Quantum Economics by David Orrell

Author:David Orrell [David Orrell]
Language: eng
Format: epub
ISBN: 9781785784002
Publisher: Icon Books Ltd
Published: 2018-07-18T16:00:00+00:00

The rational gene

Far from being a ‘universal bogey’ as Robbins called him, rational economic man had morphed into the Cold War economics version of a universal soldier. As discussed in the previous chapter, he soon switched into the more lucrative field of finance, playing a key role in efficient market theory and quantitative finance. He also received a degree of validation from the idea of ‘the selfish gene’, a controversial hypothesis popularised by zoologist Richard Dawkins in his 1976 book of the same name. According to this theory, we might think we are living, conscious, independent people, but actually we are just the puppets of our genes, which are bent only on propagation. As physicist David Deutsch wrote: ‘An organism is the sort of thing – such as an animal, plant or microbe – which in everyday terms we usually think of as being alive. But … “alive” is at best a courtesy title when applied to the parts of an organism other than its DNA.’13 Life therefore reduces to genes – and even if people sometimes appear irrational, our genes are experts at hyper-rational game theory, since the only reason they are here is because they have been ruthlessly maximising their own chances of survival for millennia. All change, including even the emergence of life in the first place, is due to random mutations, or what biologist Jacques Monod called in his 1970 book Chance and Necessity a ‘Monte Carlo game’.14

Economics could therefore apply to much more than the economy – it could serve as a blueprint for all the social sciences. As Gary Becker wrote in his book The Economic Approach to Human Behavior, written like Dawkins’ book in 1976, ‘the combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and consistently form the heart of the economic approach … I have come to the position that the economic approach is a comprehensive one that is applicable to all human behavior.’15 His University of Chicago colleague Robert Lucas pushed the idea of rational economic man to its limits with his theory of rational expectations, which says that people are not just rational, but also have a perfect mental model of the economy, in the sense that they don’t make systematic errors. Markets must be at equilibrium, because disequilibrium can be caused only by irrational behaviour.

Faith in the powers of our own rationality provided intellectual justification for the rollback of financial sector regulations that gathered steam in the early 2000s. After all, if the market was rational, and risk could be hedged away through the use of complex derivatives, how could regulation help? As Chairman of the Federal Reserve Ben Bernanke told Congress in 2006, ‘the best way to make sure the hedge funds are not taking excessive risk or excessive leverage is through market discipline’.16 It also led to an incredible degree of complacency in economics, captured by Lucas when he announced in his 2003 talk, cited in the first chapter, that ‘the central problem

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