“In the last few years, many economists have begun to feel that while the standard neoclassical approach is elegant and abstract, it is too narrow and unrealistic,” said Brian Arthur of the Santa Fe Institute. “One of the main contenders to take over mainstream thinking is an approach Santa Fe pioneered in the 1990s: Complexity economics.”
“The economy is vast, interactive, complicated, with lots going on, all grounded in human behaviour,” he added. “This is a view of the economy not as a perfectly balanced, smoothly functioning machine, but as a system that is organic, evolutionary, ever-changing, and full of messy vitality.”
In his seminar Arthur guided STIAS fellows through the history of complexity economics explaining what this new economics does, how it works, why it is needed, and how it might guide future policy.
“During the 1900s there was a steady shift in science away from order, to seeing objects as more organic and indeterminate. This began before 1900 with Max Planck and Quantum Theory. Science has not been the same since. The question is if science is shifting why not economics? And, what would that shift in economics look like?”
He pointed out that from the 1870s economics had become largely mathematical – using maths to solve economic problems. Such neoclassical or standard economics makes a number of assumptions – that there are rational agents solving well-defined problems, that these agents are identical and that their aggregated behaviour produces an aggregated outcome that gives them no incentive to change their behaviour – namely equilibrium.
“It’s a beautifully elegant structure, a highly mathematical model of perfection and very good economics has been done in this way,” he said.
“But,” he added, “humans are not necessarily rational and they may not have a mathematically definable problem.”
He explained that economics is a complex system – “a huge set of arrangements and actions in which the players or agents react to the patterns they create together”.
“It’s not necessarily complicated but it contains many elements that react to the patterns created,” he continued. “Think of traffic – objects called cars make changes depending on their reaction to others and the patterns they create in a recursive loop. Or think of the stars which alter their positions due to the gravitational field set up by others.”
Although we’ve known that economics is a complex system for 250 years – since Adam Smith – and, more recently, similar ideas have been expressed by economists such as Veblen, Schumpeter and Hayek, Arthur explained that a meeting in Santa Fe in 1987 provided the momentum to explore the economy and complexity.
‘The Santa Fe meeting brought together the who’s who in economics and physics,” he said,
“and resulted in the Santa Fe Research programme which I ran. We were tasked with figuring out what economics looked like as a complex system. Initially we didn’t know what to do and were told to do what we liked providing it was not conventional which floored us at the time!”
The group decided to look at questions in the economy as realistically as possible.
“We realised that in a given situation the agents are not the same, they don’t know what the other players will do and they don’t know the whole problem. There is fundamental uncertainty.”
“The problem is not well-defined therefore rational solutions are not well-defined.”
“However,” he continued, “we know that people act all the time in situations that are not well-defined. People make sense of situations, form hypotheses, try things and, if they don’t work, make adjustments. Most situations are about uncertainty, with no rational moves. We are bumbling about, testing ideas, trying out things and getting smarter with others around us doing the same.”
“So, clearly, agents with partial knowledge can try different hypotheses and adjust, just like real people. Actions or events are tested for survival in a situation – ‘an ecology’ – that those strategies create.”
Out of equilibrium
He explained that the usual assumption of equilibrium in the system puts a strong filter on what we can see and “doesn’t allow scope for adjustments, new products, changes to the structure, innovation. It lacks reality, authenticity and aliveness”.
“It’s a huge step forward to understand economics as a non-equilibrium problem,” he continued. Anything that is in equilibrium is basically dead. All the interesting things happen outside of equilibrium.”
Inspired by the pioneering work of computer scientist John Holland of the University of Michigan who also presented at the Santa Fe meeting, the group also explored the role of computer programmes and algorithms to model decision making in non-defined situations.
“The field has moved to being much more computer based using computers as an exploratory laboratory. Computation is the instrument for exploring, tracking things that are too complex for the naked mind. This allows us to imagine ‘what it would be like if …… ‘.”
“If in standard economics the agents are identical and hyper rational, the problem is well-defined, and the metaphor is a machine. In complexity economics the agents are diverse, the situation is ill-defined and event driven, the agents face fundamental uncertainty and perpetual novelty, and must experiment (model) to make sense. The metaphor therefore is an ecology.”
“If there are two mountains to climb (a metaphor used by American Economist David Colander) one mountain can be tackled mathematically but the other is higher, more difficult, ill-defined, alive, non-equilibrium, organic. I believe we are now starting to climb the right mountain. I’m grateful to be one of the conspirators behind this. Many others are now pursuing these ideas.”
In discussion, he highlighted the parallels with process-driven theories in biology.
“What would economics be like if it was allowed to be event/process driven? I believe this is where economics will go and this will restore aliveness in the field.”
He also spoke of shortcomings in current ways of measuring development and in the teaching of economics.
“Economic development is a deeply structural issue. Development is not just about growth in efficiency, it’s about redefining the structure of society, technology, culture, history. We need different ways to construct our understanding which recognise history, institutions and culture but also allow the new to come along and change the structure.”
“I believe we are moving away from the individual as the unit of analysis and of reducing things to crude mathematical calculation. Future economics could involve ideas of culture, for example.”
“All economics, like all science, is not about some ideal truth but about telling stories. We are looking for simple units we can hold in our minds, compare and use to construct experiences,” he concluded. “Adding to the story is richer if you know economic history, not just theory. I would like to see economics taught by teaching culture, history and sociology. We need to be richly experienced by the time we go out into the world as economists.”
Michelle Galloway: Part-time media officer at STIAS
Photograph: Anton Jordaan