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Plan and experiment
on 1 January 2012
Economics is supposed to be the study of human behaviour as human beings make choices to satisfy their needs/wants using scarce resources. At least that's what I learnt in high school. However, the more I learn about economics the more it seems that economics--at least as is taught in many universities--is not about human beings.
As part of my Ph.D. programme, I took a course on microeconomic theory and was chuffed that the predictions of economic theory are mathematically elegant, but shaky. Why do human beings not behave as `rational' economic theory would predict? Why do human beings not scout for the best solution to satisfy their needs from a menu of available options and then choose the option that maximises utility?
In this book, Paul Ormerod challenges key economic concepts like equilibrium, perfect information and perfect competition. Mr. Ormerod is clearly not enamoured of economic theory. He discusses the history of these concepts as `physics envy': economists in the eighteenth century assumed that the economy--like many physical systems--will reach a predictable equilibrium. That may be harmless theory, but, according to Mr. Ormerod, these concepts have dominated economic thought and policy. The result: policy prescriptions to economic problems have often done more harm than good and well-meaning social policies (such as racially integrated neighbourhoods and schools) flounder.
The author uses recent research from the biological sciences (for example on the size and probability of biological extinction events inferred from the fossil record) to argue that the economy is more like a complex ecosystem that is hardly predictable. Perhaps, most importantly, Mr. Ormerod dismisses the notion that omnipotent social planners can solve all of society's problems; instead, he argues for small scale (humble) experimentation in business and in social policy as a means to solving economic and social problems.
Mr. Ormerod's arguments are fitting as the United States gears up for another election season. Invariably, President Barack Obama is being blamed for the lousy state of the US economy and may well lose his bid for re-election. But how much of the blame for the state of the economy really lies with Mr. Obama? The parlous counterargument is that only a manager president, who has business experience can run the economy. Mr. Ormerod reminds the reader that complex economies like the United States' do not lend themselves to such facile analysis.
Mr. Ormerod's prescription for success flies in the face of our obsession with control. Since the 1930s, we have believed--with good reason--in the efficacy of some form of central planning. Therefore, while Mr. Ormerod's prescription might make sense, it will be political suicide; we still need to believe that someone is in control. I liked `Why Things Fail' because it is a reminder that `rational' economics does not predict human behaviour terribly well. Moreover, it is a reminder that grand policies--on average--do not work as well as small-scale experimentation. It is a message that I, as business scholar, tend to concur with. Successful businesses make plans, but they adapt and experiment as they seek to gain market share and make a profit. The book deserves three stars.