theories about the macroeconomy (such as the currently fashionable “real business cycle” theory, which concludes that all unemployment is a matter of people voluntarily deciding to take time off from work).
Ormerod persuasively documents the failure of mainstream economists to explain important features of the macro-economy, such as inflation, recessions, stock market rollercoasters and the growth of GDP. He claims that the ant-farm model, by taking account of social interactions (in a simplified way, so as to make the math feasible) gives a much more accurate picture. Of course, economics debates are hashed out in the rhetoric of fiendishly complicated computer simulations.
Ormerod does a good job explaining the gist of his simulations in layman’s terms, banishing the actual math to the appendices. And according to the few statistical measures he highlights, his simulations do resemble the real world more than their mainstream counterparts.
Ormerod claims his model explains many puzzling socio-economic phenomena, like crime waves, divorce rates, the triumph of VHS over Betamax, and the rise of Britney Spears.
Unfortunately, there’s no real payoff to Ormerod’s New General Theory. In terms of policy prescriptions, Ormerod is resolutely middle-of-the-road, sometimes recommending mildyly Keynesian initiatives, sometimes mildly libertarian ones. His argument is Keynesian in spirit, because it assumes the economy is structured around surges of euphoria and panic derived from the social psychology of individuals, rather than the smoothly self-correcting markets of classical economics. But contrary to Keynes, he assumes that the economy’s ups and downs are inherently chaotic, unpredictable, and largely immune to government control, especially in the short term.
Ormerod’s theory is dourly pessimistic about the one thing people really want from a general theory of economics – the ability to control the economy. Ormerod castigates Marx for his famous dictum, “Philosophers have sought to interpret the world. The point, however, is to change it.” He would substitute a different slogan, something like: “Shit happens, deal with it.”
That principle may be more in tune with the times, but times have a way of changing on you.
Butterfly Economics: A New General Theory of Social and Economic Behavior, by Paul Ormerod (Pantheon 2000, 240 pp.)