Butterfly Economics

"Butterfly Economics is by an economist who is very critical of most other economists. Paul Ormerod might classify himself as a heterodox economist, outside the mainstream. But actually I think his approach is one that mainstream economists ought to take very seriously. He doesn’t adopt the model of rational economic man, he doesn’t believe that people make rational calculations based on wonderful information – he believes that they influence each other. It’s that aspect – of people influencing each other – that is missing from a lot of macroeconomics, when people think about how the economy as a whole behaves. Most economists would assume that I make my choices about what to buy in my own mind, and it doesn’t depend on a program I watch on television, where I see somebody else wearing something and that makes me want to go and buy the same dress. So Paul Ormerod looks explicitly at how we influence each other in taking economic decisions. And I think it’s a much more fruitful way of thinking about a recession, for example, as a kind of collective failure of confidence in what the future is going to bring. If someone starts to feel pessimistic then they don’t invest in their firm as they might otherwise have done, and if they’re not investing then someone else starts to feel pessimistic about their prospects too. And it’s almost a kind of contagious disease, where a recession becomes a self-fulfilling phenomenon. Get the weekly Five Books newsletter Financial market bubbles are another good example of how one person having the confidence that the price of an asset is going to carry on going up will make other people have that same confidence, and it will make itself come true. So Butterfly Economics is about that – the title refers to the famous statement in mathematics of complexity theory, where the flapping of a butterfly’s wings in Brazil can cause a hurricane on the other side of the world – because those interconnections, even if they seem minor from one to the next, actually can have major implications for how the system as a whole turns out. In the book there are lots of terrific examples about how you need to think differently about economic growth and recessions and financial markets, if you are thinking about the influence that we definitely do have on each other. One of the interesting implications is how we do economic policy. If you think about how the governments of the Western world are dealing with the financial crisis and its aftermath, they think of it very much in terms of, ‘We’ve got the lever of monetary policy, and we can loosen that a bit to help stimulate the economy,’ or, ‘We’ve got the lever of fiscal policy, and we can equally use that to try and stimulate the economy.’ It’s a very mechanistic way of thinking: that if you do x then y will follow. But one of the implications of the self-fulfilling economy model is that it’s actually extremely hard to turn around one of these spiral or avalanche processes, and we only have the illusion that governments can control the economy in this very mechanical way. There’s a chapter in the book called, ‘The illusion of control’. It’s a fantastic contrast to the conventional way of thinking, which dates back to the 1950s when a well-known New Zealand economist called Bill Phillips actually devised a machine (which now sits in the Science Museum in London) where he built a physical representation of the economy as a model with lots of valves and tubes and reservoirs, and if you poured a bit of liquid in, the level of the economy would go up. It was an incredibly mechanical and reductionist version of how to do the economy. I think they have become part of the mainstream, especially in financial markets, where economists like Bob Shiller have made very much the same point, and in the behavioural economics literature . But that doesn’t stop a lot of people who are critics of economics pretending that they haven’t. You still read a lot of newspaper articles and even quite learned journal articles in other social sciences criticising economists for not doing exactly the kind of work that so many of them are doing now. I find it extraordinary. I’ve written a whole book, The Soulful Science , which says, ‘These are the terrific things economists have been doing for a couple of decades!’ It still doesn’t stop this rather ill-informed criticism. And I’ve even now come across people saying, ‘Well, economists are only pretending to change the way they think about things when they talk about behavioural economics and psychology. They’re still not really understanding the world the way they ought to.’ I don’t know what you can do, apart from carry on saying, ‘Here’s all the good stuff.’ It’s a fancy way of saying it’s mathematics that looks at non-linear relationships over time. Economics has tended to use linear relationships, because they’re easy to solve. This is a new kind of maths that dates back to the 70s or thereabouts, and has been used in the physical sciences and biology, and is now being adopted in economics. He’s a highly mathematical economist."