I just finished reading this important paper by Brian Arthur
(‘Complexity-economics:
A Different Framework for Economic Thought’).
I noted my irritation earlier on Facebook that he has no reference to Hayek or
any of the Austrians, and wondered how one could write about complexity in
economics without mentioning, indeed examining, Hayek’s work. Now that I have
read the paper I have a better appreciation of it and think that it is quite
well done and is a valuable contribution. Of particular note is the penultimate
section, ‘Discussion’ which contains Arthur’s analysis of the place of complexity-economics
within economics generally. He provides both methodological and historical
perspective. Here is my quick paraphrase of part of that section, focusing on what
I find noteworthy.
According to Arthur, complexity-economics is about open-ended
systems that are in the continual process of forming and in which the arrival of
novelty is on-going. This means that the methods of traditional quantitative
economics, concerned mainly with allocation of ends to means in a closed
system, and amenable to mathemization, are inapplicable. Other methods have to
be found. In particular, time in complexity-economics is real-time as we
experience it and not linear, reversible time as expressed in traditional
economics. Complexity must deal for example with events that are essentially
non-repeatable.
So, while the familiar Marginalist economics (what Austrians
call the “pure logic of choice”) has a role to play in economic education it is
only one aspect of a much bigger picture, one only now beginning to fully emerge.
In an important way, complexity-economics
is close to old-fashioned political economy. There is a synergy between them. “Complexity-economics
allows us to explore the world of formation theoretically and systematically; political
economy allows us to explore it intuitively and empirically” (17).
So far so good. Quite encouraging. And he does include a
passing shout-out to Hayek as a political economist, though no reference.
Austrians will see much to agree with albeit they will wonder if Arthur came to
all this (the ‘literary’ side of things) never having read Hayek, or Lavoie,
etc. He speaks of “nonequilibrium” not “disequilibrium”. Never mind. But then
he turns to “policy implications”. And as satisfying and reassuring as the
discussion so far has been it now becomes incredibly irritating and
bewildering. To wit:
“Certainly, complexity teaches us
that markets left to themselves possess a tendency to bubbles and crashes,
induce a multiplicity of local attractor states, propagate events through
financial networks, and generate a sequence of technological solutions and
challenges, and this opens a role for policies of regulating excess, nudging
towards favored outcomes, and judiciously fostering conditions for innovation.
Colander and Kupers (2012) express this succinctly as getting meta conditions
right. (18, italics added)”
So the principle lesson he draws from his perceptive, and
expert, understanding of complexity is that “markets left to themselves”
exhibit bubbles and crashes that open the way for benevolent regulation? How
can this be right? No mention of the amazing self-regulating properties of the market.
Where is the ‘invisible hand’? No mention of “complex adaptive systems” or
converging network effects, never mind “spontaneous order”. Now maybe I am
being picky, but in a contemplative piece on the place and significance of complexity-economics
surely the first and foremost of characteristics to note are the convergent and homeostatic
properties of many complex social systems. Am I wrong in thinking that this is
a big part of the complexity literature? But they are nowhere to be found in
this paper.
It gets worse. He goes on to blame an inability to see the
benefits of and necessity for regulation on equilibrium economics. (And here we
all thought that the neoclassical perfect general equilibrium edifice lent
itself to the advocacy of central planning a la Oskar Lange. Does Arthur
even know about that?)
“I believe we can make a stronger
statement. The failures of economics in the practical world are largely due to
seeing the economy in equilibrium. If we look at the economic crises of the
last 25 years—the debacle that followed the freeing of markets in Russia in
1990, the extensive gaming of California’s energy market after the lifting of
regulations in 2000, the collapse of Iceland’s banks in 2008, the ongoing Euro
crisis, the Wall Street meltdown of 2008—all these were caused in no small
part by the exploitation of the system by a few well-positioned players, or by
markets that careened out of control (Arthur, 2010a). Equilibrium thinking
cannot “see” such exploitation in advance for a subtle reason: by definition,
equilibrium is a condition where no agent has any incentive to diverge from its
present behavior, therefore exploitive behavior cannot happen. And it cannot
see extreme market behavior easily either: divergences are quickly corrected by
countervailing forces. By its base assumptions, equilibrium economics is not
primed to look for exploitation of parts of the economy or for system
breakdowns.
Complexity-economics, by contrast,
teaches us that the economy is permanently open to response and that every part
of it is open to new behavior—to being exploited for gain, or to abrupt changes
in structure. A complexity outlook would recommend putting carefully thought
out controls in place, much as authorities put sensible building codes in place
in seismic regions.” (18, italics added).
And herein lies the explanation for his neglect of Hayek and
similar approaches. It does not fit into his topsy-turvy mindset, his view of
the social universe in which complexity applies to everything in that universe
except government regulation and policy-making. He refers to “the exploitation
of the system by a few well-positioned players” in the market, but seems oblivious
to the much greater danger of such well-placed players in government. Knowledge
and incentive problems don’t seem to exist for him. He is in the grip of the
Keynesian presumption that all that is necessary is to put the right people
(the complexity economists) in charge of designing the system of regulation.
Many, I am sure many complexity-economists included, will
see this as precisely the wrong lesson to learn. The correct lesson, surely, is
that policy in a complex world should be humbled by the inescapable unpredictabilities
implied by ongoing formative social processes in real time embodying novelty;
should incline toward the setting of general abstract rules at the
constitutional level, less amenable to exploitation than ad hoc regulation,
as so clearly explained by Hayek, Buchanan and others (Lewin, 2014).
For me this was a revealing lesson in power of mindset. Forgive
my naiveté.
References.
Arthur, W.B., 2010a. “Exploitive Behavior in Policy
Systems,” Mss., IBM Almaden.
Arthur, W.B., 2013. Complexity-economics: A Different Framework for Economic Thought’ SFI Working paper: 2013-04-012, Sante Fe Institute.
Colander, D, and R. Kupers. 2012. Laissez-Faire Activism:
The Complexity Frame for Policy, Princeton.
Lewin, 2014. “Policy Design and Execution in a Complex
World: Can We Learn from the Financial Crisis?” working paper,
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