Complexity economics
Encyclopedia
Complexity economics is the application of complexity science
to the problems of economics
. It studies computer simulations to gain insight into economic dynamics, and avoids the assumption that the economy is a system in equilibrium.
in 1989. The model shows two different outcomes, one where "agents do not search much for predictors and there is convergence on a homogeneous rational expectations outcome" and another where "all kinds of technical trading strategies appearing and remaining and periods of bubbles and crashes occurring".
Another area has studied the prisoner's dilemma
, such as in a network where agents play amongst their nearest neighbors or a network where the agents can make mistakes from time to time and "evolve strategies". In these models, the results show a system which displays "a pattern of constantly changing distributions of the strategies".
, Steven N. Durlauf
, and David A. Lane
describe several features of complex systems that deserve greater attention in economics.
, institutional economics
/evolutionary economics
, Austrian economics and the work of Adam Smith
. It also draws inspiration from other fields, such as statistical mechanics
in physics, and evolutionary biology.
, the dynamics of opinion
s among agents composed of multiple selves, and macroeconomics. In voting theory, the methods of symbolic dynamics
have been applied by Donald G. Saari
. Complexity economics has attracted the attention of historians of economics.
is evolving to be more "eclectic", diverse, and pluralistic
. state that contemporary mainstream economics is "moving away from a strict adherence to the holy trinity---rationality, selfishness, and equilibrium", citing complexity economics along with recursive economics
and dynamical system
s as contributions to these trends. They classify complexity economics as now mainstream but non-orthodox
.
journalist John Horgan "ridiculed" the movement as being the fourth C among the "failed fads" of "complexity
, chaos
, catastrophe
, and cybernetics
". In 1997, Horgan wrote that the approach had "created some potent metaphors: the butterfly effect, fractals, artificial life, the edge of chaos, self organized criticality. But they have not told us anything about the world that is both concrete and truly surprising, either in a negative or in a positive sense".
Rosser "granted" Horgan "that it is hard to identify a concrete and surprising discovery (rather than "mere metaphor") that has arisen due to the emergence of complexity analysis" in the discussion journal of the American Economic Association
, the Journal of Economic Perspectives
. Surveying economic studies based on complexity science, Rosser wrote that the findings, rather than being surprising, confirmed "already-observed facts". Rosser wrote that there has been "little work on empirical techniques for testing dispersed agent complexity models". Nonetheless, Rosser wrote that "there is a strain of common perspective that has been accumulating as the four C's of cybernetics, catastrophe, chaos and complexity emerged, which may now be reaching a critical mass in terms of influencing the thinking of economists more broadly".
Complex system
A complex system is a system composed of interconnected parts that as a whole exhibit one or more properties not obvious from the properties of the individual parts....
to the problems of economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
. It studies computer simulations to gain insight into economic dynamics, and avoids the assumption that the economy is a system in equilibrium.
Models
The "nearly archetypal example" is an artificial stock market model created by the Santa Fe InstituteSanta Fe Institute
The Santa Fe Institute is an independent, nonprofit theoretical research institute located in Santa Fe and dedicated to the multidisciplinary study of the fundamental principles of complex adaptive systems, including physical, computational, biological, and social systems.The Institute houses a...
in 1989. The model shows two different outcomes, one where "agents do not search much for predictors and there is convergence on a homogeneous rational expectations outcome" and another where "all kinds of technical trading strategies appearing and remaining and periods of bubbles and crashes occurring".
Another area has studied the prisoner's dilemma
Prisoner's dilemma
The prisoner’s dilemma is a canonical example of a game, analyzed in game theory that shows why two individuals might not cooperate, even if it appears that it is in their best interest to do so. It was originally framed by Merrill Flood and Melvin Dresher working at RAND in 1950. Albert W...
, such as in a network where agents play amongst their nearest neighbors or a network where the agents can make mistakes from time to time and "evolve strategies". In these models, the results show a system which displays "a pattern of constantly changing distributions of the strategies".
Features
Brian ArthurW. Brian Arthur
William Brian Arthur is an economist credited with influencing and describing the modern theory of increasing returns. He has lived and worked in Northern California for many years. He is an authority on economics in relation to complexity theory, technology and financial markets...
, Steven N. Durlauf
Steven N. Durlauf
Steven N. Durlauf is the Kenneth J. Arrow Professor of Economics at the University of Wisconsin–Madison, USA.He has served as co-director of the economics program of the Santa Fe Institute and is a research associate of the National Bureau of Economic Research...
, and David A. Lane
David A. Lane (scientist)
David A. Lane is an American economist, who developed the theory of artifact innovation. At the Santa Fe Institute he has been defining the notion of economic complexity and the Santa Fe approach...
describe several features of complex systems that deserve greater attention in economics.
- Dispersed interaction—The economy has interaction between many dispersed, heterogeneous, agents. The action of any given agent depends upon the anticipated actions of other agents and on the aggregate state of the economy.
- No global controller—Controls are provided by mechanisms of competition and coordination between agents. Economic actions are mediated by legal institutions, assigned roles, and shifting associations. No global entity controls interactions. Traditionally, a fictitious auctioneer has appeared in some mathematical analyses of general equilibrium models, although nobody claimed any descriptive accuracy for such models. Traditionally, many mainstream models have imposed constraints, such as requiring that budgets be balanced, and such constraints are avoided in complexity economics.
- Cross-cutting hierarchical organization—The economy has many levels of organization and interaction. Units at any given level behaviors, actions, strategies, products typically serve as "building blocks" for constructing units at the next higher level. The overall organization is more than hierarchical, with many sorts of tangling interactions (associations, channels of communication) across levels.
- Ongoing adaptation—Behaviors, actions, strategies, and products are revised frequently as the individual agents accumulate experience.
- Novelty niches—Such niches are associated with new markets, new technologies, new behaviors, and new institutions. The very act of filling a niche may provide new niches. The result is ongoing novelty.
- Out-of-equilibrium dynamics—Because new niches, new potentials, new possibilities, are continually created, the economy functions without attaining any optimum or global equilibrium. Improvements occur regularly.
Contemporary trends in economics
Complexity economics has a complex relation to previous work in economics and other sciences, and to contemporary economics. Complexity economics has been applied to many fields.Intellectual predecessors
Complexity economics draws inspiration from behavioral economics, Marxian economicsMarxian economics
Marxian economics refers to economic theories on the functioning of capitalism based on the works of Karl Marx. Adherents of Marxian economics, particularly in academia, distinguish it from Marxism as a political ideology and sociological theory, arguing that Marx's approach to understanding the...
, institutional economics
Institutional economics
Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour. Its original focus lay in Thorstein Veblen's instinct-oriented dichotomy between technology on the one side and the "ceremonial" sphere of society on the...
/evolutionary economics
Evolutionary economics
Evolutionary economics is part of mainstream economics as well as heterodox school of economic thought that is inspired by evolutionary biology...
, Austrian economics and the work of Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
. It also draws inspiration from other fields, such as statistical mechanics
Statistical mechanics
Statistical mechanics or statistical thermodynamicsThe terms statistical mechanics and statistical thermodynamics are used interchangeably...
in physics, and evolutionary biology.
Applications
The theory of complex dynamic systems has been applied in diverse fields in economics and other decision sciences. These applications include capital theory, game theoryGame theory
Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...
, the dynamics of opinion
Public opinion
Public opinion is the aggregate of individual attitudes or beliefs held by the adult population. Public opinion can also be defined as the complex collection of opinions of many different people and the sum of all their views....
s among agents composed of multiple selves, and macroeconomics. In voting theory, the methods of symbolic dynamics
Symbolic dynamics
In mathematics, symbolic dynamics is the practice of modeling a topological or smooth dynamical system by a discrete space consisting of infinite sequences of abstract symbols, each of which corresponds to a state of the system, with the dynamics given by the shift operator...
have been applied by Donald G. Saari
Donald G. Saari
Donald Gene Saari is the Distinguished Professor of Mathematics and Economics and director of the Institute for Mathematical Behavioral Sciences at the University of California Irvine...
. Complexity economics has attracted the attention of historians of economics.
Complexity economics as mainstream, but non-orthodox
According to , , and contemporary mainstream economicsMainstream economics
Mainstream economics is a loose term used to refer to widely-accepted economics as taught in prominent universities and in contrast to heterodox economics...
is evolving to be more "eclectic", diverse, and pluralistic
Pluralism in economics
The pluralism in economics movement is a campaign to eliminate monism in economics. The movement's adherents have stated that substantive and methodological monism currently dominates mainstream economics....
. state that contemporary mainstream economics is "moving away from a strict adherence to the holy trinity---rationality, selfishness, and equilibrium", citing complexity economics along with recursive economics
Dynamic programming
In mathematics and computer science, dynamic programming is a method for solving complex problems by breaking them down into simpler subproblems. It is applicable to problems exhibiting the properties of overlapping subproblems which are only slightly smaller and optimal substructure...
and dynamical system
Dynamical system
A dynamical system is a concept in mathematics where a fixed rule describes the time dependence of a point in a geometrical space. Examples include the mathematical models that describe the swinging of a clock pendulum, the flow of water in a pipe, and the number of fish each springtime in a...
s as contributions to these trends. They classify complexity economics as now mainstream but non-orthodox
Heterodox economics
"Heterodox economics" refers to approaches or to schools of economic thought that are considered outside of "mainstream economics". Mainstream economists sometimes assert that it has little or no influence on the vast majority of academic economists in the English speaking world. "Mainstream...
.
Criticism
In 1995-1997 publications, Scientific AmericanScientific American
Scientific American is a popular science magazine. It is notable for its long history of presenting science monthly to an educated but not necessarily scientific public, through its careful attention to the clarity of its text as well as the quality of its specially commissioned color graphics...
journalist John Horgan "ridiculed" the movement as being the fourth C among the "failed fads" of "complexity
Complexity
In general usage, complexity tends to be used to characterize something with many parts in intricate arrangement. The study of these complex linkages is the main goal of complex systems theory. In science there are at this time a number of approaches to characterizing complexity, many of which are...
, chaos
Chaos theory
Chaos theory is a field of study in mathematics, with applications in several disciplines including physics, economics, biology, and philosophy. Chaos theory studies the behavior of dynamical systems that are highly sensitive to initial conditions, an effect which is popularly referred to as the...
, catastrophe
Catastrophe theory
In mathematics, catastrophe theory is a branch of bifurcation theory in the study of dynamical systems; it is also a particular special case of more general singularity theory in geometry....
, and cybernetics
Cybernetics
Cybernetics is the interdisciplinary study of the structure of regulatory systems. Cybernetics is closely related to information theory, control theory and systems theory, at least in its first-order form...
". In 1997, Horgan wrote that the approach had "created some potent metaphors: the butterfly effect, fractals, artificial life, the edge of chaos, self organized criticality. But they have not told us anything about the world that is both concrete and truly surprising, either in a negative or in a positive sense".
Rosser "granted" Horgan "that it is hard to identify a concrete and surprising discovery (rather than "mere metaphor") that has arisen due to the emergence of complexity analysis" in the discussion journal of the American Economic Association
American Economic Association
The American Economic Association, or AEA, is a learned society in the field of economics, headquartered in Nashville, Tennessee. It publishes one of the most prestigious academic journals in economics: the American Economic Review...
, the Journal of Economic Perspectives
Journal of Economic Perspectives
The Journal of Economic Perspectives is an economic journal published by the American Economic Association. The journal is very broad in its scope...
. Surveying economic studies based on complexity science, Rosser wrote that the findings, rather than being surprising, confirmed "already-observed facts". Rosser wrote that there has been "little work on empirical techniques for testing dispersed agent complexity models". Nonetheless, Rosser wrote that "there is a strain of common perspective that has been accumulating as the four C's of cybernetics, catastrophe, chaos and complexity emerged, which may now be reaching a critical mass in terms of influencing the thinking of economists more broadly".
External links
- Santa Fe Institute A center of complexity science
- What Should Policymakers Know About Economic Complexity (PDF) Summary of complexity economics