Can frogs explain finance?
Alex Tabarrok has an enjoyably weird post this morning wondering whether animals really have "animal spirits," as defined by John Maynard Keynes. To figure it out, he offers an economic analysis of a pond. And "pond" isn't a technical term here. I'm talking body of water, with frogs. "Biology and economics have much to offer one another," Tabarrok concludes, which reminds me of this report from the most recent conference of the American Economic Association:
The adaptive-markets hypothesis, for instance, proposes a new way of looking at the economy, and in particular the financial markets: through the prism of evolutionary biology. The idea is simple enough: Adherents view the economy and financial markets as an ecosystem, with different "species" (hedge funds, investment banks) vying for "natural resources" (profits). These species adapt to one another, but also go through periods of sudden mutations (read: crises), which dramatically alter the makeup of the ecosystem. To advocates of this theory, cell biology could hold the key to a new, unifying theory of economics; policymakers like Larry Summers can craft better policy, they suggest, by considering all market players as parts of a living organism.
The theory, which first emerged in 2004 but has gained importance since the crisis, is now heralded in the international business press, and was recently employed by the Federal Reserve to explain the behavior of foreign-exchange markets. The idea of introducing Darwin to Adam Smith has captivated many of the professions' best minds. "Cell biologists are much more interesting to me than economists right now," says Yale professor Robert Shiller, one of the handful who predicted the crisis.
Photo credit: By Mike Segar/Reuters
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