Complexity economics

Complexity economics is the application of complexity science to the problems of economics. It sees the economy not as a system in equilibrium, but as one in motion, perpetually constructing itself anew.[1][2] It uses computational and mathematical analysis to explore how economic structure is formed and reformed, in continuous interaction with the adaptive behavior of the 'agents' in the economy.[3]

This article is about the application of complexity science to the problems of economics. For its application to strategy, see Complexity theory and organizations. For other uses, see Complexity theory (disambiguation).
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Models

The "nearly archetypal example" is an artificial stock market model created by the Santa Fe Institute in 1989.[4] 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".[4]

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".[4] In these models, the results show a system which displays "a pattern of constantly changing distributions of the strategies".[4]

More generally, complexity economics models are often used to study how non-intuitive results at the macro-level of a system can emerge from simple interactions at the micro level. This avoids assumptions of the representative agent method, which attributes outcomes in collective systems as the simple sum of the rational actions of the individuals.

Measures

Economic complexity index

MIT physicist César Hidalgo and Harvard economist Ricardo Hausmann introduced a spectral method to measure the complexity of a country's economy by inferring it from the structure of the network connecting countries to the products that they export. The measure combines information of a country's diversity, which is positively correlated with a country's productive knowledge, with measures of a product ubiquity (number of countries that produce or export the product).[5][6] This concept, known as the "Product Space", has been further developed by MIT's Observatory of Economic Complexity, and in The Atlas of Economic Complexity[6] in 2011.

Relevance

The economic complexity index (ECI) introduced by Hidalgo and Hausmann[5][6] is highly predictive of future GDP per capita growth. In Hausmann, Hidalgo et al.,[6] the authors show that the List of countries by future GDP (based on ECI) estimates ability of the ECI to predict future GDP per capita growth is between 5 times and 20 times larger than the World Bank's measure of governance, the World Economic Forum's (WEF) Global Competitiveness Index (GCI) and standard measures of human capital, such as years of schooling and cognitive ability.[7][8]

Metrics for country fitness and product complexity

Pietronero and collaborators have recently proposed a different approach.[9][10][11] These metrics are defined as the fixed point of non-linear iterative map. Differently from the linear algorithm giving rise to the ECI, this non-linearity is a key point to properly deal with the nested structure of the data. The authors of this alternative formula claim it has several advantages:

  • Consistency with the empirical evidence from the export country-product matrix that diversification plays a crucial role in the assessment of the competitiveness of countries. The metrics for countries proposed by Pietronero is indeed extensive with respect to the number of products.
  • Non-linear coupling between fitness and complexity required by the nested structure of the country-product matrix. The nested structure implies that the information on the complexity of a product must be bounded by the producers with the slowest fitness.
  • Broad and Pareto-like distribution of the metrics.
  • Each iteration of the method refines information, does not change the meaning of the iterated variables and does not shrink information.

The metrics for country fitness and product complexity have been used in a report[12] of the Boston Consulting Group on Sweden growth and development perspectives.

Features

Brian Arthur, Steven N. Durlauf, and David A. Lane describe several features of complex systems that deserve greater attention in economics.[13]

  1. 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.
  2. 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.
  3. 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.
  4. Ongoing adaptation—Behaviors, actions, strategies, and products are revised frequently as the individual agents accumulate experience.[14]
  5. 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.
  6. 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.

Complexity economics has a complex relation to previous work in economics and other sciences, and to contemporary economics. Complexity-theoretic thinking to understand economic problems has been present since their inception as academic disciplines. Research has shown that no two separate micro-events are completely isolated,[15] and there is a relationship that forms a macroeconomic structure. However, the relationship is not always in one direction; there is a reciprocal influence when feedback is in operation.[16]

Complexity economics has been applied to many fields.

Intellectual predecessors

Complexity economics draws inspiration from behavioral economics, Marxian economics, institutional economics/evolutionary economics, Austrian economics and the work of Adam Smith.[17] It also draws inspiration from other fields, such as statistical mechanics in physics, and evolutionary biology. Some of the 20th century intellectual background of complexity theory in economics is examined in Alan Marshall (2002) The Unity of Nature, Imperial College Press: London. See Douma & Schreuder (2017) for a non-technical introduction to Complexity Economics and a comparison with other economic theories (as applied to markets and organizations).

Applications

The theory of complex dynamic systems has been applied in diverse fields in economics and other decision sciences. These applications include capital theory,[18][19] game theory,[20] the dynamics of opinions among agents composed of multiple selves,[21] and macroeconomics.[22] In voting theory, the methods of symbolic dynamics have been applied by Donald G. Saari.[23] Complexity economics has attracted the attention of historians of economics.[24] Ben Ramalingam's Aid on the Edge of Chaos includes numerous applications of complexity economics that are relevant to foreign aid.

Complexity economics as mainstream, but non-orthodox

According to Colander (2000), Colander, Holt & Rosser (2004), and Davis (2008) contemporary mainstream economics is evolving to be more "eclectic",[25][26] diverse,[27][28][29] and pluralistic.[30] Colander, Holt & Rosser (2004) 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 systems as contributions to these trends.[31] They classify complexity economics as now mainstream but non-orthodox.[32][33]

Criticism

In 1995-1997 publications, Scientific American journalist John Horgan "ridiculed" the movement as being the fourth C among the "failed fads" of "complexity, chaos, catastrophe, and cybernetics".[4] 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."[4][34][35]

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.[4] Surveying economic studies based on complexity science, Rosser wrote that the findings, rather than being surprising, confirmed "already-observed facts."[4] Rosser wrote that there has been "little work on empirical techniques for testing dispersed agent complexity models."[4] 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."[4]

See also

Notes
  1. W. Brian Arthur, Complexity and the Economy, Oxford: Oxford Economic Press, 2015
  2. Beinhocker, Eric D. The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics. Boston, Massachusetts: Harvard Business School Press, 2006.
  3. https://www.youtube.com/watch?v=W0dGLEreBrM
  4. Rosser Jr, J. Barkley (1999). "On the Complexities of Complex Economic Dynamics". Journal of Economic Perspectives. 13 (4): 169–192. doi:10.1257/jep.13.4.169.
  5. Hidalgo, Cesar A.; Hausmann Ricardo (2009). "The Building Block of Economic Complexity". PNAS. 106 (26): 10570–10575. arXiv:0909.3890. Bibcode:2009PNAS..10610570H. doi:10.1073/pnas.0900943106. PMC 2705545. PMID 19549871.
  6. Hausmann & Hidalgo (2011). The Atlas of Economic Complexity: Mapping Paths to Prosperity (PDF). Cambridge, MA: The MIT Press. ISBN 978-0615546629.
  7. "Complexity matters". The Economist. Oct 27, 2011.
  8. "Diversity Training". The Economist. Feb 4, 2010.
  9. Tacchella, Andrea; et al. (10 October 2012). "A New Metrics for Countries' Fitness and Products' Complexity". Scientific Reports. 2 (723): 723. Bibcode:2012NatSR...2E.723T. doi:10.1038/srep00723. PMC 3467565. PMID 23056915.
  10. Cristelli, Matthieu; et al. (2013). "Measuring the Intangibles: A Metrics for the Economic Complexity of Countries and Products". PLOS ONE. 8 (8): e70726. Bibcode:2013PLoSO...870726C. doi:10.1371/journal.pone.0070726. PMC 3733723. PMID 23940633.
  11. "Economic Complexity: Measuring the Intangibles. A Consumer's Guide" (PDF). Archived from the original (PDF) on 2 February 2014. Retrieved 30 January 2014.
  12. "National Strategy for Sweden: From Wealth to Well-being". BCG. Retrieved 30 January 2014.
  13. Arthur, Brian; Durlauf, Steven; Lane, David A (1997). "Introduction: Process and Emergence in the Economy". The Economy as an Evolving Complex System II. Reading, Mass.: Addison-Wesley. Retrieved 2008-08-26.
  14. Shiozawa, Y. (2004). "Evolutionary Economics in the 21st Century: A Manifest". Evolutionary and Institutional Economics Review. 1 (1): 5–47. doi:10.14441/eier.1.5.
  15. Albert-László Barabási "explaining (at 27:07) that no two events are completely isolated in the BBC Documentary". BBC. Retrieved 11 June 2012. "Unfolding the science behind the idea of six degrees of separation"
  16. "Page 20 - Ten Principles of Complexity & Enabling Infrastructures" (PDF). by Professor Eve Mitleton-Kelly, Director Complexity Research Programme, London School of Economics. Archived from the original (PDF) on 12 May 2013. Retrieved 1 June 2012.
  17. Colander, David (March 2008). "Complexity and the History of Economic Thought" (PDF). Retrieved 29 July 2012.
  18. Rosser Jr, J. Barkley (1983). "Reswitching as a Cusp Catastrophe". Journal of Economic Theory. 31: 182–193. doi:10.1016/0022-0531(83)90029-7.
  19. Ahmad, Syed Capital in Economic Theory: Neo-classical, Cambridge, and Chaos. Brookfield: Edward Elgar (1991)
  20. Sato, Yuzuru; Akiyama, Eizo; Farmer, J. Doyne (2002). "Chaos in learning a simple two-person game". Proceedings of the National Academy of Sciences of the United States of America. 99 (7): 4748–4751. Bibcode:2002PNAS...99.4748S. doi:10.1073/pnas.032086299. PMC 123719. PMID 11930020.
  21. Krause, Ulrich. "Collective Dynamics of Faustian Agents", in Economic Theory and Economic Thought: Essays in honour of Ian Steedman (ed. by John Vint et al.) Routledge: 2010.
  22. Flaschel, Peter; Proano, Christian R. (2009). "The J2 Status of 'Chaos' in Period Macroeconomics Models". Studies in Nonlinear Dynamics & Econometrics. 13 (2): 2. doi:10.2202/1558-3708.1674. hdl:10419/105911. Archived from the original on 2013-01-17.
  23. Saari, Donald G. Chaotic Elections: A Mathematician Looks at Voting. American Mathematical Society (2001).
  24. Bausor, Randall. "Qualitative dynamics in economics and fluid mechanics: a comparison of recent applications", in Natural Images in Economic Thought: Markets Read in Tooth and Claw (ed. by Philip Mirowski). Cambridge: Cambridge University Press (1994).
  25. "Economists today are not neoclassical according to any reasonable definition of the term. They are far more eclectic, and concerned with different issues than were the economists of the early 1900s, whom the term was originally designed to describe." Colander (2000, p. 130)
  26. "Modern economics involves a broader world view and is far more eclectic than the neoclassical terminology allows." Colander (2000, p. 133)
  27. "In our view, the interesting story in economics over the past decades is the increasing variance of acceptable views..." Colander, Holt & Rosser (2004, p. 487)
  28. "In work at the edge, ideas that previously had been considered central to economics are being modified and broadened, and the process is changing the very nature of economics." Colander, Holt & Rosser (2004, p. 487)
  29. "When certain members of the existing elite become open to new ideas, that openness allows new ideas to expand, develop, and integrate into the profession... These alternative channels allow the mainstream to expand, and to evolve to include a wider range of approaches and understandings... This, we believe, is already occurring in economics." Colander, Holt & Rosser (2004, pp. 488–489)
  30. "despite an increasing pluralism on the mainstream economics research frontier..." Davis (2008, p. 353)
  31. Colander, Holt & Rosser (2004, p. 485)
  32. "The second (Santa Fe) conference saw a very different outcome and atmosphere than the first. No longer were mainstream economists defensively adhering to general equilibrium orthodoxy... By 1997, the mainstream accepted many of the methods and approaches that were associated with the complexity approach." Colander, Holt & Rosser (2004, p. 497) Colander, Holt & Rosser (2004, pp. 490–492) distinguish between orthodox and mainstream economics.
  33. Davis (2008, p. 354)
  34. Horgan, John (1995). "From Complexity to Perplexity". Scientific American. 272 (6): 104–09. Bibcode:1995SciAm.272f.104H. doi:10.1038/scientificamerican0695-104.
  35. Horgan, John, The End of Science: Facing the Limits of Knowledge in the Twilight of the Scientific Age. Paperback ed, New York: Broadway Books, 1997.

References
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