Deep ignorance

Why Most Things Fail: evolution, extinction and economics

Paul Ormerod <em>Faber & Faber, 255pp, £

There are few things more exhilarating than the authoritative endor-sement of human ignorance. It resolves an imaginative tension from which we all suffer. We feel that the world is indecipherable, unknowable; yet, at the same time, we fear this may reflect nothing more than our own failing. There may be others - shrewder, wiser, better read - to whom it all makes perfect sense.

Economics is particularly threatening in this respect. It seems to explain so much, perhaps everything. However, it does so in a language of extreme hermeticism and by deploying bizarre, highly abstract assumptions about markets, supply, demand and prices. The hermeticism keeps the layperson in doubt. At least it kept me in doubt for years until, one day, I heard an economist muttering to him-self, "Why don't people maximise their interests?" At once the scales fell from my eyes and I understood that almost all economics is junk.

People don't "maximise their interests" because they are people, and because they have no idea what their interests are or what they might be in the future. I (like you, I am pretty sure) spend almost none of my time pursuing goals that would make any sense to an economist. These goals may have economic consequences, but, given the idiosyncrasies of both the goals and their pursuit, those consequences cannot be measured on any grand scale. The illusion that they can be is the basic story of academic economics.

Though he does not put it in anything like those terms, that is Paul Ormerod's message in this punchy and entertaining book. His main point is that economics has blithely ignored failure, the one constant in human affairs. Thousands of books are read and lectures delivered about how companies and nations succeed. These result in theories of success which eventually result in those laughable management books read by desperate junior executives at airports. Yet as Orm-erod puts it, "not a single ounce of orthodox theory has been of any use".

Theories of success must be wrong, because success is so fleeting and rare, and because, when it does happen, it is always the product of virtually unique circumstances. So, for example, during the internet bubble, all models of success tended to converge around the idea of laid-back techie companies that made no money but were, everybody agreed, changing the capitalist paradigm. In fact, as we now know, their only real success was in raising their own share prices.

What we need, says Ormerod, is a clear understanding of failure, because this happens to everybody. Firms, even the largest, vanish at an astonishing rate, and government projects - such as, say, the imposition of greater equality through redistributive policies - invariably produce the opposite outcome from the one intended. When we look at the figures, as Ormerod does at length, human rationality seems to have no impact on the world. Social and economic failure occurs at much the same rate in the human sphere as it does in the biological.

The reason is that the world is so intrinsically complex that it defies all our powers of analysis. All decisions are taken in conditions of deep ignorance about the future. Even the most (apparently) elementary pricing decisions turn out to be guesswork because the networks of supply, demand and competition are indecipherable. "This," writes Ormerod, "is the economics of the 21st century. Individuals, firms, governments, households may lack access to complete information. Even more importantly, they do not have the cognitive ability to process it in a way which finds the single, optimal choice."

Ormerod believes it makes more sense, in such a context, to look at biological models of species extinction than at human affairs. Using the sophisticated mathematics of power laws, these do, indeed, seem to provide us with some tenuous grasp of what might happen in the future. We can see that extinctions follow certain patterns. Yet this is of no direct help to the individual or company because, though failure rates may be statistically foreseeable, the causes of each failure are simply too complex to analyse and, as a result, "the future remains covered in a deep veil to all".

From these theoretical ruins, Ormerod begins the construction of a new way of looking at human affairs. This, again, is essentially biological. Acknowledging our ignorance, we should allow our behaviour to evolve in response to changing conditions. Above all, we should innovate, because the more new developments there are, the more chance there is that some will survive. Certainly, our experience of increasing wealth in the west and, to a lesser extent, globally does suggest that, in general and in spite of our theories, we have responded with sufficient flexibility and innovation to succeed. This is, however, still a relatively short-lived phenomenon, and nobody, having read this book, is likely to feel complacent.

Yet the real importance of what Ormerod is saying goes far beyond economics. In dismissing theories of human affairs, he puts a strict limit on human rationality. As in the uncertainty principle in quantum theory, he has found that we cannot know the future, not just because we do not know enough in the present, but because there is an absolute limitation on our capacity to know. We are back where we started, "on all fours", as John Ashbery puts it, "before the lamentable spectacle of the unknown". It is, as I said, exhilarating.

Bryan Appleyard's most recent book is Aliens: why they are here (Scribner)