W. Brian Arthur — Economic complexity: A different way to look at the economy

Economics is a stately subject, one that has altered little since its modern foundations were laid in Victorian times. Now it is changing radically. Standard economics is suddenly being challenged by a number of new approaches: behavioral economics, neuroeconomics, new institutional economics. One of the new approaches came to life at the Santa Fe Institute: complexity economics. 

Complexity economics got its start in 1987 when a now-famous conference of scientists and economists convened by physicist Philip Anderson and economist Kenneth Arrow met to discuss the economy as an evolving complex system. That conference gave birth a year later to the Institute’s first research program – the Economy as an Evolving Complex System – and I was asked to lead this. That program in turn has gone on to lay down a new and different way to look at the economy.…

But it took us a couple of years before we realized we were developing an economics based not just on different methods, but on different assumptions.

Instead of seeing agents in the economy as facing perfect, well-defined problems, we allowed that they might not know what situation they were in and would have to make sense of it. Instead of assuming agents were perfectly rational, we allowed there were limits to how smart they were. Instead of assuming the economy displayed diminishing returns (negative feedbacks), we allowed that it might also contain increasing returns (positive feedbacks). Instead of assuming the economy was a mechanistic system operating at equilibrium, we saw it as an ecology – of actions, strategies, and beliefs competing for survival – perpetually changing as new behaviors were discovered.

Other economists – in fact some of the greats like Joseph Schumpeter – had looked at some of these different assumptions before, but usually at one assumption at a time. We wanted to use all these assumptions together in a consistent way. And other complexity groups in Brussels, France, Ann Arbor, and MIT were certainly experimenting with problems in economics. But we had the advantage of an interdisciplinary critical mass for a program that ran across all of economics. The result was an approach that saw economic issues as playing out in a system that was realistic, organic, and always evolving.…

Our artificial-worlds-in-the-computer approach, along with the work of others both inside and outside economics, in the early 1990s became agent-based modeling, now a much-used method in all the social sciences.…

None of this means the new, nonequilibrium approach has been easily accepted into economics. The field’s mainstream has been interested but wary of it. This changed in 2009 after the financial meltdown when, as theEconomist magazine observed dryly, the financial system wasn’t the only thing that collapsed; standard economics had collapsed with it. Something different was needed, and the complexity approach suddenly looked much more relevant.…

Where does complexity economics find itself now? Certainly, many commentators see it as steadily moving toward the center of economics. And there’s a recognition that it is more than a new set of methods or theories: it is a different way to see the economy. It views the economy not as machine-like, perfectly rational, and essentially static, but as organic, always exploring, and always evolving – always constructing itself. 

Some people claim that this economics is a special case of equilibrium economics, but actually the reverse is true. Equilibrium economics is a special case of nonequilibrium and hence of complexity economics.

Complexity economics is economics done in a more general way.

Santa Fe Institute
Economic complexity: A different way to look at the economy
W. Brian Arthur | External Professor, Santa Fe Institute; Visiting Researcher, Palo Alto Research Center

h/t Steve Keen