Butterfly Economics: A New General Theory of Social and Economic Behavior [Paperback]

Paul Ormerod (Author)

Book Description

Publication Date: January 23, 2001

In this cogently and elegantly argued analysis of why human beings persist in engaging in behavior that defies time-honored economic theory, Ormerod also explains why governments and industries throughout the world must completely reconfigure their traditional methods of economic forecasting if they are to succeed and prosper in an increasingly complicated global marketplace.

Editorial Reviews

Amazon.com Review

In Hollywood, William Goldman's famous dictum that nobody knows anything is accepted as gospel. Nobody can tell you how much a movie will gross before it's released, no matter how big the stars or advertising budget. Compare the box-office receipts of two summer-of-'99 horror movies, if you have any doubt about this law: The Blair Witch Project, with no stars and a small budget, earned far more money than the very expensive, star-driven The Haunting. Yet, in economics, it's assumed that everything boils down to an engineering calculation: Maintain girders A, B, and C, and the roof will never cave in.

Paul Ormerod, author of The Death of Economics (1994), offers a different idea: "In the current state of scientific knowledge, it is simply not possible to carry out forecasts which are systematically accurate over a period of time." The title Butterfly Economics comes from the idea in chaos theory that a butterfly flapping its wings here could cause a hurricane on the other side of the world. It's not that chaos is guaranteed in economics; it's just that we never know when it'll occur, or what will cause it. "Small changes can have big consequences, and vice versa," Ormerod notes. His arguments range far afield. He talks about crime and family structure, biology, fashion, and many other topics seemingly unrelated to economics. But it comes down to this: No matter how you analyze it, human behavior is surprisingly random. And no economic model can account for all of it at any given time.

Butterfly Economics will, of course, be of most use to those with professional interest in the titular topic (economics, that is, not butterflies). But anyone seeking a good read on the vagaries of life might want to give this one a shot. Any author who can analyze the behavior of ants and Hollywood studio executives in successive breaths deserves a wide audience. --Lou Schuler --This text refers to an out of print or unavailable edition of this title.

From Publishers Weekly

Combining sophisticated economic analysis with a gift for lucid explanation, Ormerod deepens and expands upon the points he made in 1994's The Death of Economics. He starts with an elegant critique of conventional economics, arguing that the prevailing thinking mistakenly ignores insights from other fields (notably biology, psychology and literature) and that practitioners of the dismal science pay too little attention to empirical verification and see the world through narrow theoretical blinders. Ormerod, head of the economic assessment unit at the Economist, then presents his alternative approach, Butterfly Economics, an interdisciplinary view that takes its cues from sources as diverse as ant behavior and the mathematics of chaos theory. The mathematics, relegated to three appendices, are simplified to a high-school algebra level. But Ormerod's argument is easy enough to follow without the numbers as he applies Butterfly Economics to explain why VHS beat out Betamax to become the VCR standard and why low-budget movies often outperform the most expensive Hollywood features. At the core of Ormerod's thinking is the observation that human behavior is not nearly as neatly predictable as prevailing economic models assume, that economic life is more like a living organism than like a machine. His book is amusingly written, and every page offers surprising facts or strikingly new ways of looking at well-known facts. Anyone who likes to think about people and how they act will find much of interest, and probably something to love or hate, in this book.
Copyright 1999 Reed Business Information, Inc. --This text refers to an out of print or unavailable edition of this title.

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Product Details

• Paperback: 240 pages
• Publisher: Basic Books (January 23, 2001)
• Language: English
• ISBN-10: 0465053564
• ISBN-13: 978-0465053568
• Product Dimensions: 8 x 5.2 x 0.6 inches
• Shipping Weight: 9.9 ounces (View shipping rates and policies)
• Average Customer Review: 3.8 out of 5 stars  See all reviews (25 customer reviews)
• Amazon Best Sellers Rank: #346,875 in Books (See Top 100 in Books)

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41 of 46 people found the following review helpful:

5.0 out of 5 stars A new economics, based on complexity., June 8, 2000

By 

Bill Godfrey (Mt Stuart, TAS Australia) - See all my reviews
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This review is from: Butterfly Economics: A New General Theory of Social and Economic Behavior (Hardcover)

This is a brilliant successor to Ormerod's previous Death of Economics. It lucidly and wittily demonstrates the fallacy that economic forecasts can predict. More important, it further develops his economic theories based on complexity. His conclusion: "governments should do much less .. detailed short-term intervention .. and [spend more time] thinking about the overall framework.'

Ormerod is rare (I am tempted to say unique) among economists. He uses clear and straightforward English - and he has a devastating wit. Assuming that you bring yourself to read books on economics, when was the last time that one caused you to laugh aloud?

Butterfly Economics combines clear English, humour and the capacity to translate the realities of human behaviour into a credible explanation of the behaviour of economies. It is very readable, even if you are not really interested in economic theory. The importance of the book and its predecessor is that they provide a better explanation of what is going on than do conventional explanations. It explains why so much of government economic policy produces unintended side effects and it also supports the arguments of Brian Arthur and others that initial inequalities tend to become magnified. Behind the simple explanation is some quite rigorous analysis based on the mathematics of complexity, but this is kept decently in the background for the sake of the general reader.

Whereas the primary focus of attack in The Death of Economics was the assumptions underlying 'general equilibrium theory' - the cornerstone of economics and economic policy - Butterfly Economics concentrates on one aspect of human behaviour - choice. It shows what happens when one relaxes the unreal assumption that buyers form their preferences independently and are not influenced by the behaviour of others.

16 of 17 people found the following review helpful:

5.0 out of 5 stars All that is solid melts into air..., November 8, 2005

By 

Junglies (Morrisville, NC United States) - See all my reviews
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This review is from: Butterfly Economics: A New General Theory of Social and Economic Behavior (Paperback)

When I left Albion's shores some ten years ago, examination entrants for economics were in decline as A-level students switched to Business Studies in their droves. Economics departments in universities across the British Isles have closed and indeed, in my alma mater (or at least one of them) there are a mere two economists remaining but, as the joke goes, with three opinions between them.

I came across Ormerod's book in a reference in a publication by the Institute of Economic Affairs and since receiving it I have scarecly put it down.

My first degree is in Economics and prior to completing that degree I had several qualifications in the subject. My specialisma were in the History of Economic Thought and Development Economics but my extra-curriculla activities brought me into contact with the Austrian School mainly through the tremendous work of Ralph Harris and Arthur Seldon at the IEA. The abstraction in modern economics and the tools with which it operates mean that there is often a chasm between the work of the theorists and the realities of life. Too often the forecasts have gone and been forgotten but in hindsight they are often wildly inaccurate. In the United States there has been a lengthy debate throught the intermediary of newspapers such as the Financial Times and others over the discrepancy which exists between the short and long term interest rate in that country which has no explanation according to the current state of theory.

Prof. Ormerod does us all a great service in exposing the tottering edifice that is modern economics to criticisms which go back at least one hundred years. There are many voices in the wilderness from Austrians and Institutionalists among others who have shown the inadequacies of the formalist approach but who have been ignored by the vested interests of the economics profession who, like priests of an empty religion, maintain that only the true believer can enter the gates of paradise.

Ormerod does great service in opening up some of the basics to this critique in a form which a reasonably educated person may understand. Those working in the field of "Complexity" will know of the difficulties of the mathematical tools in use but which nevertheless have a tremendous applicability in today's world. I resent the description of the text as repetitive. To a degree it has to be if the general public are to keep up with the argument but the same material is not gone over and over again.

I suspect that many who are unhappy with this little book have somewhat of a vested interest in maintaining economics as a so-called science, although to me economics resembles light in that whereas light may be viewed as particle or wave, economics may be viewed as science or art. Many who owe economics for their daily bread migght be at risk if Ormerod's work has the validity he claims. What does it profit a man if he gains the whole world but suffers the loss of his own soul? Ormerod's work is a threat to the structure which has assumed for itself the mantle of the keeper of the sacred flame of policy prescription.

For that reason alone everyone interested in any aspects of economics or business or politics or public policy-making may want to read this book with care. In a way it is as revolutionary as the work of the neo-classical economists of the 19th century, in another it is one of the most radical threats to economics ever.

21 of 24 people found the following review helpful:

3.0 out of 5 stars Interesting and accessible, but repetitive, January 21, 2002

By 

E A Glaser (Delft, The Netherlands) - See all my reviews
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This review is from: Butterfly Economics: A New General Theory of Social and Economic Behavior (Paperback)

Paul Ormerod's "Butterfly Economics" has several points in its favor. He writes intelligently and with conviction about the flaws he perceives in economic theory, and without requiring any advance knowledge of economics beyond what one might read in the newspaper.

His best contribution comes in the first chapter, when he talks about an experiment that was done with ants which revealed that the ants don't make independent choices about where to gather food -- they always have a statistical chance of being affected by the choices of other ants. His point is that conventional economic theory assumes that people are individual agents who always make the best choice, rationally and independently of other people. This is clearly an iffy assumption, when in fact people are more like ants in that we are constantly influenced by our peers. The author further compares macro-economic trends with similar graphs depicting the ants' mostly unpredictable behavior. Hence, he concludes that economic theory (and the policies that are based on economic theory) are misguided because they don't take into account the inter-relatedness of people's choices, and in a larger sense, because it is not even possible to make accurate enough predictions of future states of the economy (or even the exact current state). His wish is that governments should stop meddling altogether, and quit pretending that they have any kind of control over the economy.

My main complaint is that I was expecting a more in-depth take on the subject; I should probably check out other books by the same author, because he does have a very readable and amusing style and clearly has a lot of knowledge and passion for the subject of economics. Unfortunately, Ormerod plays this one note about the ants throughout the whole book and I was losing interest by the end. I guess I was expecting deeper analogies as the book progressed, but the ants keep coming back in every chapter. It's an interesting and plausible analogy, but still. I understand that this book was written for a lay audience with not much mathematical or economic training, so perhaps this was part of the author's effort to keep the book accessible and consistent throughout.

My other complaint is probably just me ... perhaps I'm too much a dyed-in-the-wool cynic and libertarian, but the points he's stressing (that governments don't have the control over the economy that they claim, and that they should stop tinkering so much) seemed pretty obvious to me already. You don't have to read the paper for too long before you notice that the economic forecasts that governments rely upon to make decisions are often drastically altered as new data is collected and interpreted. It's not a big leap to say that all their tinkering is done to present the appearance of doing something, without having actual predictable outcomes. On the other hand, you don't have to be an economist to know that American presidential elections are almost always decided by the economy (well, except for the last one), because voters blindly give credit or blame for the state of the economy to whatever party is in power. So maybe more people should read this book to get a better perspective on the limits to the power that their government actually has. "Butterfly Economics" provides some nice counter-evidence to the idea that the government even knows what direction the economy is going in at any given time, much less able to determine a course of action that will make the economy "better".

"Butterfly Economics" is okay as a starting point, but I would recommend reading it and then going on to read "The Tipping Point" and books on chaos theory and cellular automata if you're interested in more information about the mechanics of the ant trends Ormerod talks about. More in-depth critiques of economic theory I'll have to find on my own (although any suggestions would be welcome).