Chris Dillow — In Praise Of Complexity Economics

Good post summarizing complexity economics with many useful links.

The question is: why is complexity economics not more influential? 

One reason is that it requires different techniques. It can't be studied merely by problem sets (ugh) devoted to standard optimization techniques. Instead, it requires agent-based simulations (here are a couple of examples), laboratory experiments of the sort done by Charles Noussair among others, or close attention to history and the institutional and cultural settings in which markets operate. 

And therein lies a second reason why complexity economics is under-rated. For me, one of its big messages is that context matters. Emergent processes sometimes lead to benign outcomes and sometimes instead to inequality and inefficiency, and which turns out to be the case can hinge on quite small differences. The great economists of the 20th century - such as Keynes, Samuelson or Friedman - tried to offer a general theory. Complexity economics doesn't. 

There's a third reason why complexity economics is under-rated. It does not give us a means of foreseeing the future. Of course, conventional economics doesn't do so either. But the difference is that complexity theory tells us that such forecasts might well be impossible - which is not what the customer wants to hear. The best it can do is help us understand what has happened. And for me, this is good enough. As someone once said, "Economists have only changed the world; the point, however, is to understand it."

Stumbling and Mumbling

In Praise Of Complexity Economics

Chris Dillow | Investors Chronicle

Nick Hanauer & Eric Beinhocker — Capitalism Redefined

It isn’t the amount of money that a society has in circulation, whether dollars, euros, beads, or wampum. Rather, it is the availability of the things that create well-being—like antibiotics, air conditioning, safe food, the ability to travel, and even frivolous things like video games. It is the availability of these “solutions” to human problems—things that make life better on a relative basis—that makes us prosperous.

This is why prosperity in human societies can’t be properly understood by just looking at monetary measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems.

These solutions run from the prosaic, like a crunchier potato chip, to the profound, like cures for deadly diseases. Ultimately, the measure of a society’s wealth is the range of human problems that it has found a way to solve and how available it has made those solutions to its citizens. Every item in the huge retail stores that Americans shop in can be thought of as a solution to a different kind of problem—how to eat, clothe ourselves, make our homes more comfortable, get around, entertain ourselves, and so on. The more and better solutions available to us, the more prosperity we have.

The long arc of human progress can be thought of as an accumulation of such solutions, embodied in the products and services of the economy. The Yanomami economy, typical of our hunter-gatherer ancestors 15,000 years ago, has a variety of products and services measured in the hundreds or thousands at most. The variety of modern America’s economy can be measured in the tens or even hundreds of billions. Measured in dollars, Americans are more than 500 times richer than the Yanomami. Measured in access to products and services that provide solutions to human problems, we are hundreds of millions of times more prosperous.

Growth as the Rate of Solution Creation

If the true measure of the prosperity of a society is the availability of solutions to human problems, then growth cannot simply be measured by changes in GDP. Rather, growth must be a measure of the rate at which new solutions to human problems become available. Additionally, since problems differ in importance, a new view of growth also must take this into account; finding a universal flu vaccine is more important than creating a crunchier potato chip. But in general, economic growth is the actual experience of having one’s life improved. Going from fearing death from a sinus infection one day to having access to life-saving antibiotics the next isgrowth. Going from sweltering in the heat one day to living with air conditioning the next is growth. Going from walking long distances to driving is growth. Going from needing to go to a library to look up basic information to having all the information in the world instantly available to you on your phone is growth. (Obviously, some solutions, like air conditioning, may create other problems, like global warming. How to make the trade-offs between solutions and problems is one of the central challenges of any society—an issue we will return to later in this essay.)

This all implies that we must find new ways to measure progress….

Democracy — A Journal of Ideas

Capitalism Redefined

Nick Hanauer & Eric Beinhocker

See also Eric Beinhocker, A Truer Form of Capitalism [points out that Ayn Rand was down on economic rent as market distorting]

This is making a splash. The frame is beginning to change with pretty remarkable speed.