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Complexity economics is the application of complexity science to the problems of
economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analy ...
. It sees the economy not as a system in equilibrium, but as one in motion, perpetually constructing itself anew.Beinhocker, Eric D. The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics. Boston, Massachusetts: Harvard Business School Press, 2006. 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.


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, inclu ...
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 an example of a game analyzed in game theory. It is also a thought experiment that challenges two completely rational agents to a dilemma: cooperate with their partner for mutual reward, or betray their partner ("defe ...
, 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 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 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 John F. ...
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). 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

Pietronero 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 (or MBB, the world’s three largest management consulting firms by rev ...
on
Sweden Sweden, formally the Kingdom of Sweden,The United Nations Group of Experts on Geographical Names states that the country's formal name is the Kingdom of SwedenUNGEGN World Geographical Names, Sweden./ref> is a Nordic countries, Nordic c ...
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 academy (Attic Greek: Ἀκαδήμεια; Koine Greek Ἀκαδημία) is an institution of secondary or tertiary higher learning (and generally also research or honorary membership). The name traces back to Plato's school of philosophy ...
s. Research has shown that no two separate micro-events are completely isolated, Albert-László Barabási "Unfolding the science behind the idea of six degrees of separation" and there is a relationship that forms a
macroeconomic Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and ...
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 studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from those implied by classical economic theory. ...
,
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 ...
,
institutional economics Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behavior. Its original focus lay in Thorstein Veblen's instinct-oriented dichotomy between technology on the ...
/
evolutionary economics Evolutionary economics is part of mainstream economics as well as a heterodox school of economic thought that is inspired by evolutionary biology. Much like mainstream economics, it stresses complex interdependencies, competition, growth, str ...
,
Austrian economics The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian schoo ...
and the work of
Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——� ...
. 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. It does not assume or postulate any natural laws, but explains the macroscopic b ...
in physics, and
evolutionary biology Evolutionary biology is the subfield of biology that studies the evolutionary processes (natural selection, common descent, speciation) that produced the diversity of life on Earth. It is also defined as the study of the history of life fo ...
. 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 among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has applic ...
, the dynamics of
opinion An opinion is a judgment, viewpoint, or statement that is not conclusive, rather than 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 with ...
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 (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and ...
s. In voting theory, the methods of
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 (e ...
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. Ai ...
.


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 describes the time dependence of a point in an ambient space. Examples include the mathematical models that describe the swinging of a clock pendulum, the flow of water i ...
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 1995-1997 publications, ''
Scientific American ''Scientific American'', informally abbreviated ''SciAm'' or sometimes ''SA'', is an American popular science magazine. Many famous scientists, including Albert Einstein and Nikola Tesla, have contributed articles to it. In print since 1845, it ...
'' journalist John Horgan "ridiculed" the movement as being the fourth ''C'' among the "failed fads" of "
complexity Complexity characterises the behaviour of a system or model whose components interact in multiple ways and follow local rules, leading to nonlinearity, randomness, collective dynamics, hierarchy, and emergence. The term is generally used to ch ...
, chaos,
catastrophe Catastrophe or catastrophic comes from the Greek κατά (''kata'') = down; στροφή (''strophē'') = turning ( el, καταστροφή). It may refer to: A general or specific event * Disaster, a devastating event * The Asia Minor Catastro ...
, and
cybernetics Cybernetics is a wide-ranging field concerned with circular causality, such as feedback, in regulatory and purposive systems. Cybernetics is named after an example of circular causal feedback, that of steering a ship, where the helmsperson ma ...
". In 1997, Horgan wrote that the approach had "created some potent metaphors: the butterfly effect,
fractal In mathematics, a fractal is a 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 scales, as ill ...
s,
artificial life Artificial life (often abbreviated 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 biochemi ...
, the
edge of chaos The edge of chaos is a transition space between order and disorder that is hypothesized to exist within a wide variety of systems. This transition zone is a region of bounded instability that engenders a constant dynamic interplay between orde ...
, 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."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. 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. It publishes several peer-reviewed journals acknowledged in business and academia. There are some 23,000 members. History and Constitution The AEA was esta ...
, 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. It is very broad in its scope. According to its editors its purpose is: #to synthesize and i ...
''. 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."


See also

* Agent-based computational economics *
Econophysics Econophysics is a heterodox 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 and nonlinear dynam ...
*
List of countries by economic complexity This list orders countries by their economic complexity index (ECI), as it was defined and calculated by Cesar A. Hidalgo and Ricardo Hausmann. Country rankings Factors affecting differences between countries As an illustration, we can ...
* Complexity theory and organizations


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 Sytse Wybren Douma (born 1942) is a Dutch organizational theorist, consultant and Emeritus Professor at the Tilburg School of Economics and Management of the Tilburg University, known for his work with Hein Schreuder on "Economic approaches to org ...
&
Hein Schreuder Hein Schreuder (born December 24, 1951) is a Dutch economist and business executive, former executive vice-president corporate strategy & acquisitions at DSM and former 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 ComplexityFoundations of complexity economics
{{DEFAULTSORT:Complexity Economics Complex systems theory