A Murmuration Of Markets

I was raised in a clockwork universe. Most of my education was based upon the presumption of Newtonian physics. This presumption extended into how I was taught economics. It was believed that human affairs could be distilled into mathematical models that worked like clockwork, a dance of algorithms.  It could explain our behaviour and, more importantly, could be used to predict how we would behave in the future. Models of markets were described in very mechanical terms.

If demand exceeded supply, consumers would bid up the price of goods paid to producers until the market cleared. If supply exceeded demand, producers would lower the prices paid by consumers until the market cleared. Intuitively, this reasoning has a great appeal. We can see it happening in any fruit and veg market in virtually any country. If there is fruit and veg left at the end of the day, the market traders reduce the price to get rid of it. Equally, if there is a rush on certain products, the traders can re-price the stock to account for the additional demand.

It's hard to say when I stopped believing this view of the world. The model of how markets behave didn't quite fit the facts of the real world. I think that it was the issue of food waste that first confirmed my suspicions. According to the Newtonian model of supply and demand, there should be no food waste. The price of food should fall and the market should clear (i.e. there should be no waste). For there to be waste meant that the markets weren't functioning as they should.

This has been the usual policy response when reality doesn't quite accord to what the theory would lead us to expect. If there is a mismatch between what the models lead us to expect and what we actually experience, then there has to be a flaw in reality. We have been able to rub along with this for most of the time because most of the remedial action has been to tinker around at the edge of markets. For most of the time, markets worked perfectly adequately. Until suddenly they didn't.

The financial crisis is dated differently in different parts of the world. In the US, it is dated from the demise of Lehman Brothers in 2008. In the UK, we tend to date the crisis from the run on Northern Rock in 2007. Irrespective of which date we select, the point is that we are describing different aspects of the same thing - the failure of global markets. If markets fail on such a systemic scale, then perhaps it's not the fault of reality? Might it be that there are fundamental flaws in the models of markets? Could it be that we ought not to be slaves to Newtonian mechanics?

There was a deep soul searching in the economics profession following the financial crisis. It was patently obvious that economics, as a profession, was not fit for purpose. And so, a quest for a new economics started, this time based on the presumption that reality is always right, and that models either describe reality, or they don't. If they do, they are useful. If they don't, they are redundant. Taken from this perspective, human affairs might not have a Newtonian certainty after all.

If we reject the clockwork universe, what do we have to replace it? Markets are obviously a fact. They generally work adequately for most of the time. So how can we conceptualise this behaviour? There are some, and I count myself in this number, who are attracted to a more organic view of human affairs. Might the economy work less like a giant clock, and more like a giant organism? Admittedly, a very complex organism, but an organism nonetheless. 

If we accept that view, then economics can be extended to include aspects of the economy that have been downplayed. The models can be extended to include the dynamics of time and space, two pretty important features of the economy that classical economics ignores. We can include the social and political dimensions that traditional economics dismisses as normative. More importantly, we can introduce such features as the impact of the environment - natural resources and the climate - which current models abstract away from. We can start to arrive at a more rounded view of human activity by incorporating more of reality into the rather bland Newtonian economic models.

Supposing we adopt this approach, how would we represent markets? There is one feature of the natural world that could be very instructive here. Starlings have a collective behaviour - a murmuration - that could help us to understand how markets work. The Starlings fly as a group, much in the way that we shop at supermarkets as a group. No one starling is in charge, and each starling acts on their own volition, very much in the way that we can all exercise choice in our shopping habits according to our individual needs and desires. External factors can change the behaviour of the murmuration. If a bird of prey comes into view, the murmuration will fly away from it, very much as the imposition of VAT on a product will discourage us from purchasing it. 

Despite this, there is still much we do not know about collective and aggregative behaviour in the economy. The insights of the macroeconomists suggest that the economy in the aggregate is not the same as the sum of all microeconomic activity. Perhaps we are having trouble in explaining this disconnect because we are looking in the wrong place. Perhaps we should study the mechanics of general equilibrium less, and study the murmurations of starlings more?

Stephen Aguilar-Millan

© The European Futures Observatory 2018