Thursday, January 29, 2015

Some Puzzles About Brian Arthur’s Views on Complexity

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.

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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