The biorhythms of business, ably explained

April 23, 2006|George Scialabba

Why Most Things Fail: Evolution, Extinction and Economics
By Paul Ormerod
Pantheon, 255 pp., $24.95

Strategies of Commitment and Other Essays
By Thomas C. Schelling
Harvard University, 341 pp., $39.95

John Maynard Keynes once asked Max Planck, the inventor of quantum theory and perhaps the leading theoretical physicist of his time, whether he had ever considered taking up economics. Planck shook his head. ''The math is too difficult."

Maybe Planck was pulling Keynes's leg. But maybe not: Things occasionally get a bit complicated in ''Why Most Things Fail," even though Paul Ormerod, besides being an original and prolific economist, is a first-rate explainer. This is his third short but very ambitious book in a dozen years. ''The Death of Economics" (1994) proclaimed the bankruptcy of conventional economic theory at a time of its untrammeled institutional dominance. ''Butterfly Economics" (1998) outlined an alternative based on biology, in which the economy was seen not as a vast mechanism whose workings could be described and predicted, at least in principle, by a system of linear differential equations, but rather as an organism, ''a living creature whose behavior can only be understood by looking at the complex interactions of its individual parts." ''Why Most Things Fail" applies this alternative theory to the business cycle, arguing that it is a life cycle.

The self-confidence of contemporary economists is one of the wonders of the world -- ''often in error but never in doubt," as the saying goes. The reason for their ineffable sense of superiority to their fellow social scientists is the theory of competitive market equilibrium. This is a mathematical demonstration that, given certain simplifying assumptions, an unregulated price system -- a ''free market" -- will result in maximum efficiency, or the best possible allocation of resources, or the greatest good of the greatest number. The supply of everything will eventually equal the demand, unemployment will tend toward zero, and any outside (i.e., government) interference, however well intentioned, must necessarily bring about a net reduction in welfare.

As Ormerod explains, this theoretical model conquered the economics profession for two reasons. First and most obviously: He who pays the piper calls the tune. Business is the dominant force in the Western democracies, and the free-market theory rationalized that dominance. The deregulation of financial markets, the weakening of unions, the privatization of state-owned industries and resources, the reduction of social-welfare spending -- orthodox economics appeared to entail all these policies, which were exactly the policies business wanted.