Economics

Orthodox Economics Is Broken. How Evolution, Ecology, and Collective Behavior Can Help Us Avoid Catastrophe

After the crash, can biologists fix economics?

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By Kate Douglas

The global financial crisis of 2008 took the world by surprise. Few mainstream economists saw it coming. Most were blind even to the possibility of such a catastrophic collapse. Since then, they have failed to agree on the interventions required to fix it. But it’s not just the crash: there is a growing feeling that orthodox economics can’t provide the answers to our most pressing problems, such as why inequality is spiralling. No wonder there’s talk of revolution.

Earlier this year, several dozen quiet radicals met in a boxy red building on the outskirts of Frankfurt, Germany, to plot just that. The stated aim of this Ernst Strüngmann Forum at the Frankfurt Institute for Advanced Studies was to create “a new synthesis for economics”. But the most zealous of the participants – an unlikely alliance of economists, anthropologists, ecologists and evolutionary biologists – really do want to overthrow the old regime. They hope their ideas will mark the beginning of a new movement to rework economics using tools from more successful scientific disciplines.

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Drill down, and it’s not difficult to see where mainstream “neoclassical” economics has gone wrong. Since the 19th century, economies have essentially been described with mathematical formulae. This elevated economics above most social sciences and allowed forecasting. But it comes at the price of ignoring the complexities of human beings and their interactions – the things that actually make economic systems tick.

The problems start with Homo economicus, a species of fantasy beings who stand at the centre of orthodox economics. All members of H. economicus think rationally and act in their own self-interest at all times, never learning from or considering others.

We’ve known for a while now that Homo sapiens is not like that (see “Team humanity“). Over the years, there have been various attempts to inject more realism into the field by incorporating insights into how humans actually behave. Known as behavioural economics, this approach has met with some success in microeconomics – the study of how individuals and small groups make economic decisions. It has persuaded governments to “nudge” people into doing what’s best for the economy, influencing behaviour by more subtle forms of persuasion than financial inducements. In 2010, the UK government set up the Behavioural Insights Team (known as the Nudge Unit) and the White House established something similar in the US in February last year.

Pass the risk

But the complexities introduced by behavioural economics make it too unwieldy to be applied across the board. And it has had little to say about macroeconomics – the workings of financial markets and national and global economies, which have been so troubled in recent years. In the run-up to the recent crash, for example, economists seemed blind to the perils associated with selling sub-prime mortgages and bundling them up as derivatives, where the financial risk is transferred from party to party over and over again. “It’s macroeconomics where the problem lies,” says Alan Kirman, an economist at the School for Advanced Studies in the Social Sciences in Paris, France, who co-chaired the Frankfurt forum.

Its aim was to try to address the macroeconomic problem by looking to psychology, anthropology, evolutionary biology and our growing understanding of the dynamics of collective behaviour. That way we might better understand the deficiencies of current economic models and how they can be improved.

Prime among those is their indifference to how individual humans really interact, and the wider effects of those interactions. For simplicity’s sake, orthodox economics assumes that H. economicus, when making a fundamental decision such as whether to buy or sell something, has access to all relevant information. And because our made-up economic cousins are so rational and self-interested, when the price of an asset is too high, say, they wouldn’t buy – so the price falls. This leads to the notion that economies self-organise into an equilibrium state, where supply and demand are equal.

Real humans – be they Wall Street traders or customers in Walmart – don’t always have accurate information to hand, nor do they act rationally. And they certainly don’t act in isolation. We learn from each other, and what we value, buy and invest in is strongly influenced by our beliefs and cultural norms, which themselves change over time and space.

“Many preferences are dynamic, especially as individuals move between groups, and completely new preferences may arise through the mixing of peoples as they create new identities,” says anthropologist Adrian Bell at the University of Utah in Salt Lake City. “Economists need to take cultural evolution more seriously,” he says, because it would help them understand who or what drives shifts in behaviour.

Using a mathematical model of price fluctuations, for example, Bell has shown that prestige bias – our tendency to copy successful or prestigious individuals – influences pricing and investor behaviour in a way that creates or exacerbates market bubbles.

We also adapt our decisions according to the situation, which in turn changes the situations faced by others, and so on. The stability or otherwise of financial markets, for instance, depends to a great extent on traders, whose strategies vary according to what they expect to be most profitable at any one time. “The economy should be considered as a complex adaptive system in which the agents constantly react to, influence and are influenced by the other individuals in the economy,” says Kirman.

This is where biologists might help. Some researchers are used to exploring the nature and functions of complex interactions between networks of individuals as part of their attempts to understand swarms of locusts, termite colonies or entire ecosystems. Their work has provided insights into how information spreads within groups and how that influences consensus decision-making, says Iain Couzin from the Max Planck Institute for Ornithology in Konstanz, Germany – insights that could potentially improve our understanding of financial markets.

Collective stupidity

Take the popular notion of the “wisdom of the crowd” – the belief that large groups of people can make smart decisions even when poorly informed, because individual errors of judgement based on imperfect information tend to cancel out. In orthodox economics, the wisdom of the crowd helps to determine the prices of assets and ensure that markets function efficiently. “This is often misplaced,” says Couzin, who studies collective behaviour in animals from locusts to fish and baboons.

By creating a computer model based on how these animals make consensus decisions, Couzin and his colleagues showed last year that the wisdom of the crowd works only under certain conditions – and that contrary to popular belief, small groups with access to many sources of information tend to make the best decisions.

That’s because the individual decisions that make up the consensus are based on two types of environmental cue: those to which the entire group are exposed – known as high-correlation cues – and those that only some individuals see, or low-correlation cues. Couzin found that in larger groups, the information known by all members drowns out that which only a few individuals noticed. So if the widely known information is unreliable, larger groups make poor decisions. Smaller groups, on the other hand, still make good decisions because they rely on a greater diversity of information (Proceedings of the Royal Society Bdoi.org/565).

So when it comes to organising large businesses or financial institutions, “we need to think about leaders, hierarchies and who has what information”, says Couzin. Decision-making structures based on groups of between eight and 12 individuals, rather than larger boards of directors, might prevent over-reliance on highly correlated information, which can compromise collective intelligence. Operating in a series of smaller groups may help prevent decision-makers from indulging their natural tendency to follow the pack, says Kirman.

Taking into account such effects requires economists to abandon one-size-fits-all mathematical formulae in favour of “agent-based” modelling – computer programs that give virtual economic agents differing characteristics that in turn determine interactions. That’s easier said than done: just like economists, biologists usually model relatively simple agents with simple rules of interaction. How do you model a human?

It’s a nut we’re beginning to crack. One attendee at the forum was Joshua Epstein, director of the Center for Advanced Modelling at Johns Hopkins University in Baltimore, Maryland. He and his colleagues have come up with Agent_Zero, an open-source software template for a more human-like actor influenced by emotion, reason and social pressures. Collections of Agent_Zeros think, feel and deliberate. They have more human-like relationships with other agents and groups, and their interactions lead to social conflict, violence and financial panic. Agent_Zero offers economists a way to explore a range of scenarios and see which best matches what is going on in the real world. This kind of sophistication means they could potentially create scenarios approaching the complexity of real life.

Orthodox economics likes to portray economies as stately ships proceeding forwards on an even keel, occasionally buffeted by unforeseen storms. Kirman prefers a different metaphor, one borrowed from biology: economies are like slime moulds, collections of single-celled organisms that move as a single body, constantly reorganising themselves to slide in directions that are neither understood nor necessarily desired by their component parts.

For Kirman, viewing economies as complex adaptive systems might help us understand how they evolve over time – and perhaps even suggest ways to make them more robust and adaptable. He’s not alone. Drawing analogies between financial and biological networks, the Bank of England’s research chief Andrew Haldane and University of Oxford ecologist Robert May have together argued that we should be less concerned with the robustness of individual banks than the contagious effects of one bank’s problems on others to which it is connected (Nature, vol 469, p 351). Approaches like this might help markets to avoid failures that come from within the system itself, Kirman says.

To put this view of macroeconomics into practice, however, might mean making it more like weather forecasting, which has improved its accuracy by feeding enormous amounts of real-time data into computer simulation models that are tested against each other. That’s not going to be easy.

So will the ideas that came out of the Strüngmann Forum have any practical influence? Economist Scott Page from the University of Michigan, Ann Arbor, is sceptical. He doubts that “evo-complex economics”, as he calls it, will ever be mainstream. “Most economists are already smart to the alternatives,” he says. And although the biological perspective offers a more realistic view of human behaviour, incorporating this disorder into workable economic models is a massive challenge. What’s more, Page points out, economists are not alone in resisting complexity. “Politicians want simplicity, hence the appeal of the neoclassical approach.”

Biologist Peter Turchin of the University of Connecticut in Storrs, another attendee in Frankfurt, thinks it is more to do with an attitude problem. Although some economists are open to new ideas, he says, the field as a whole is resistant to outside incursions. “I doubt that our forum will make any impact on this proud and superior profession,” Turchin wrote in the aftermath of the gathering.

It’s a point echoed by David Sloan Wilson, an evolutionary biologist at Binghamton University in New York who co-chaired the meeting and in 2008 set up the Evolution Institute, a think-tank that aims to bring evolutionary thinking into policy formation. “The reluctance of the economics profession to change and the fact that the people most in need of change are also in a position of power is a big part of the problem,” says Wilson. “At what point does one stop trying to be diplomatic and adopt a rebellious stance?”

Yet the calls are not going entirely unheard. Haldane, for one, sees the need for a change in attitude. “We require a great leap forward if we are to do a better job of reading the bumps in the economy in future,” he says. “That calls for new data, new models and a new humility across the profession.”

For would-be revolutionaries, it’s not just a question of whether economists should do biology. It’s about viewing the world through a different lens. It’s about basing economic modelling on what biology tells us about human behaviour – and how we can channel that into creating the outcomes we desire. What is the right balance between competition and cooperation? How should we value welfare? Can we pull together to solve global problems? How do we create a more equitable form of capitalism? These are daunting questions – but all revolutions have to start somewhere.

Team humanity

The selfishness of humans is a central assumption of orthodox economics, where it is thought to lead to benefits for the economy as a whole. It is what the 18th-century Scottish economist Adam Smith described as the “invisible hand”.

But evolutionary biologists have come to see cooperation and selflessness as a big part our success as a species. During the course of our evolution, they point out, cooperative groups consistently outcompeted groups of cheats.

So we are inherently cooperative when operating within our own groups. We have also developed social mechanisms to reinforce actions that benefit the group. “You could say teamwork at the scale of small groups is the signature adaptation of our species,” says evolutionary biologist David Sloan Wilson from Binghamton University in New York.

But effective teamwork can include competition, and mechanisms to promote actions that benefit the group can break down, particularly in larger groups. It’s also important to remember that in-group cooperation evolved partly in response to competition between groups.

This evolutionary perspective is radically new to economics, and it could be relevant to grand-scale economic problems that require solutions involving cooperation between nations. Take the challenge of getting nations to work together over economic solutions to climate change – a particular focus in the run-up to climate negotiations in Paris, France, later this year. This is a gargantuan problem from any perspective, but it is essentially an issue of coordination for the sake of the common good at a massive scale, says Wilson. “The challenge is therefore to implement at larger scales the coordination and control that takes place more spontaneously at smaller scales,” he says – from multicellular organisms to village-sized groups of humans.

“Morality evolved out of cooperation within and competition between groups, so when acting as a single group to tackle global problems we will have to assume the role of natural selection ourselves,” Wilson says. This might involve pursuing a wide variety of strategies, identifying those that work best, and then creating incentives to cooperate on implementation. “In some ways it’s the opposite of the invisible hand.”

Originally published at the New Scientist.

2016 July 22


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  • kenny

    A slightly sad, but perhaps not surprising, reflection on New Scientist. An article criticising economists – quite understandable – but by someone who clearly has little knowledge of economics beyond those of newspaper headlines. If you’re going to quote from Adam Smith’s ‘Wealth of Nations’ in support of your argument, then to be credible, you should consider his ‘Theory of Moral Sentiments’. I would agree that economics, as a subject, has little or no real rigour as a science, as it seems incapable of testing any of it’s ideas. As a result, economics, as practised, looks more like a 21st religion than anything a scientist would recognise.

    At the same time, most sociologists seem to be little more than political fantasists, so the whole ‘social’ area has a long way to go.

    • John M Legge

      I particularly dislike the misuse of Smith’s “invisible hand” reference, here and elsewhere.

  • Sherman Ackerson

    rB>C

  • SLDI

    Kate asks: “What is the right balance between competition and cooperation? How should we value welfare? Can we pull together to solve global problems? How do we create a more equitable form of capitalism?”

    The Universal Principles of Sustainable Development – http://www.triplepundit.com/2011/02/universal-principles-sustainable-development/

    The SLDI Code™ functions as a completely integrated, fractal matrix which leads decision-makers from the foundation of triple-bottom-line sustainability to sustainable results…

  • franciscolopezus

    It seems to me that all these writers have not gone beyond an intermediate economics book for undergraduates. Well intended and intelligent but from a layman point of view.

  • I recall the first economics conference I attended in 1984 – IIFET (International Institute of Fisheries Economics and Trade). I had read Dawkin’s Selfish Gene 6 years previously. I had 14 years experience as a commercial fisherman, and two years running a wholesale retail fishing business. I also had two years experience on a senior political advisory committee, and had just experienced a 6 week full time campaign as a candidate for our parliament.
    I listened to all the speakers, and in question time asked why none of their assumptions bore any relationship to how real decisions were made at any level.

    No sensible answer was given.

    Nothing has changed substantially.

    The predatory strategies that profit vastly from the boom bust cycles retain their dominant place.

    There is no real incentive from the system itself to change anything.

    We peasants at the bottom of the heap are supposed to be ignorant.
    We never have been.
    Some certainly, to some degrees.
    Others, far more aware than those at the top of the current economic system would like to believe.

    It is becoming obvious even to those at the very top, that the current system has wild instabilities that are fundamentally dangerous even to them.
    That hard reality is the only real opportunity for real change.

    The current system cannot deliver the sort of security that allows individuals to live a very long time, with any real confidence.
    The biological capacity to extend lifespans indefinitely is now only months away from being reality.

    We can create a system that does deliver such security, and doing so cannot be done with the existing well understood suite of predatory strategies. Such security demands a change of strategy sets. It demands universal cooperation. Diversity is fine, no one is really interested in being exactly like everyone else. We all cherish our uniqueness, however much we may profess otherwise. That demands diversity.

    What is required, is a high guaranteed minimum for all.
    Technically it is not a major issue.
    Socially, culturally, it is much more difficult.

    And most cultures have constructs that can be aligned for delivery.
    And there can be no absolutes.
    We are dealing with real complexity, real randomness, even chaos in some instances.
    All any of us can have is probability distributions – anything more is fantasy.

    We have a narrow window of opportunity.
    Global security is possible, and it requires global cooperation.

    We have the technology to support distributed trust networks, and to empower all individuals with high fidelity and long lasting memory of prior interactions, digital memory is far better than human memory. Every individual can easily track every interaction they have.
    Dunbar’s number (the effective limit of about 150 on social networks imposed by the limits of human memory reliability) need not apply to our future. Individual networks of several hundred thousand are easily possible, which radically alters stability dynamics.

    If we want a reasonable probability of personal survival, then we must transition away from scarcity based measures of value.
    We have the tools.
    We have the confidence.

    What is needed is integrity at every level, of the sort that few are used to dealing with.

    Most of our society is fiction – falsity masquerading as fact.

    Time to change that.
    By my best guess, we have less than 20 years.

    • anotherneighborhoodactivist

      This is one of the best blog comments I’ve read.

  • Rebecca Trotter

    Here’s how it works with complexity, in my view:
    Imagine a large painting, larger than anything in existence. And right at the center is a very detailed tableaux which you can only see by looking through a soda straw held right up to the painting. Once you’ve located that very small picture, you can pull back a bit and discover that the clear picture starts to lose focus and becomes overwhelmed by the additional visual information and it looks like chaos until you can see a bigger picture emerging and if you keep pulling back from the picture while looking through that soda straw, you see this happening over and over.

    The chaos/overwhelming complexity is what happens when you’ve let in lots and lots of new details but haven’t gotten enough to see the whole picture. But I truly believe that we need to be doing exactly what is happening here: using what we know about the natural world to better understand ourselves and create systems that work for us rather than the other way around. I’m wondering if a similar effort could be made to figure out strategies for overcoming counter-productive tendencies such as are running amok right now at the macro level. But I have to expect that at some point one of those very elegant, demonstrably true answers that are both mind boggling simple and impossibly complex which the universe seems to run on will appear. I mean, we are part of the universe. Why should our problems be any different than anything else in creation?

    • anotherneighborhoodactivist

      Sounds like fractals. And also HT Odum’s ecological systems analysis.

  • So regarding the last Paragraph, “when acting as a single group to tackle global problems we will have to assume the role of natural selection ourselves” means according to Wilson using an experimental approach with varie alternatives to solution design and selection. What are the “incentives to cooperate on implentation” in this approach?

  • James D. Campbell

    Many of the very reasonable objections you are raising in this piece are already part of exciting and rich strands of research within economics, going back many decades. Perhaps we could engage with that instead of setting up a fictitious “orthodoxy” that I think has no support among academic economists. It is at best out of date and at worst a straw man.

    To give just one example, herd behavior has been extensively studied and considered in economics since at least the seminal contribution (and one of the most heavily cited papers in economics in recent decades) by Bikchandani, Hirshleifer, and Welch (http://www.jstor.org/stable/2138632).

    I do not see how behavioral economics can be so complex as to be “too unwieldy”, and yet the proposed solution of “complex adaptive systems” not suffer from the same problem. It is not clear to me in any case that these are at odds. Both are valid, and both are entirely consistent with the “homo economicus” approach. In both cases various assumptions about human behavior must be made and remade. Whether in a computer simulation or a mathematical model, the agents in our analysis must behave somehow. This is a modeling choice that will always have to be made, regardless of the nuts and bolts of the approach.

    Indeed, the rational choice model does not presuppose anything about human behavior until we, the modelers, do so. It is truly a model that is robust to any behavioral assumption. Pro-social motivations are quite consistent with the model. Any motivation is. It is definitely valuable for economics, as with any subject, to explore a diversity of methodologies, but we must at least be accurate about the benefits and drawbacks of different methodologies.

  • Joaquim Alves

    We do not have to reform capitalism because this system has a negative relationship with human cooperation. How would Polanyi, capitalism is a satanic mill.

  • Kelborn Sinclair

    To make this change happen current leadership needs to be removed; playing musical chairs with figureheads won’t cut it. Investors should be replaced with the real stake-holders, the workers. And it’s the workers who should determine who fills the spots of leadership, from the ground up. This cleaning-of-house would make all the changes described in the article possible. Workers know what they do best, certainly better than a suit who was born into money, a sheltered life, and an inflated sense of worth. They, as a collective, have the knowledge and experience necessary to make the correct policy and operational decisions. And most importantly, they know what changes can be made to make production ethical, for consumers AND producers. Psychopaths like Bezos wouldn’t last a quarter if they were held responsible to the people who do the work. More likely, they would just be quartered.

    Keeping small and well informed councils in charge of decision-making will ensure that the right decisions can be made. Keeping those councils absolutely accountable to a body of workers that elects them will ensure that it’s the right ethics that determine what the right decisions are.

    Power that comes from below is just as self-serving as power that comes from above, but that’s exactly the point.

    • christiaan weiler

      . As an architect and space-planner, dealing with many different business-cultures from public institutions to plumbers, to (co)create complex structures over long planning periods, i think complexity is somehow part of my daily practice. And i totally agree what is said above, about scale and accountablility. As a designer of physical environments, i’d add that personal presence is still the most confronting condition that demands trustworthiness. Trust is a concept in complex organizations (even more when its online), but it is a very real condition in space-sharing. The whole dynamics of organization probably follow a similar pattern on any scale, only the absolute numbers are not the same – for finance, for co2, etc. Smaller units in large quantities (by space limits) redestribute everything better (see ‘Diversity Stability Debate, Shear McCann et.al.).

      Whatever the scale (I like the last phrase “Power that comes from below is just as self-serving as power that comes from above, but that’s exactly the point…”) and ‘resolution’ of accountable clusters however, ‘weakness’ and ‘power’ are part of human nature, and not even fixed in an individuals life. It’s weird to realize that hippies, became syndicalists, became governors, and advisors, and 20 years later collectively decided on privatization. The same individuals (body, mind and soul) evolved through those phases, and decided with conviction to take a certain direction .. of neoliberalism and globalization. I prefer to belive that from their perspective at the time, they were doing the right thing. Only they didn’t. Once again, (smaller) scale can be the mechanism that redistributes better and avoids concentrated error (and advances alike).

      A systems overhaul, as I heard say at the COP21, is far to complex. It’s like changing an elephant into a whale starting at the nose… But new initiatives can produce a new foundation, and they do. Small scale initiatives based on human relations are finding stability, and succeeding in creating recursive positive change for a more responsable daily life with more quality to pass on (to your kids, for example). It’s all small scale, but there are a lot of them, and their existence could be proof of cultural evolution practicing entropy ? Here are some best-practices under study : http://bit.do/oosEU-RT