The network effect

And what it means for policy

Economics assumes that individuals operate autonomously, isolated from the direct influences of others. But today’s social and economic worlds are not like this. The choices people make are directly influenced by others through "social networks" – not merely Facebook but, more importantly, real-life social networks such as family, friends and colleagues.

Network effects have been pervasive throughout history. Humans, whether Hittite potters three and a half millennia ago or traders in financial markets today, have a propensity to copy the behaviour of others around them. On the financial markets, this herd mentality can lead all too easily to the booms and crashes we have experienced in recent years.

Networks are especially important in finance. When Lehman Brothers went bankrupt, it precipitated a crisis that almost led to a total collapse of the global economy, and it was precisely because Lehman was connected into a network of other banks that the situation was so serious. Incredibly, neither the system of financial regulation that was in place, nor the thinking of mainstream economics that influenced policy so strongly, took any account of the possibility of such a network effect. Ironically, policy makers and the financial establishment thought that risk could be mitigated by spreading it across the system. They misunderstood completely the dynamics of financial networks and the possibility that such networks might not reduce risk but could create upheaval.

A world in which network effects drive behaviour is completely different from the world of conventional economics. Network effects require policy makers to have a markedly different view of how the world operates. They make successful policy much harder to implement but they also help explain many policy failures.

The intellectual underpinning of the burgeoning activity of the state has been provided by mainstream economics. Paradoxically, a theoretical construct that purports to establish the efficiency of the free market has been used to justify an enormously enhanced role for the state. The concept of "market failure", at first sight a critique of free market economics, has provided powerful backing to state intervention. When markets have not functioned in the real world as the theory suggests they should, then regulation, taxes, incentives of all shapes and forms have been used in an attempt to make the imperfect world conform to more closely to the perfect one of economic theory.

We have now had over sixty years of this vision. Yet the stark fact is that the combination of large- scale state activity and a mechanistic intellectual approach to policy-making has not delivered anything like the success hoped for. Deep social and economic problems remain. For example, the average unemployment rate in the UK in the six decades before the Second World War was 5.5 per cent – virtually identical to the average rate for the six decades since. Rational planning and clever regulation did not prevent the biggest economic recession since the 1930s from taking place in 2008/9.

It is time for mainstream economics to adopt a model of the world that more closely approximates the reality of networks.  A fundamental feature of any system in which network effects are important is that it is ‘robust yet fragile’. Most of the time, the system is stable and resilient to shocks. But every so often a particular shock can have a dramatic effect and the behaviour of individuals across the network will be altered. These events are extremely difficult to anticipate, and hard to control when they do occur.

But the network view highlights the importance of social norms in determining the success of legislation. When network effects are present, the most effective policies are unlikely to be generic changes to incentives, as per the mainstream view. Careful analysis and targeting become the order of the day. Fewer resources used more intelligently can potentially lead to much more effective strategies. The silver bullet of this approach is that there are no silver bullets. Instead, we need to rely much more on the processes of experimentation and discovery.

The focus of policy needs to shift away from prediction and control. We can never predict the unpredictable. Instead we need systems that exhibit resilience and robustness on the one hand, and the ability to adapt and respond well to unpredictable future events on the other.

Paul Ormerod is an economist and author of Positive Linking: How networks and nudges can revolutionise the world.

This is an edited version of a chapter from IPPR’s forthcoming book, Complex New World: translating new economic thinking into public policy. For more see http://bit.ly/IPPR9499

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How Donald Trump is slouching towards the Republican nomination

There was supposed to be a ceiling above which Trump’s popular support could not climb.

In America, you can judge a crowd by its merchandise. Outside the Connecticut Convention Centre in Hartford, frail old men and brawny moms are selling “your Trump 45 football jerseys”, “your hats”, “your campaign buttons”. But the hottest item is a T-shirt bearing the slogan “Hillary sucks . . . but not like Monica!” and, on the back: “Trump that bitch!” Inside, beyond the checkpoint manned by the Transportation Security Administration and the secret service (“Good!” the man next to me says, when he sees the agents), is a family whose three kids, two of them girls, are wearing the Monica shirt.

Other people are content with the shirts they arrived in (“Waterboarding – baptising terrorists with freedom” and “If you don’t BLEED red, white and blue, take your bitch ass home!”). There are 80 chairs penned off for the elderly but everyone else is standing: guys in motorcycle and military gear, their arms folded; aspiring deal-makers, suited, on cellphones; giggling high-school fatsos, dressed fresh from the couch, grabbing M&M’s and Doritos from the movie-theatre-style concession stands. So many baseball hats; deep, bellicose chants of “Build the wall!” and “USA!”. (And, to the same rhythm, “Don-ald J!”)

A grizzled man in camouflage pants and combat boots, whose T-shirt – “Connecticut Militia III%” – confirms him as a member of the “patriot” movement, is talking to a zealous young girl in a short skirt, who came in dancing to “Uptown Girl”.

“Yeah, we were there for Operation American Spring,” he says. “Louis Farrakhan’s rally of hate . . .”

“And you’re a veteran?” she asks. “Thank you so much!”

Three hours will pass. A retired US marine will take the rostrum to growl, “God bless America – hoo-rah!”; “Uptown Girl” will play many more times (much like his speeches, Donald J’s playlist consists of a few items, repeated endlessly), before Trump finally looms in and asks the crowd: “Is this the greatest place on Earth?”

There was supposed to be a ceiling above which Trump’s popular support could not climb. Only a minority within a minority of Americans, it was assumed, could possibly be stupid enough to think a Trump presidency was a good idea. He won New Hampshire and South Carolina with over 30 per cent of the Republican vote, then took almost 46 per cent in Nevada. When he cleaned up on Super Tuesday in March, he was just shy of 50 per cent in Massachusetts; a week later, he took 47 per cent of the votes in Mississippi.

His rivals, who are useless individually, were meant to co-operate with each other and the national party to deny him the nomination. But Trump won four out of the five key states being contested on “Super-Duper Tuesday” on 15 March. Then, as talk turned to persuading and co-opting his delegates behind the scenes, Trump won New York with 60 per cent.

Now, the campaign is trying to present Trump as more “presidential”. According to his new manager, Paul Manafort, this requires him to appear in “more formal settings” – without, of course, diluting “the unique magic of Trump”. But whether or not he can resist denouncing the GOP and the “corrupt” primary system, and alluding to violence if he is baulked at at the convention, the new Trump will be much the same as the old.

Back in Hartford: “The Republicans wanna play cute with us, right? If I don’t make it, you’re gonna have millions of people that don’t vote for a Republican. They’re not gonna vote at all,” says Trump. “Hopefully that’s all, OK? Hopefully that’s all, but they’re very, very angry.”

This anger, which can supposedly be turned on anyone who gets in the way, has mainly been vented, so far, on the protesters who disrupt Trump’s rallies. “We’re not gonna be the dummies that lose all of our jobs now. We’re gonna be the smart ones. Oh, do you have one over there? There’s one of the dummies . . .”

There is a frenzied fluttering of Trump placards, off to his right. “Get ’em out! . . . Don’t hurt ’em – see how nice I am? . . . They really impede freedom of speech and it’s a disgrace. But the good news is, folks, it won’t be long. We’re just not taking it and it won’t be long.”

It is their removal by police, at Trump’s ostentatious behest, that causes the disruption, rather than the scarcely audible protesters. He seems to realise this, suddenly: “We should just let ’em . . . I’ll talk right over them, there’s no problem!” But it’s impossible to leave the protesters where they are, because it would not be safe. His crowd is too vicious.

Exit Trump, after exactly half an hour, inclusive of the many interruptions. His people seem uplifted but, out on the street, they are ambushed by a large counter-demonstration, with a booming drum and warlike banners and standards (“Black Lives Matter”; an image of the Virgin of Guadalupe, holding aloft Trump’s severed head). Here is the rest of the world, the real American world: young people, beautiful people, more female than male, every shade of skin colour. “F*** Donald Trump!” they chant.

After a horrified split-second, the Trump crowd, massively more numerous, rallies with “USA!” and – perplexingly, since one of the main themes of the speech it has just heard was the lack of jobs in Connecticut – “Get a job!” The two sides then mingle, unobstructed by police. Slanging matches break out that seem in every instance to humiliate the Trump supporter. “Go to college!” one demands. “Man, I am in college, I’m doin’ lovely!”

There is no violence, only this: some black boys are dancing, with liquid moves, to the sound of the drum. Four young Trump guys counter by stripping to their waists and jouncing around madly, their skin greenish-yellow under the street lights, screaming about the building of the wall. There was no alcohol inside; they’re drunk on whatever it is – the elixir of fascism, the unique magic of Trump. It’s a hyper but not at all happy drunk.

As with every other moment of the Trump campaign so far, it would have been merely some grade of the cringeworthy – the embarrassing, the revolting, the pitiful – were Trump not slouching closer and closer, with each of these moments, to his nomination. 

This article first appeared in the 28 April 2016 issue of the New Statesman, The new fascism