Positive linking: How networks can revolutionise the world
Paul Ormerod on his latest book
In my first book, Death of Economics written in 1993, I criticised free market policy long before it became the fashionable thing to do. In Butterfly Economics and Why Most Things Fail, I extended the critique of mainstream economics.
In my new book, Positive Linking, I make an even more fundamental attack. I argue that we need to replace the basic unit of mainstream economics, that of the Economic Rational Person, operating in splendid isolation. In this view of the world, there is no such thing as society. The views and behaviour of others has no direct influence on how an agent makes a decision. Instead, we need to think instead of people, firms – all decision makers in fact – as operating within networks, in which their behaviour can be altered directly by what others do.
The financial crisis exposed brutally the mainstream view of the world. Networks played the key role in the crisis. The networks of assets and liabilities across the banking system. The networks of sentiment in financial markets. The networks across which large firms form their ‘animal spirits’ about the future when considering their investment plans. Viewed from a network perspective, many aspects of our social and economic world look completely different than they do from the conventional view of mainstream economics.
There is a fundamental problem with the assumption that individuals operate in isolation from each other, that their preferences are not affected directly by the decisions of others. The social and economic worlds of the twenty-first century are simply not like this at all.
We are far more aware than ever before of the choices, decisions, behaviours and opinions of other people. In 1900, not much more than 10 per cent of the world’s population lived in cities. Now, for the first time in human history, more than half of us live in cities, in close, everyday proximity to large numbers of other people. In the last decade or so, the internet has revolutionised communications in a manner not experienced since the invention of the printing press in the mid-fifteenth century.
The assumption that people make choices in isolation, that they do not adopt different tastes or opinions simply because other people have them, is no longer sustainable. Perhaps – perhaps, and it is a big ‘perhaps’ – over a hundred years ago this might not have been a bad assumption to make. But no longer. The choices people make, their attitudes, their opinions, are influenced directly by other people.
In many ways, this makes successful policy making, whether in the public or private sectors – much harder. So much is contingent on who influences whom on a network and when. Simple causal relationships between a change in policy and any given outcome no longer exist – if they ever did!
At the same time, far more effective policy making becomes possible. It requires a fundamental change of mindset by policy makers. The positive aspects of the huge recent increase in knowledge about social and economic networks open up new possibilities for solving many long-standing problems. A lighter, smarter touch, one which exploits the positive linking aspects of our modern, networked world.
Paul Ormerod www.paulormerod.com Positive Linking: How Networks Can Revolutionise the World is published by Faber and Faber, London, on 4 July 2012
From: P.5 of World Economics Association Newsletter 2(3), June 2012 http://www.worldeconomicsassociation.org/files/newsletters/Issue2-3.pdf