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Maximisation, optimisation and all that

Will biological metaphors get economics out of its post-crisis dudgeon? Or is the problem the use of economics in society?
William Davies
4 April 2010

There’s a compelling notion that, post-financial crisis, economists are turning from ‘physics envy’ to ‘biology envy’. Our economic metaphors have certainly become more vital and ecological: ‘financial contagion’, ‘toxic assets’, ‘systemic risk’. Some have suggested that the regulators of the future will stare at vast fractal diagrams of the financial economy, studying its mutations in real time to assess its overall health.

Paul Mason’s fascinating two-part Newsnight investigation of the future of Britain’s economy included another example: ‘bio-mimicry’ in business. What the bio-mimicry movement seeks to understand is how we can learn from the adaptive properties of nature.

Only three years ago, this might have sounded like hippy mysticism. But now, with economic rationalism in ruins and an environmental disaster awaiting, Mason’s interviewees sounded eminently plausible. As one of them said with regard to the notion of profit maximisation, “one thing nature never does is maximise. It optimises”.

‘Maximisation’ is a ubiquitous feature of neo-classical economics and neo-liberal corporate governance. Economists assume that people are rational utility maximisers . Many business executives of the last thirty years have bought into the ‘shareholder value’ creed, namely that the purpose of management is to maximise profits for shareholders and themselves.

Why maximise, and not optimise? Economists will tell you that it is only this implied insatiability that keeps their models nice and tidy. Throw in notions of altruism, reputation, psychology and relationship-building, and neo-classical economics loses its central virtue, which is that it gives straight, unambiguous answers.

Even the most aggressive profit-seeking manager will probably admit that this is mainly a rule of thumb. If they only thought about profit, they’d have a mutiny from employees, citizens and customers on their hands. If they were truly to maximise the return to shareholders, they’d liquidate the company and offer a bumper payout there and then.

But the desire to eradicate social complexity from business – too often supported by business school teaching – has been a major feature of recent capitalism. Private equity takeovers are a particularly fierce case of this.

In the temples of high finance, complexity eventually had to be recognised, when it turned out that the banking whiz-kids had concocted financial products whose behaviour was too unpredictable to model. This helps explain how the ecological metaphors found their way into the recent speeches and policy documents of regulators. 

But further from Canary Wharf and the City, more vocational, socially-conscious managers had already woken up to the dangers of ‘maximisation’ as a goal. As I explore in Reinventing the Firm, businesses that are not subject to the pressure of external shareholders or private equity funds can be considered profit-making, but not profit-maximising.

Profit, after all, is simply that which is left over. All societies, as the French social theorist Georges Bataille explored, have some way of dispensing this excess, be it sacrifice, public gifts, retention or hedonistic over-consumption. But any economic model that seeks to generate as much of it as possible is clearly self-destructive in the medium or long-term.

Ecological systems may represent a helpful model in this regard. At least rhetorically, they move us away from a mechanistic view of the economy, towards something more adaptive, softer and oriented around survival. A more nuanced understanding of both capitalism and nature might recognise that ‘survival of the fittest’ isn’t some quasi-Fascist appeal to supremacy, but a recognition that survivors are those who fit in with their surroundings.

But ideally we manage without scientific analogies at all. The first question is how we can return to thinking of business in optimising terms, rather than maximising. Then the deeper question is how we became so deluded as to treat surplus extraction – surely a bi-product of making, exchanging and consuming – as our raison d’etre in the first place. The fact that surpluses are simple and quantifiable, while achieving them is complex, is an absurd justification for elevating the former above the latter in our hierarchy of economic goals and needs.


 

 

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