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The Economy as a Complex System

Recently I had a discussion with brother Teun, who is an economist, about a book by Colander and Kupers that is defective but that led Alan Kirman to write a worthy essay for the Journal of Economic Literature Vol LIV (2016): Complexity and Economic Policy: A Paradigm Shift or a Change in Perspective? A Review Essay on David Colander and Roland Kupers’s Complexity and the Art of Public Policy. I endorse his concluding paragraph in full – including the criticisms contained therein:

“If we were to adopt the approach that from observing an economic system we can recognize certain configurations of behavior at the aggregate level, and that we can possibly, with the use of theory, exclude others, and finally, that we can construct a probability measure over those states, then this would be a true paradigm shift. We would not make either statements nor predictions as we do today, but would rather make probabilistic statements about the trajectories that the economy might follow. The difference with our current approach is that these trajectories would not be “equilibrium” paths and their evolution would be largely endogenous. The role of the policymaker in this context would not be to restructure its rules so as to make it more like the Walrasian model, since we do not know how to show, even in that abstract context, how “equilibrium” would be attained. Nor would it be, as Colander and Kupers (2014) would hope, to nudge the individuals and the organization of the economy towards a socially desirable state, for such a state may be ill-defined in a complex evolving economy. Rather, policymakers would have to content themselves with constantly observing and, where possible, influencing a system over which they have much less control than one has been led to think. A number of them have long since come to that conclusion and accept that they, and particularly those who advise them, have to exhibit a little more humility. The observation of the former Governor of the Bank of England sums up the situation admirably, as he said when reviewing Hayek’s contributions

the message from Hayek is that we should avoid the hubris of thinking that we understand how the economy works, just as we should avoid the hubris of thinking that leaving markets to their own devices will lead to nirvana (Mervyn King, Governor of the Bank of England, April 2013).

Economics as a discipline could therefore be considered analogous to meteorology.