Review on “Butterfly Economics” by Paul Ormerod

Miguel Palacios

Butterfly Economics introduces a non-traditional methodology for analyzing many of the problems that social sciences deal with. This book is a must to have a glimpse of how economic theory is changing. It gives light to a new way of thinking about a broad range of economic and social problems.

Orthodox economic theory states that individuals’ preferences are fixed. This premise leads ultimately to the belief that the economy can be controlled like a machine. Consequently, though orthodox economic theory has led to many explanations about business cycles and economic growth among other subjects, most of these explanations still have major flaws. The implications are serious given that major policies undertaken by governments are based on orthodox theory. It is always positive to have someone remind our governments, that they are really far away from understanding the problems they are dealing with. Personally, this reminder is what I liked most of the book.

Ormerod, the author, makes a book-lasting attack on the premise that individuals’ preferences are fixed. His point is based on the idea that what others do influences an individual’s behavior. Therefore, theory has to be adjusted to cover this fact. Ormerod goes on to illustrate a model that takes this into account and then shows how it could be used to explain, among other things, changes in crime rates, family structure, the business cycle and economic growth.

I agree with the author in the belief that his main point will eventually be adopted by mainstream economics and other social sciences. That my preferences are influenced directly by what others do is generally regarded as truth. Now that mathematics and computers allow us to incorporate that statement in our models, we should expect that every new analysis will take it into account.

The main policy implication is the book’s conclusion: less can be more. If the economy doesn’t really work as a machine, trying with multiple adjustments to influence the economy and obtaining the desired results is almost impossible. In the process, lots of resources are consumed without success. Smaller but critical changes can produce huge results.

Although I agree with the author’s main point, I disliked some contradictory policy implications that he suggests. For example, after explaining how sometimes the worst technology wins over a better one (beta and VHS), the author states that “…support for companies to get new technologies or new products to market as rapidly as possible seems to be a sensible strategy in those industries where early success might secure a decisive advantage.” If you agree with that statement, bear in mind that the book also argues that control is an illusion and that forecasting cannot be done accurately.

Finally, the fact that the author’s model suggests that some successful policies could be found in changing the way economic agents behave reminds me of Hayek’s phrase: “The worst threats to liberty have not yet been seen.” Of course, in the end every policy changes the way we behave.