Complexity economics
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Complexity economics is the application of complexity science to the problems of economics. This new mode of economic thought rejects traditional assumptions that imply that the economy is a closed system that eventually reaches an equilibrium. Instead, it views economies as open complex adaptative systems with endogenous evolution.
Complexity economics rejects many aspects of traditional economic theory. The mathematic models used by traditional economics were copied from early models of thermodynamics. These mathematic models of economics were solely based on the first law of thermodynamics, equilibrium. Later, the second law of thermodynamics, entropy, was discovered. Proponents of complexity economics claim that traditional economic models never adapted to the latter discovery and thus remain incomplete models of reality.
Complexity economics is built on foundations of a long-standing tradition of heterodox economics that includes areas such as behavioral economics, institutional economics, Austrian economics, and evolutionary economics.
Eric Beinhocker proposes five concepts that distinguish complexity economics from traditional economics.
| Complexity Economics | Traditional Economics | |
|---|---|---|
| Dynamic | Open, dynamic, non-linear systems, far from equilibrium | Closed, static, linear systems in equilibrium |
| Agents | Modelled individually; use inductive rules of thumb to make decisions; have incomplete information; are subject to errors and biases; learn to adapt over time | Modelled collectively; use complex deductive calculations to make decisions; have complete information; make no errors and have no biases; have no need for learning or adaptation (are already perfect) |
| Networks | Explicitly model bi-lateral interactions between individual agents; networks of relationships change over time | Assume agents only interact indirectly through market mechanisms (e.g. auctions) |
| Emergence | No distinction between micro/macro economics; macro patterns are emergent result of micro level behaviours and interactions. | Micro-and macroeconomics remain separate disciplines |
| Evolution | The evolutionary process of differentiation, selection and amplification provides the system with novelty and is responsible for its growth in order and complexity | No mechanism for endogenously creating novelty, or growth in order and complexity |
[edit] References
- Santa Fe Institute Birthplace of complexity science
- Beinhocker, Eric D. The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics. Boston, Massachusetts: Harvard Business School Press, 2006.[1]
- What Should Policymakers Know About Economic Complexity (PDF) Summary of key ideas in complexity economics
