...Ormerod concentrates on failure and extinction in biology and economics. In the biological sphere, mutations lead to species that out-compete other species which eventually become extinct or retreat to some marginal niche. Extraneous events such as climate change may lead to the same outcome because some species are better able to survive in the new environment than others. Ormerod argues that failure and extinction are also pervasive in the economic sphere. Mutations and external events play a role in business life just as they do in biology. The counterparts to biological mutations are new technologies, new forms of organisation and new types of product....So far, so good. Ormerod's not really saying anything new, but perhaps it seems new to Rowthorn, whose weak grasp of economics is reflected in Democracy and Efficiency in the Economic Enterprise, of which he is co-editor. A reading of the sample pages (available at the link) brings Rowthorn's idealistic socialism into view, as does the rest of Rowthorn's review of Ormerod; viz.:
In the biological sphere, most mutations are harmful and reduce the ability of the organism to survive. Some mutations linger on, but many are driven out entirely by competition from incumbent genes. Many potentially beneficial mutations are also driven out by competition before they have time to establish themselves, or before a complementary mutation occurs which allows them to achieve their full potential. The same is true in the economic sphere. Many innovations are harmful, and even potentially beneficial innovations may fail to establish themselves in the face of competition from powerful incumbents....
Ormerod's alternative vision of economics lays great stress on social interaction. Individuals and organisations have only a very limited ability to obtain and process information, so they rely heavily on the information they acquire from encounters with those around them. This leads to herd behaviour and unpredictable consequences. It can make it very difficult for firms to plan their investment and innovation strategies because success or failure may depend on huge swings of fortune that are impossible to anticipate.
Ormerod gives many examples of social interaction leading to outcomes which are impossible to predict. The most striking example is Schelling's model of residential segregation. In the US, there are few racially mixed communities and most blacks and whites live in neighbourhoods which are populated almost entirely by their own kind. This might suggest that there is a strong antipathy between the two groups. Yet a large amount of evidence suggests that this is not the case. Most blacks and whites would like to live in neighbourhoods where their racial group is in a majority, but they are perfectly happy to have a large minority of people from the other group as neighbours.In sum, the "fact" that blacks and whites would prefer some degree of residential integration (whose fact?) trumps the reality that blacks and whites segregate themselves. Why?
To explore the implication of such preferences, Schelling ran a number of simulations in which individuals were allowed to move house if they found themselves surrounded by too many of the other racial group. These simulations demonstrated two things. In the course of time, the typical result was that blacks and whites spontaneously relocated themselves into highly segregated neighbourhoods. It was impossible to predict where the boundaries of these neighbourhoods would lie or where any particular individual would end up. But it was a safe bet that the bulk of people would end up surrounded largely by people of their own race. This outcome showed clearly that social interaction may magnify small variations into very large differences. It also showed the limitations of the conventional approach to social phenomena, which assumes that large differences must have large causes.Schelling's results simply show that simulation sometimes mimics reality. The results offer no insight into causation. As for the "conventional approach to social phenomena," I've never heard or read anything which suggests "that large differences must have large causes" (terms that are meaninglessly vague). The "conventional approach" is to find relationships in the data, and to let those relationships speak for themselves. Rowthorn goes on to praise Ormerod's embrace of "non-linearity" as if Ormerod had discovered gravitation. Non-linearity is no news to economists, which tells you something about Rowthorn's credentials as an economist.
Rowthorn finally unveils his agenda:
Ormerod, despite being a man of the left, is sceptical of human ability to predict and plan. If this is true, what is the role for government? Should it be merely a nightwatchman, defending the polity against internal and external threats, enforcing property rights and preventing crime, or should its role be much wider? Can the state intervene effectively to achieve aims that commend widespread support? Ormerod does not discuss this issue explicitly, although his stress on failure would suggest that most state intervention is pointless. For example, he argues that government attempts to alter the distribution of income have had little long-term impact. Yet surely this is an exaggeration. Human nature and market forces limit what governments can do about inequality, but that does not mean they are powerless. The existence of a strong welfare state in Sweden, for example, clearly helps explain why it is a far more equal society than Brazil. More generally, there are many examples of grand projects which governments have undertaken with conspicuous success, such as the TGV network in France or the D-day landings in the second world war. Ormerod's book is concerned with failure. But what is surprising is not that governments fail, but how often they succeed. The same goes for large corporations, which also perform amazing feats of planning and co-ordination. Successful planning by large public and private organisations, in tandem with markets, have created an environment that is more stable and predictable for many people in advanced economies than at any time in history.Rowthorn has his politics mixed up with his economics:
1. Sweden may be a "far more equal society than Brazil" (whatever that means), but the real question is how much better off Swedes might be if they weren't so blasted "equal" with each other. (It's a hot topic in Sweden these days.)
2. Yes, it's true that goverments can do a lot of things, but Rowthorn ignores the crucial considerations: whether those things are worth doing, and whether government can do them best. Governments "succeed" only to the extent that they do something, but not to the extent that they do the right things or do them as well as they would be done by competitive markets.
3. Rowthorn tries to equate large corporations with government, as if government were nothing more than a special type of large corporation. He tellingly omits the point that large corporations -- to the extent that they're not protected from competition by government -- must respond to the needs of consumers and the pressures of competition in order to survive and thrive. When's the last time the government of the United States went out of business? There was a close call in the early 1860s, and that's about it.
4. Corporatism -- "[s]uccessful planning by large public and private organisations, in tandem with markets" -- substitutes "stability and predictability" for dynamism and prosperity. It's the triumph of bureaucracy over humanity.
What I really learned from Rowthorn's review is that Ormerod -- the "man of the left" -- is too right (and too "right") for Rowthorn.
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