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Can frogs explain finance?

frog.JPG

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

By Ezra Klein  |  January 29, 2010; 10:57 AM ET
Categories:  Economics  
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Comments

This is new? This is what the Artificial Life people were talking about 20 years ago.

Posted by: paul314 | January 29, 2010 10:59 AM | Report abuse

"by considering all market players as parts of a living organism"

This raises the obvious question: which part of the organism would you like your company to be? I know what I'd pick.

Posted by: ostap666 | January 29, 2010 11:33 AM | Report abuse

People interested in developments in this area are encouraged to follow evolutionary theorist David Sloan Wilson's weblog, http://scienceblogs.com/evolution/.

Posted by: kpidcoc | January 29, 2010 12:00 PM | Report abuse

I cannot believe you guys are just figuring out that economics has a lot to learn from biology.

I learned biology first, and then when I took economics, I realized it was just ecosystem biology. But really, really, STUPID and simplistic biology. More like social Darwinism than actual Darwin.

I literally passed the intro class by analogizing economics to Lysenkoist biology under Stalin. I passed exams by simply forgetting all I knew about how complex systems ACTUALLY work and just said "okay, what would the guy who wrote this model WANT to have happen? So, then, this must be the right answer."

It should not be surprising that economics has a lot to learn from cross-pollination with evolutionary biology--they have the same intellectual roots! They were invented at about the same time! Darwin READ Malthus. He was extremely engaged in the exact same intellectual circles that early economists came from. He's literally studying the same problem of how limited resources are distributed, and how that shapes the world over time!

But frankly, Darwin was much smarter than most of today's economists, and he also wasn't pushing an ideological agenda. He was following the facts, and he was intelligent enough to see where they led.

I mean, efficient market theory is as simplistic as believing that survival of the fittest=survival of the best. It's just so stupid, and I laughed the first time I heard it. And then I was terrified when I learned that people in charge of very important parts of the economy seemed to believe it.

It was such a breath of fresh air to read Keynes. This guy was much more in tune with the way systems actually work. But then Milton came along, and it was like the entire discipline got set back 50 years as people stopped looking at how things worked, and started debating the finer points of their ideology with more and more complex math.

Don't get me started on how bad U. Chicago economics is. They're like biologists who have never heard of extinction. "Oh, no, if we all just do nothing, the system will just re-balance itself and everything will be better..."

Also, when you learn enough biology, you are going to understand why our economy is collapsing because it has too much money tied up in private capital, and too little going to public capital and too little going to real consumption. It's like too much nitrogen.

And you'll also understand why most major leaps in human standards of living come when there is a major breakthrough either in the production of energy, or our ability to use an energy resource (for instance, the domestication of grazing animals meant we could change grass into mechanical work.)

It's not about analogizing stockbrokers to frogs. It's about realizing that the study of system implications of bounded actors competing over limited resources is the same fundamental discipline, whether you call it biology or economics.

Posted by: theorajones1 | January 29, 2010 12:12 PM | Report abuse

Theoriajones, that was a fantastic comment. It deserves more visibility.

Posted by: jdhalv | January 29, 2010 7:00 PM | Report abuse

--"[E]fficient market theory is as simplistic as believing that survival of the fittest=survival of the best. It's just so stupid, and I laughed the first time I heard it."--

That's ironic, isn't it? Because none of us arrived where we are by any other means than survival of the fittest. And that includes the last century's worth of meddling by collectivists convinced they could outsmart the basic individual selection process.

theorajones1's implication that biologic imperative hasn't been sufficiently augmented via political FORCE is abject nonsense. Political FORCE distorts the incentives of evolution, exactly like price controls distort the functions of markets. Klein, and those he links in current regards, are propagandists feeding confusion out of ignorance and hypocrisy.

Posted by: msoja | January 30, 2010 12:33 AM | Report abuse

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