Complexity economics is the application of
complexity science
A complex system is a system composed of many components that may interact with one another. Examples of complex systems are Earth's global climate, organisms, the human brain, infrastructure such as power grid, transportation or communication sy ...
to the problems of
economics
Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and interac ...
. It relaxes several common assumptions in economics, including
general equilibrium theory
In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an ov ...
. While it does not reject the existence of an equilibrium, it features a
non-equilibrium approach and sees such equilibria as a special case and as an emergent property resulting from complex interactions between economic agents.
[Beinhocker, Eric D. The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics. Boston, Massachusetts: Harvard Business School Press, 2006.] The complexity science approach has also been applied to
computational economics
Computational economics is an interdisciplinary research discipline that combines methods in computational science and economics to solve complex economic problems.''Computational Economics''."About This Journal"an"Aims and Scope" This subject e ...
.
Models
The "nearly archetypal example" is an artificial
stock market
A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange a ...
model created by the
Santa Fe Institute
The Santa Fe Institute (SFI) is an independent, nonprofit theoretical research institute located in Santa Fe, New Mexico, United States and dedicated to the multidisciplinary study of the fundamental principles of complex adaptive systems, inc ...
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
The prisoner's dilemma is a game theory thought experiment involving two rational agents, each of whom can either cooperate for mutual benefit or betray their partner ("defect") for individual gain. The dilemma arises from the fact that while def ...
, 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".][
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
Economists use the term representative agent to refer to the typical decision-maker of a certain type (for example, the typical consumer, or the typical firm).
More technically, an economic model is said to have a representative agent if all agen ...
method, which attributes outcomes in collective systems as the simple sum of the rational actions of the individuals. It also takes into account the view of emergence
In philosophy, systems theory, science, and art, emergence occurs when a complex entity has properties or behaviors that its parts do not have on their own, and emerge only when they interact in a wider whole.
Emergence plays a central rol ...
in economics.
Measures
Economic complexity index
Physicist César Hidalgo and Harvard economist Ricardo Hausmann
Ricardo Hausmann (born 1956) is the former Director of the Center for International Development currently leading the Center for International Development's Growth Lab and is a professor of the Practice of Economic Development at the Harvard Ken ...
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
Diversity, diversify, or diverse may refer to:
Business
*Diversity (business), the inclusion of people of different identities (ethnicity, gender, age) in the workforce
*Diversity marketing, marketing communication targeting diverse customers
* ...
, 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). 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[ in 2011.
]
Relevance
The economic complexity index (ECI) introduced by Hidalgo and Hausmann[ is highly predictive of future GDP per capita growth. In Hausmann, Hidalgo et al.,][ 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.
]
Metrics for country fitness and product complexity
Sapienza physicist Luciano Pietronero
Luciano Pietronero (born 15 December 1949) is an Italian physicist (statistical physics) and full professor at the department of Physics at the Sapienza University of Rome.
He is also Director of the Institute of Complex Systems of the Nationa ...
and collaborators have recently proposed a different approach. 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 of the Boston Consulting Group
Boston Consulting Group, Inc. (BCG) is an American global management consulting firm founded in 1963 and headquartered in Boston, Massachusetts. It is one of the "Big Three (management consultancies), Big Three" (or MBB, the world's three large ...
on Sweden
Sweden, formally the Kingdom of Sweden, is a Nordic countries, Nordic country located on the Scandinavian Peninsula in Northern Europe. It borders Norway to the west and north, and Finland to the east. At , Sweden is the largest Nordic count ...
growth and development perspectives.
Features
Brian Arthur, Steven N. Durlauf, and David A. Lane describe several features of complex systems that they argue 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-theoretic thinking to understand economic problems has been present since their inception as academic discipline
An academic discipline or academic field is a subdivision of knowledge that is taught and researched at the college or university level. Disciplines are defined (in part) and recognized by the academic journals in which research is published, a ...
s. Research has shown that no two separate micro-events are completely isolated,Albert-László Barabási
Albert-László Barabási (born March 30, 1967) is a Romanian-born Hungarian-American physicist, renowned for his pioneering discoveries in network science and network medicine.
He is a distinguished university professor and Robert Gray Profe ...
"Unfolding the science behind the idea of six degrees of separation" and there is a relationship that forms a macroeconomic
Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output/ GDP ...
structure. However, the relationship is not always in one direction; there is a reciprocal influence when feedback is in operation.
Complexity economics has been applied to many fields.
Intellectual predecessors
Complexity economics draws inspiration from behavioral economics
Behavioral economics is the study of the psychological (e.g. cognitive, behavioral, affective, social) factors involved in the decisions of individuals or institutions, and how these decisions deviate from those implied by traditional economi ...
, Marxian economics
Marxian economics, or the Marxian school of economics, is a heterodox school of political economic thought. Its foundations can be traced back to Karl Marx's critique of political economy. However, unlike critics of political economy, Marxian ...
, and institutional economics
Institutional economics focuses on understanding the role of the Sociocultural evolution, evolutionary process and the role of institutions in shaping Economy, economic Human behavior, behavior. Its original focus lay in Thorstein Veblen's instin ...
/evolutionary economics
Evolutionary economics is a school of economic thought that is inspired by evolutionary biology. Although not defined by a strict set of principles and uniting various approaches, it treats economic development as a process rather than an equil ...
. It also draws inspiration from other fields, such as statistical mechanics
In physics, statistical mechanics is a mathematical framework that applies statistical methods and probability theory to large assemblies of microscopic entities. Sometimes called statistical physics or statistical thermodynamics, its applicati ...
in physics, and evolutionary biology
Evolutionary biology is the subfield of biology that studies the evolutionary processes such as natural selection, common descent, and speciation that produced the diversity of life on Earth. In the 1930s, the discipline of evolutionary biolo ...
. 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,[Ahmad, Syed ''Capital in Economic Theory: Neo-classical, Cambridge, and Chaos''. Brookfield: Edward Elgar (1991)] game theory
Game theory is the study of mathematical models of strategic interactions. It has applications in many fields of social science, and is used extensively in economics, logic, systems science and computer science. Initially, game theory addressed ...
, the dynamics of opinion
An opinion is a judgement, viewpoint, or statement that is not conclusive, as opposed to facts, which are true statements.
Definition
A given opinion may deal with subjective matters in which there is no conclusive finding, or it may deal ...
s among agents composed of multiple selves,[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.] and macroeconomic
Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output/ GDP ...
s. In voting theory, the methods of symbolic dynamics
In mathematics, symbolic dynamics is the study of dynamical systems defined on a discrete space consisting of infinite sequences of abstract symbols. The evolution of the dynamical system is defined as a simple shift of the sequence.
Because of t ...
have been applied by Donald G. Saari.[Saari, Donald G. ''Chaotic Elections: A Mathematician Looks at Voting''. American Mathematical Society (2001).] Complexity economics has attracted the attention of historians of economics.[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).] Ben Ramalingam's Aid on the Edge of Chaos includes numerous applications of complexity economics that are relevant to foreign aid
In international relations, aid (also known as international aid, overseas aid, foreign aid, economic aid or foreign assistance) is – from the perspective of governments – a voluntary transfer of resources from one country to another. The ...
.
Testing
In the literature, usually chaotic models are proposed but not calibrated on real data nor tested. However some attempts have been made recently to fill that gap. For instance, chaos could be found in economics by the means of recurrence quantification analysis Recurrence quantification analysis (RQA) is a method of nonlinear data analysis (cf. chaos theory) for the investigation of dynamical systems. It quantifies the number and duration of recurrences of a dynamical system presented by its phase space tr ...
. In fact, Orlando et al. by the means of the so-called recurrence quantification correlation index were able detect hidden changes in time series. Then, the same technique was employed to detect transitions from laminar (i.e. regular) to turbulent (i.e. chaotic) phases as well as differences between macroeconomic variables and highlight hidden features of economic dynamics. Finally, chaos could help in modeling how economy operate as well as in embedding shocks due to external events such as COVID-19.
For an updated account on the tools and the results obtained by empirically calibrating and testing deterministic chaotic models (e.g. Kaldor-Kalecki, Goodwin, Harrod ), see Orlando et al.
Complexity economics as mainstream, but non-orthodox
According to , , and contemporary mainstream economics
Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to ...
is evolving to be more "eclectic",["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." ]["Modern economics involves a broader world view and is far more eclectic than the neoclassical terminology allows." ] diverse,["In our view, the interesting story in economics over the past decades is the increasing variance of acceptable views..." ]["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." ]["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." ] and pluralistic.["despite an increasing pluralism on the mainstream economics research frontier..." ] 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
In mathematics, a dynamical system is a system in which a Function (mathematics), function describes the time dependence of a Point (geometry), point in an ambient space, such as in a parametric curve. Examples include the mathematical models ...
s as contributions to these trends. They classify complexity economics as now mainstream but non-orthodox.["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." distinguish between orthodox and mainstream economics.]
Criticism
In 1995, journalist John Horgan "ridiculed" the movement as being the fourth ''C'' among the "failed fads" of "complexity
Complexity characterizes the behavior of a system or model whose components interact in multiple ways and follow local rules, leading to non-linearity, randomness, collective dynamics, hierarchy, and emergence.
The term is generally used to c ...
, chaos
Chaos or CHAOS may refer to:
Science, technology, and astronomy
* '' Chaos: Making a New Science'', a 1987 book by James Gleick
* Chaos (company), a Bulgarian rendering and simulation software company
* ''Chaos'' (genus), a genus of amoebae
* ...
, catastrophe, and cybernetics
Cybernetics is the transdisciplinary study of circular causal processes such as feedback and recursion, where the effects of a system's actions (its outputs) return as inputs to that system, influencing subsequent action. It is concerned with ...
".[ In 1997, however, Horgan wrote that the approach had "created some potent metaphors: the ]butterfly effect
In chaos theory, the butterfly effect is the sensitive dependence on initial conditions in which a small change in one state of a deterministic nonlinear system can result in large differences in a later state.
The term is closely associated w ...
, fractal
In mathematics, a fractal is a Shape, geometric shape containing detailed structure at arbitrarily small scales, usually having a fractal dimension strictly exceeding the topological dimension. Many fractals appear similar at various scale ...
s, artificial life
Artificial life (ALife or A-Life) is a field of study wherein researchers examine systems related to natural life, its processes, and its evolution, through the use of simulations with computer models, robotics, and biochemistry. The discipline ...
, 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 American Economic Association (AEA) is a learned society in the field of economics, with approximately 23,000 members. It publishes several peer-reviewed journals, including the Journal of Economic Literature, American Economic Review, an ...
, the ''Journal of Economic Perspectives
The ''Journal of Economic Perspectives'' (''JEP'') is an economic journal published by the American Economic Association. The journal was established in 1987. The JEP was founded by Joseph Stiglitz, Carl Shapiro, and Timothy Taylor.
It is orien ...
''.[ 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."][
Horgan's writing attempts to force what complexity science has found within out-of-date scientific ideas. Thus, it is an example of Edgar Morin's Restricted Complexity which expects complexity is subject to traditional scientific assumptions. Morin contrasts this with a General Complexity embracing the complexity of a connected natural world. Partly, complexity science has shown the traditional scientific paradigm to be erroneous. The traditional paradigm assumes hidden order behind all things due to full determinism, trust in reduction, and relying on disjunctive study. Morin notes it is now well proven that law-like order does not dominate all natural science. ][https://web-archive.southampton.ac.uk/cogprints.org/5217/1/Morin.pdf]
See also
* Agent-based computational economics
Agent-based computational economics (ACE) is the area of computational economics that studies economic processes, including whole economies, as dynamic systems of interacting agents. As such, it falls in the paradigm of complex adaptive systems. ...
* Econophysics
Econophysics is a non-orthodox (in economics) interdisciplinary research field, applying theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic processes ...
* List of countries by economic complexity
This list orders countries by their Economic Complexity Index (ECI), as it was defined and calculated by César Hidalgo and Ricardo Hausmann and published by The Observatory of Economic Complexity.
Country rankings
Factors affecting differen ...
* Complexity theory and organizations
Complexity theory and organizations, also called complexity strategy or complex adaptive organizations, is the use of the study of complexity systems in the field of strategic management and organizational studies. It draws from research in t ...
Notes
References
*
*
*
*
* Goodwin, Richard M. ''Chaotic Economic Dynamics''. Oxford: Clarendon Press (1990)
* Rosser, J. Barkley, Jr. ''From Catastrophe to Chaos: A General Theory of Economic Discontinuities'' Boston/Dordrecht: Kluwer Academic.
*Benhabib, Jess (editor) ''Cycles and Chaos in Economic Equilibrium'', Princeton University Press (1992).
*Waldrop, M. Mitchell. ''Complexity: The Emerging Science at the Edge of Order and Chaos''. New York:Touchstone (1992)
*Saari, Donald. "Complexity of Simple Economics", ''Notices of the AMS''. V. 42, N. 2 (Feb. 1995): 222-230
* Ormerod, Paul (1998). '' Butterfly Economics: A New General Theory of Social and Economic Behavior''. New York: Pantheon.
* Sytse Douma & Hein Schreuder
Hein Schreuder (24 December 1951 – 28 May 2023) was a Dutch economist and business executive, executive vice-president corporate strategy & acquisitions at DSM and professor at the University of Maastricht, especially known for his work on "Ec ...
. ''Economic Approaches to Organizations'', 6th edition, Harlow: Pearson (2017)
External links
Santa Fe Institute
A center of complexity science
What Should Policymakers Know About Economic Complexity (PDF)
Summary of complexity economics
Harvard HKS-MIT Media Lab Observatory of Economic Complexity
Foundations of complexity economics
{{DEFAULTSORT:Complexity Economics
Complex systems theory
Management cybernetics