Paul Omerod — The Future of Economics Uses the Science of Real-Life Social Networks

In the early 21st century, just as in the late 19th, economics in general makes the assumption that individuals operate autonomously, isolated from the direct influences of others. A person has a fixed set of tastes and preferences; when choosing from a set of alternatives, he or she compares the attributes of those alternatives and selects the one which most closely corresponds to his or her preferences. At first sight, this may seem quite reasonable, or even ‘rational’, as economists describe this theory of behaviour. If I am interested in buying a product which many people want, I may have to pay a high price. So the choices other people make affect me indirectly through the workings of the market. My preferences, however, remain unaltered, according to this conventional view of economics.…

The fact that a person can and often does decide to change his or her preferences simply on the basis of what others do is known in economics as network effects. Also called network externalities or demand-side economies of scale, network effects pervade the modern world.

Network effects have in fact been pervasive throughout human history.…

In any event, the network view of the world inherently gives rise to the concept of collective action. If a set of values spreads across a network, the behaviour of the individual component parts is altered by these emergent, collective values. The agents in the network are not isolated individuals, but operate in society and have their behaviour, at least in part, shaped by society.…

Our current political institutions are to a large extent based on the vision of society and the economy operating like machines, populated by economically rational agents. This view of the world leads to centralised bureaucracies and centralised decision-making.

We live in a society where decisions are made through several layers of bureaucracy, in both the public and private sectors. On the whole, this leads to decisions that are insensitive to local (micro) conditions, and which are insensitive to society as it changes.

A lack of both resilience and robustness is a characteristic feature of such approaches to social and economic management. Structures, rules, regulations, incentives are put in place in the belief that a desired outcome can be achieved, that a potential crisis can be predicted and forestalled by such policies. As the recent financial crisis illustrates only too well, this view of the world is ill-suited to creating systems which are resilient when unexpected shocks occur, and which exhibit robustness in their ability to recover from the shock. The focus of policy needs to shift away from prediction and control. We can never predict the unpredictable. Instead, we need systems which exhibit resilience and robustness together with the ability to adapt and respond well to unpredictable future events.

Evonomics

The Future of Economics Uses the Science of Real-Life Social Networks
Paul Omerod