After any great political or sociological phenomenon, the publishing industry's response tends to follow three distinct phases. Firstly, there are knee-jerk accounts of what happened by people who frankly don't have a clue. In the case of the credit crunch the worst include cash-in City memoires by assorted junior traders, and opportunistic accounts by novelists, political science academics and others who barely know their RAVs from their elbows. The second wave includes more considered accounts by more knowledgeable types. These typically take longer to get out because their authors are waiting for the dust to settle/have proper jobs. Here you tend to get books by senior City figures, intelligent financial journalists and so on. These, however, are still focused on describing and explaining what has just occurred, and perhaps offering suggestions for regulatory changes to make them less likely to occur again. Philip Augur's `Reckless' is a good example of this type. Finally, you get the books that put the events into their wider context and suggest some more radical solutions. These can be very variable indeed, ranging from the frankly nutty to the brilliant. `Economyths' is brilliant.
As it happens, I wasn't expecting a great deal from the book. David Orrell isn't an economist, he's an applied mathematician, and he hasn't, so far as I can tell, worked in the City. Books by outsiders, however talented, frequently miss the point, often because they are pushing a political agenda, or perhaps because they just `don't get it'. But I was pleasantly surprised from the first chapter, and by the end I was absolutely converted to his viewpoint. Indeed, is should carry a health warning - read this book and you will never be able to take the claims of classical economics seriously again.
In each of his ten chapters Orrell takes aim at one of the founding assumptions of neo-classical economics, like `Homo economicus' and the efficient markets hypothesis, and knocks them down one by one. Typically he starts by undermining their foundations by showing their questionable origins (usually in dodgy analogies to 19th Century physics). Then he meticulously demonstrates how they distort, fail to represent or contradict the economic data. By the end, you wonder how you ever took them seriously at all.
Easily my favourite chapter was his demolition of the `law' of supply and demand. This is perhaps the one thing that everyone thinks they know and agrees with about economics. Yet, if it was true, markets would always (at least in the absence of catastrophic shocks to supply or demand) self-regulate towards a mean. The mean itself would change only slowly (e.g. with changes in agricultural practice, general wealth or population) and bubbles would be effectively impossible. In fact, bubbles in all sorts of areas are relatively common. Orrell demonstrates convincingly that in certain circumstances market moves operate as `negative feedback' and the `law' holds, in others they operate as `positive feedback' and it doesn't. It's an obvious point, and it's been made before, but rarely has it been made so fluently or convincingly. It turns out that the Gausian bell curve does not represent the typical shape of market movements - at least not stock markets with their heavily speculative character - but instead they observe the fractal `power relationships' visible in, for example, the ratio of earthquake magnitude to frequency. If you're like me you'll be slapping your forehead.
Markets, it seems, are more like chaotic organic systems than the well-regulated physical `machines' that the neo-classical economists would have us believe. And this is where the book ascends above similar attacks on the status quo, into the realms of genius. Too many critiques of the neo-classical, liberal consensus point out plausibly what is wrong and then point vaguely in the direction of a `something' that must be done. For example, we didn't need David Orrell to tell us that `homo economicus' was a myth, and a silly one at that. Anyone who's read the work of Kahneman and Tversky knows that. But that lack of a plausible alternative theoretical framework allows the neo-classical economists to throw them off. We've seen a lot of work recently aimed at tweaking the models to deal with things like asymmetrical information or imperfect rationality.
Orrell recognises that we need a Copernican revolution to sweep away these Ptolemaic epicycles and the discredited theory they are shoring up. Fortunately, with his mathematical background he recognises that maths and physics haven't stood still, and that changes in the fields of network theory, for example, hold the key to a looser but more accurate model - or more likely set of models - that would more correctly describe the behaviour of economies. This doesn't set out a new framework - that would take a long and complex book - but it plausibly shows where one is to be found, and hopefully a new generation of economists will be inspired to fill in the gaps.
This is a book that should be read by everyone. It deserves to be a best seller. I suspect it won't be, though, and the responsibility lies with the publishers. This is a serious, exciting, invigoration and beautifully written destruction of the economic status quo. So, what do they do? Package it in a garish mustard yellow cover with a stupid, cartoonish design so that it looks like it's aimed at children. Even the subtitle ("Ten Ways That Economics Gets it Wrong") doesn't do justice to the scope and importance of this book. So, come on Icon, re-release this with a properly-designed, smart cover, and get it on the `three for two' tables. Your author deserves it. We deserve it.
