Traditional economics isn’t working, but a radical alternative is now coming of age, as complexity theorist J. Doyne Farmer tells Thomas Lewton
IN 2006, economists at the Federal Reserve Bank of New York started to worry about the overheating US housing market.
Concerned that the bubble might burst, they used their best model to predict what would happen if house prices dropped by 20 per cent.
Not much, was the answer it churned out. Soon after, house prices fell by almost exactly this amount, leading to probably the worst period of global economic decline in a century.
Economics is often lambasted for being a pseudoscience, with dense mathematical formulae that belie its subjectivity and a poor track record of making accurate predictions. J. Doyne Farmer thinks we can do better. In his new book, Making Sense of Chaos, he unpicks why standard economic approaches often fail – and presents a radical alternative. Complexity economics, as it is called, treats economies as systems akin to natural ecosystems or Earth’s climate. Giant computer simulations based on these ideas offer a better representation of how billions of people interact within the global economy.
Farmer currently holds posts at the University of Oxford and the Santa Fe Institute in New Mexico, but his journey into economics has been unconventional. It began when he dropped out of graduate school, built the world’s first wearable computer and used it to beat the casino at roulette. In the 1990s, he set up Prediction Company, where he applied similar principles to the stock market. Apioneer of chaos theory and complex systems, he believes that complexity economics has recently come into its own, making reliable predictions about the world’s most intractable economic problems. It is time, he argues, for policy-makers to take note.
Thomas Lewton: Why do we need a more objective economics?
J. Doyne Farmer: One of the problems with mainstream economics now is that, on almost any important issue, there is a diversity of opinions about the right answer. Austerity is a good example. Following the financial crisis of 2008, Wolfgang Schäuble, Germany’s finance minister, argued that austerity had to be imposed on the Greeks – that it was the only cure for their failing economy. Others, like Nobel-prizewinning economist Paul Krugman, argued that, no, you had to actually cut them some slack. When economists disagree, they let politicians disagree. In the end, it means that we make our decisions based on gut feelings and beliefs rather than science. I think complexity economics offers the possibility for amore objective economics where the answers aren’t begotten by the assumptions.
What are the problematic assumptions that traditional economics makes?
The core idea underlying standard economic theory is t
