Professional Documents
Culture Documents
by Paul Ormerod
Pantheon 2000
217 pages
Focus
Leadership
Strategy
Sales & Marketing
Take-Aways
Human behavior has always defied economic theory.
Economics depends on arbitrary laws.
Corporate Finance
Human Resources
Technology
Production & Logistics
Small Business
Economics & Politics
Rating
Overall
(10 is best)
Applicability
Innovation
Style
10
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Relevance
What You Will Learn
In this Abstract you will learn: 1) The basic principles of complex systems theory; 2)
How complex systems theory applies to the economy and society in general, and 3) How
businesses and government policy makers can apply the concepts of complex systems
theory to improve their results.
Recommendation
Paul Ormerods critically acclaimed work pinpoints the failings of traditional economics
and government policy making by demonstrating the complex nature of economies and
societies. You wont find a single dry, dusty page in this dazzling book, which serves as
a primer to the latest thinking in 21st-century economics. Ormerods premise: Standard
economic theory fails to take into account the fact that people are influenced in their
decision making by other people. This interaction forms the foundation of his butterfly
economics. Ormerod keeps you turning the pages and brings the subject vividly to life.
getAbstract.com recommends this newly penned classic to all readers.
Abstract
The ability to
develop models in
which the behavior
of individuals is
directly affected by
the behavior of
others represents
a very important
intellectual advance for the
social sciences,
and offers a more
powerful explanation of a wide
range of phenomena than does
conventional thinking.
Butterfly Economics
Human behavior has always defied time-honored economic theories. If economists
want to improve the accuracy of their predictions, its their theories that will have to
change, not human behavior. Economics must become a science similar to biology, less
dependant on so-called laws and forces that provide unreliable predications, and more
open to the fact that people are influenced by what others do.
The interconnected nature of human behavior is evident in all areas of the marketplace.
Some common phenomena prove this point. For example, every Christmas season,
everyone clamors for one particular toy, and every year, some big-budget movies die at
the box office while other, low-budget films become surprise, runaway hits.
Economics is rooted in the workings of human society, with all its chaos and
unpredictability. Human society isnt a predictable, controllable machine; its more like
an organism, a living creature, whose behavior can only be understood by looking at the
complex interactions of its individual parts. This concept and all of its implications form
the foundation of butterfly economics.
Why Butterfly?
The fundamental view of society as a living creature that adapts and learns can be
compared to the butterfly. The image of the butterfly draws upon sciences chaos theory,
which maintains that the beating of the wings of a butterfly can, in principle, cause a
tornado on the other side of the globe. Modern economics and societies express this
scientific view, since both are complex systems that hover on the brink of chaos. The
behavior of the system as a whole can never be understood by mechanistically adding
together its component parts, just as a living creature is more than the sum of the
individual cells that make up its body. The economy and society are more than the sum
of the individuals who inhabit it.
Butterfly Economics
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An economy can
only grow at the
overall level if the
individual firms of
which it is composed grow. So
any theory of
growth should be
based upon the
activity and behavior of individual
companies.
In constantly changing economic and social worlds, the connection between the size
of an event and the magnitude of its effects must no longer be viewed as routine
and mechanical. Small changes often have small consequences, but sometimes they
have rather large consequences, and on occasion even dramatic impact. Large changes
certainly sometimes have large effects, but they also often make surprisingly little
difference to the eventual outcome.
It is almost as impossible to predict with any degree of accuracy the immediate effects
of any event. Even so, in the longer run, there is considerable regularity of behavior.
The often-unpredictable interactions between individuals lead to a certain kind of selfregulation in the behaviour of the system as a whole. At the root is the basic truth
that people see what others do, and may be influenced by it. By contrast, orthodox
economics is arbitrarily forced to assume that the tastes and preferences of individuals
are completely fixed, which in practice does not hold up.
Illusory Control
While it may appear sophisticated, the machine-oriented approach to human behavior
as represented by the mathematics of orthodox economics cannot cope with situations
in which peoples tastes and preferences can change according to how others behave.
Systems in which people copy each others behavior require different analytic techniques
than those used in standard economics. These mathematical techniques have only been
available during the past 10 to 15 years, and require computers to artificially simulate the
behavior of such societies.
The apparently obvious assumption that individuals dont live in a vacuum and, in fact,
live in a society in which they could be influenced directly by the behavior of others, also
has profound implications for the conduct of public policy. Once you view the economy
and society as a complex, living system, youll quickly understand the frequent failures
of public policy. Much of the control that governments believe they exercise over the
economy and society is illusory.
With their faulty, mechanistic view of society, polices makers have long been encouraged
to believe in the checklist mentality, which lies at the heart of conventional economics.
This mentality lends itself to the belief that if you do A, B and C, the consequence will
be X. But such thinking offers merely the illusion of control. It may sound manageable
on paper, but in practice, a complex, living system simply doesnt work this way.
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food pile it previously visited; 2) It is persuaded by a returning ant to visit the other food
source, and 3) Of its own volition, it decides to try the other food source itself.
As more people
choose one rather
than the other, it
becomes increasing likely that
others will subsequently choose the
successful version
of the product.
Its easy to recognize the parallels to humans making social and economic choices and to
business cycles. At any point in time, an individual agent, whether its an ant, a person,
a company, or anything else, faces three courses of action: 1) To stay with its previous
decision; 2) To select an alternative of its own accord, and 3) To be persuaded to switch
to the alternative by the actions of others.
The consequences of this kind of human behavior have deep implications for the human
colony as a whole. Many important social and economic issues in human society share
the fundamental characteristics of ant behavior: short-term unpredictability merging
imperceptibly over time into a form of regularity, of complex systems living at the edge
of chaos.
This behavior helps explain market volatility and unexpected economic outcomes, such
as a technologically inferior product beating out a superior rival. It also accounts for
social behavior, from crime and family structure to education and fashion.
Interventions to try and control the movements of the business cycle itself are also
misplaced. Its simply not possible to forecast with sufficient precision the state of the
economy in, say, one years time in order to decide which measures to take now to
bring out the desired outcome. Such precision would be impossible even if the impact of
measures such as changes in taxation or public expenditure were known with sufficient
accuracy, which they are not.
At times like this, governments should see that the periodic ups and downs of the business
cycle can never be abolished, but are an inherent feature of market economics. The
Butterfly Economics
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Studies showed
quite clearly that
by far the biggest
contribution to
Western economic
growth, according
to the growthaccounting approach, was made
by technology.
Our model of
growth is certainly
based upon general principles,
rather than on
knowledge of how
any particular
economy operates
in practice.
Inherent Chaos
Many government and academic economists do not have an intuitive understanding of
the complexity of the world. Business people realize that it is futile to search for the
perfect plan, since the future is to a large extent unpredictable. They learn this from
direct experience with reality, as opposed to the wishful thinking thats often inherent
in theories derived by academicians and clung to by bureaucrats and politicians whove
never been in the business trenches.
Companies should not place too much emphasis on the state of the overall business
cycle, and, by and large, they do not. Their main focus should be on their competitors
and their long-term strategy. Naturally, a boom or a slump affects companies, but
these always come and go, whereas rivals who steal a strategic advantage can inflict
permanent damage.
Orthodox economics is not a completely empty box, and neednt be completely rejected.
It must be extended to include the fundamental fact behind butterfly economics: that
people are influenced directly by the behaviour of others.
Buzz-Words
Business cycles / Butterfly economics / Chaos / Complex systems
Butterfly Economics
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