The dynamic equilibrium frame [of Smith's information transfer economics] not only radically simplifies the description of the data, but radically reduces the information content of the data....
This is all to say the dynamic equilibrium model bounds the relevant complexity of macroeconomic models. I've discussed this before here, but that was in the context of a particular effect. The dynamic equilibrium frame bounds the relevant complexity of all possible macroeconomic models. If a model is more complex than the dynamic equilibrium model, then it has to perform better empirically (with a smaller error, or encompass more variables with roughly the same error). More complex models should also reduce to the dynamic equilibrium model in some limit if only because the dynamic equilibrium model describes the data.This would suggest that the methodological debate in economics is not over, as conventional economists claim.
Actually, as a physicist, I would say that even if the economy was a complex nonlinear chaotic system, linear stochastic models would still be its effective theory description. Regardless of what the quantum theory of gravity is, general relativity -- and even Newton's universal law of gravitation -- is still its long-distance effective theory.Information Transfer Economics
Anyway, this prompted me to write something about Steve Keen's article in Forbes. Keen suffers from a problem that all public economists seem to suffer: asserting matters of opinion as matters of fact, and ongoing research programs as well-established frameworks. This will be made clear as we progress. Let's begin, shall we?
So why has the success of complexity science been so, well, complicated?
Some would say it’s because the core ideas of complexity, emergence, self-organization and so forth just aren’t the right ones to be looking at.
But I don’t think it’s that. These are critical, important ideas.
Rather, I think the correct message is a subtler one: Real-world systems aren’t just complex, in the Santa Fe Institute sense of displaying emergent properties and behaviors that self-organize from the large-scale simple interactions of many simple elements.
Rather, real-world systems are what I’ll -- a bit goofily, I acknowledge -- call “complexicated”.The Multiverse According to Ben
That is: They are complex (in the Santa Fe Institute sense) AND complicated (in the sense of just having lots of different parts that are architected or evolved to have specific structures and properties, which play specific roles in the whole system).
The proper role of government from a complexity science perspective.
People who believe in the free market are generally much closer to a complexity frame than are those who primarily put their faith in governmental planning and control. In fact complexity may well often be loosely equated with pure laissez-faire, but complexity includes government, seeing it not as planner or controller, but as a natural partner with existing institutions in a search for useful parameters of action. We have called this joint search an “activist laissez-faire” policy. While, the terms, activist laissez faire and laissez-faire, may look similar in the standard policy frame, they are quite different in terms of how one envisions the role of government. Hence we need to distinguish our complexity frame from the free market frame as espoused by supporters of unadulterated laissez-faire policy.Ignores the effects of class structure and class interests and asymmetry of power and ability to influence outcomes relative to interests.
CESAR HIDALGO is an assistant professor at the MIT Media Lab, and faculty associate at Harvard University’s Center for International Development. His work focuses on improving the understanding of systems by using and developing concepts of complexity, evolution, and network science. He is also the founder and driving force behind Cambridge Nights, a series of online video interviews with academics who discuss the way in which they view the world.
Yesterday my dear husband (@ruskin147) interviewed César Hidalgo (@cesifoti) about his new book Why Information Grows: The Evolution of Order from Atoms to Economies for next week’s edition of Tech Tent (19 June) on the BBC World Service. I’m very excited about reading this book. I’ve long been a fan of The Atlas of Complexity, on which Prof Hidalgo has worked. Besides, here is the overlap of information, complexity and spontaneous order, computing and economics – what’s not to like?The Enlightened Economist
We’re not going to build up useful economics… starting from individuals…WCEG — The Equitablog
Reviewed: Fred Block & Margaret Somers, The Power of Market Fundamentalism: Karl Polanyi’s Critique, Harvard University Press 2014.…
More or less self-consciously, all “polanyians” argue from a critical posture vis-a-vis the structures and processes dominant within contemporary Western societies. To that extent, they share a position on the left with a larger collectivity of scholars dealing with social and historical phenomena most of whom, instead, derive their intellectual inspiration from this or that component of the Marxian legacy. These scholars in turn disagree widely from one another, but basically share a (at best) diffident attitude toward Polanyi, due chiefly to a critical contrast between the understandings of “society” held respectively by Marx and by Polanyi.
From Marx’s standpoint, society is no more than the site of the hostile confrontation between the conflicting economic interests of two historically variable groups – freemen and slaves in antiquity, lords and serfs under feudalism, the bourgeoisie and the proletariat under capitalism. Societal dynamics revolves around the exploitation of the second element within each relation by the first. Under rare and momentous historical circumstances, an existent mode of exploitation is subverted and replaced by another mode.
Polanyi of course shared Marx’s emphasis on these developments, but challenged their absolute prominence attributed to them in his view of the social process, focused almost exclusively on the unique historical experience of the West. Thus, in Polanyi’s judgment Marx was insufficiently aware of the huge diversity of non-Western arrangements for material production and of their relationship with other significant aspects of the social process.
For Polanyi, “society” is a complex reality constituted by relatively autonomous sets of diverse institutional arrangements, varying widely in time and space, some of which address concerns of no immediate economic significance. They generate and validate similarities and contrasts between individuals and between groups that may override - or any rate frame and constrain, rather than masking or justifying - the relations regarding their economic interests and the resulting collective identities.
Block and Somers’ entire book can be considered as a sustained exploration and elaboration of this key motif in Polanyi’s thinking, the so-called ‘embedding’ of the economic aspect of the social process within a pre-existent, more complex matrix. Their concluding chapter is entitled “The reality of society” and places this notion at the core of what they label Polanyi’s “new public philosophy”.…Books & Ideas
“The Wisdom of Crowds” is about how accurate (or not) dozens or thousands of people are when they are guessing the number of beans in a bottle or predicting who is going to win the World Cup. The number of times their average collective guestimates are accurate is remarkable – which is the subject of Surowiecki’s book. But is that what WISDOM is really about?
If some individual could predict the outcome of this year’s US elections, would we call them wise? Is that what we proclaim Christ or Buddha as wise for doing?
I would love it if we would reserve the terms “wisdom” and “wise” for guidance that makes life better – especially useful guidance that makes life better for most or all of us – including all the creatures of this living, fragile Earth – over the long term. That’s what we need wisdom for, now more than ever.
The traditions of the world’s great religions are one source of that wisdom, if we are mindful and heartful about which aspects of them we choose to follow, such as the near-universal Golden Rule of treating others the ways we would like to be treated. That’s wise.
Various forms of systems thinking – from shamanism to ecology and complexity sciences – offer such wisdom because they deal with the wholeness and interconnectedness of the world. Nature’s ways of solving problems – as revealed by the sciences of biomimicry and evolution – also offers such guidance because nature’s solutions (and ways of generating solutions) have arisen and proven themselves through millions of years of testing.Public Intelligence Blog
What the physicists DO believe, however, is that markets and economies are great examples of what scientists have come to call “complex systems” — systems of many elements (people, firms, etc.) with strong interactions between those elements which create webs of non-linear feedback. The elements learn and adapt, their interactions create “emergent” coherent structures and fluctuations at the collective level, and these structures then act back downwards to influence the behavior of the elements. What happens in the system comes about through this interplay of bottom-up and top-down cause and effect. In this sense, economic systems share a deep character with many physical or biological systems from the earth’s crust to turbulent fluids to ecosystems. It’s this complex systems aspect of economics which makes physicists believe that ideas from physics (and other natural sciences) can be useful in economics.
This is precisely why many physicists, myself included, are convinced that modern economics is indeed, in an important sense, “held back because of a deficiency of mathematical tools and techniques”, to use Chris’s words. I can’t do better than to quote a short section from Brian Arthur’s excellent article Complexity Economics, which describes what many people (including physicists) believe is lacking from current economics:The Physics of Finance
It would be better to just face the truth — it is impossible to describe interaction and cooperation when there is essentially only one actor.Macroeconomic challenges
These facts are a challenge to both RBC and New Keynesian models. But they have something in common. They stress the heterogeneity of agents: some unemployed respond to benefit changes but most don't; some prices are sticky but others aren't; some firms are big enough to have macro effects, others aren't. This, I fear, means that the problem with conventional macro isn't so much its microfoundations per se as the assumption that these microfoundations must consist in representative agents.Stumbling and Mumbling
Now, you'll object that any model that tries to embed these five facts will very quickly become very complex. But that's my point - the economy is a very complex system and any theory that doesn't see this is very dubious. It could be that the best way to understand it - if at all - lies in agent-based models rather than conventional DSGE ones.
The disastrous flaws in mainstream economics, and how economies can serve our total wellbeing
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.
