Eric Liu and Nick Hanauer — Complexity Economics Shows Us Why Laissez-Faire Economics Always Fails

Traditional economic theory is rooted in a 19th- and 20th-century understanding of science and mathematics. At the simplest level, traditional theory assumes economies are linear systems filled with rational actors who seek to optimize their situation. Outputs reflect a sum of inputs, the system is closed, and if big change comes it comes as an external shock. The system’s default state is equilibrium. The prevailing metaphor is a machine.

But this is not how economies are. It never has been. As anyone can see and feel today, economies behave in ways that are non-linear and irrational, and often violently so. These often-violent changes are not external shocks but emergent properties—the inevitable result—of the way economies behave....

Machine view [physical] : Wealth = individuals accumulating moneyGarden view [biological] : Wealth = society creating solutions

One of the simple and damning limitations of traditional economics is that it can’t really explain how wealth gets generated. It simply assumes wealth. And it treats money as the sole measure of wealth. Complexity economics, by contrast, says that wealth is solutions: knowledge applied to solve problems. Wealth is created when new ideas— inventing a wheel, say, or curing cancer—emerge from a competitive, evolutionary environment. In the same way, the greatness of a garden comes not just in the sheer volume but also in the diversity and usefulness of the plants it contains.

In other words, money accumulation by the rich is not the same as wealth creation by a society. If we are serious about creating wealth, our focus should not be on taking care of the rich so that their money trickles down; it should be on making sure everyone has a fair chance—in education, health, social capital, access to financial capital— to create new information and ideas. Innovation arises from a fertile environment that allows individual genius to bloom and that amplifies individual genius, through cooperation, to benefit society. Extreme concentration of wealth without modern precedent that has undermined equality of opportunity and thus limited our overall economic potential.…

Economist Kenneth E. Boulding joined biologist Ludwig von Bertalanffy in founding the discipline of general systems theory. It was the precursor of evolutionary economics also known as complexity economics. Kenneth Boulding's economics was close to MMT, and MMT economists have recognized him as a precursor. Boulding and his wife Elise were prominent Quaker peace activists. Boulding also worked in conflict studies and emphasized love as a foundation of well-functioning society and economy.

Evonomics
Complexity Economics Shows Us Why Laissez-Faire Economics Always Fails—Markets are a type of ecosystem that is complex, adaptive, and subject to the same evolutionary forces as nature
Eric Liu and Nick Hanauer

Donella Meadows — Leverage Points: Places to Intervene in a System

Longish but important. 

Downloadable as a PDF. Scroll down to the end.

Donella Meadows Archive
Leverage Points: Places to Intervene in a System

Donella Meadows

ht Roger Erickson

Daniel Little — Do we still need microfoundations?

On examining assumptions and avoiding reductionism without invoking magical thinking, and ontological individualism as an overly restrictive reductionist assumption.

Understanding Society
Do we still need microfoundations?
Daniel Little | Chancellor of the University of Michigan-Dearborn, Professor of Philosophy at UM-Dearborn and Professor of Sociology at UM-Ann Arbor

Peter Radford — Quote[s] Of The Day #2

Economists have made the study of economies more tractable – some would say they have simplified things – by sealing off all the exits and entrances so as to prevent novelty from disrupting their analysis. Even then they were forced to enforce ever more strict definitions of rationality and access to information on the participants in an economy in order to arrive at their chosen outcome: that market magic exists. This is why, in general terms, an economic equilibrium exists when there are no sources of change within the economy.

As the quotes above illustrate, and presumably there are thousands like them littering the literature outside of economics, the very concept of the economy being a closed system is absurd. The act of closure severs the link with reality, thus rendering conclusions from the subsequent analysis highly suspect if not outright irrelevant. Defending such analysis on the grounds of simplification places a great burden on the assumptions involved and on the ease of transference of whatever is learned back into an open system such as planet earth.

Such simplification may, indeed, prove useful, but of much greater use is any analysis that tackles an economy as it actually exists rather than as it might exist in the imagination of an economist unaware of the progress other sciences have made in tackling the complexity of highly entangled systems where the pull of entropy undoes order relentlessly.

Real-World Economics Review Blog

Quote[s] Of The Day #2
Peter Radford

Greg Fisher — Beyond the plc

On Monday Civitas published a book written by me and Paul Ormerod entitled “Beyond the plc”. A press release and summary can be found on Civitas’ website here.

In this article I want to provide some background to this work in two broad ways. First, I will frame our thinking in the context of collective action (helping distinguish it from any political ideology). And, second, I’ll mention how our approach takes an evolutionary (or ‘complex’) view of the economy. When discussing political ideologies, I will use libertarianism and statism as reference points, well aware that these do not represent the plethora of views in political philosophy.

Synthesis
Beyond the plc
Greg Fisher

Revisioning the joint stock corporation from a systems POV.

Lord Keynes — King on Post Keynesian Approaches to Microfoundations

One of the most important insights King makes is this: the idea of reducing macroeconomics to neoclassical microeconomics is an instance of the strong reductionist fallacy.

Strong reductionism has already failed, not only in biology, but also (more importantly) in the social sciences (King 2012: 226). There are fundamental emergent properties in macroeconomic systems that make their reduction to microeconomics impossible (King 2012: 226).
For example, a lower-order set of parts in a biological system may interact in ways that cannot be inferred by reductionist analysis (King 2012: 51). The principle of “downward causation” consists in the manner by which a “whole” (a system broadly defined) may affect, constrain or influence its parts.
In economics, we see macroeconomic phenomena that are irreducibly social in nature. 

Nor does the strong version of methodological individualism work (King 2012: 60; see also Hodgson 2007). For interactions between individuals may cause “emergent properties” or (that is to say) novel properties not displayed by, or deducible from, the individuals in isolation.

Social Democracy For The 21st Century
King on Post Keynesian Approaches to Microfoundations
Lord Keynes

King gives two reasons for the continuing attraction of the neoclassical microfoundations delusion: physics envy and politics in the age of neoliberalism (King 2012: 229). Reductionist ontological thinking in economics is nothing less than the attempt to reduce macroeconomics to the aggregate of micro behaviour, and the assumption of individual rationality implies a socially rational outcome (King 2012: 229, quoting Denis 2009: 14). In other words, this method produces the delusion that laissez faire results in the best economic outcomes.

Bingo. But nothing new to the readers of this blog.