Economics & the Complexity Vision

2009 Summer Project

Greg Pratt

Mesa Community College

reality is bewilderingly complex, and there is always the danger that this complexity is not recognized.

Mancur Olson

Vision and Discipline• Complex Systems studies how relationships between

parts give rise to the collective behaviors of a system and how the system interacts and forms relationships with its environment.

• Look to the classical political economy of the Scottish Enlightenment, later developed by the Austrian school of economics, which says that order in market systems is spontaneous (or emergent) in that it is the result of human action, but not the execution of any human design.[2][3]– economic calculation problem– dispersed knowledge – computational complexity

• Friedrich Hayek’s study of complex phenomena,[4] not constraining his work to human economies but to other fields such as psychology,[5] biology and cybernetics.

Spontaneous orderFA Hayek

• The major problem for any economy Hayek argued, is how people’s actions are coordinated. He noticed, as Adam Smith had, that the price system—free markets—did a remarkable job of coordinating people’s actions, even though that coordination was not part of anyone’s intent. The market, said Hayek, was a spontaneous order. By spontaneous Hayek meant unplanned—the market was not designed by anyone but evolved slowly as the result of human actions.

Hayek, change and complexity

• It is, perhaps, worth stressing that economic problems arise always and only in consequence of change.

The Use of Knowledge in Society

• Friedrich Hayek will probably not be as remembered for his work in technical economic theory as in political and pure philosophy. Hayek’s achievement was to verbalize the idea of a “universal order of peace.” This would be a social order in which the ability to exchange goods and services freely with each other would unite all mankind.

• Alan Ebenstein, author of Friedrich Hayek: A Life

• While stressing that social institutions cannot and should not be simply thrown out and redesigned at will, Hayek insisted that we run terrible risks when we seek to limit the choices people make. That’s because the act of choosing is the very basis of a flourishing society. In a world in which markets have triumphed, in which technology and trade allow for ever-greater mixing and exchange, in which basic identities and customs are up for grabs in a way they never have been before, Hayek helps to explain the ground rules. And to show why we’ve got it as good as we do.

• Nick Gillespie, editor of reason and the new anthology Choice: The Best of Reason

• Hayek is one of the very few economists to take seriously Adam Smith’s notion that language matters. Since this is the chief finding of the humanities in the 20th century, I would bet that in the 21st century it will start revising our calculative, allocative, easily-socialist view of the economy. Socialism doesn’t work, Hayek said, because it treats humans as rats. Rats don’t talk, and cannot be free.

• Contributing Editor Deirdre McCloskey, a professor at the University of Illinois-Chicago and Erasmus Universiteit Rotterdam

• Hayek was among the first to call attention to the emergence of large-scale order from individual choices. The phenomenon is ubiquitous, and not just in economic markets: What makes everyone suddenly drive SUVs, name their daughters Madison rather than Ethel or Linda, wear their baseball caps backwards, raise their pitch at the end of a sentence? The process is still poorly understood by social science, with its search for external causes of behavior, but is essential to bridging the largest chasm in intellectual life: that between individual psychology and collective culture.�

• Steven Pinker, Johnstone Professor of Psychology at Harvard University and author of The Blank Slate

• Hayek placed knowledge and discovery at the center of economics and the market process. That profound insight is not the end but the beginning of a fascinating and important line of research: How is knowledge shared both within organizations and across them? Markets obviously incorporate hierarchy and planning within organizations; when is hierarchy appropriate and when isn’t it? How does economic discovery take place?

• Virginia Postrel, former editor of reason and author of The Substance of Style and The Future and Its Enemies

• Hayek was a true prophet of what we now call self-organization, making clear how and why order and intelligence can emerge out of the interaction of myriad individuals, even (or especially) without a planner or boss in charge. In the 20th century, this insight helped change the way people thought about markets. In the next century, it should change the way people think about organizations, networks, and the social order more generally.

• James Surowiecki, author of The Wisdom of Crowds

Catallaxy as a ‘Science of Exchange’ describes according

to Hayek

• ‘the order brought about by the mutual adjustment of many individual economies in a market’.

• Hayek, F.A. Law, Legislation, and Liberty, Vol. 2, pp. 108–9.

Adam Smith Invisible Hand

The Theory of Moral Sentiments

Wealth of Nations

Santa Fe Institute

• The Santa Fe Institute is a private, not-for-profit, independent research and education center founded in 1984, for multidisciplinary collaborations in the physical, biological, computational, and social sciences. Understanding of complex adaptive systems is critical to addressing key environmental, technological, biological, economic, and political challenges.

Current Research Areas• Financial Markets as an Empirical Laboratory • The Cost of Money as a Public Good • Emergence and Robustness of Community Struct

ures • Geographic Structure, Demographic History, and

Approximate Bayesian Computation

• War-time Sexual Violence • Agent-based Modeling in the Social Sciences • The Dynamics of Civilizations • The Evolution of Human Behaviors & Institutions

Santa Fe InstituteResearch Fellows Economics

• Joshua M. Epstein, External Professor, SFI Director, Center on Social & Economic Dynamics; Senior Fellow, Economic Studies, The Brookings Institution Modeling of complex social, economic, and biological systems using agent-based computational models and nonlinear dynamical systems, with applications to economics, public health, and international security.

Santa Fe InstituteResearch Fellows Economics

• Lawrence Blume, External Professor, SFI Professor, Economics and Information Science, Cornell University, Economics

• Sam Bowles, Professor, SFI Professor Economics, University of Siena Evolution of Human Altruism, Parochialism, and Cooperation Dynamics of Economic Inequality Institutional Innovation

• Nathan Collins, Omidyar Fellow, SFI Political Behavior Behavioral Economics Adaptive Social Systems

Santa Fe InstituteResearch Fellows Economics

• Anna Dreber Stockholm School of Economics, Economics Evolution of cooperation Foundations of preferences Risk preferences The marriage market Wine economics

• Duncan Foley, External Professor, SFI Graduate Faculty, New School for Social Research, Economics

• John Geanakoplos, External Professor, Science Board, Chair, SSC, Ex officio Trustee, SFI James Tobin Professor of Economics, Yale University, Economics

Santa Fe InstituteResearch Fellows Economics

• Herbert Gintis, External Professor, SFI •Professor, Central European University, Economics Dynamics of General Equilibrium Unification of the Behavioral Sciences Modeling Cooperation in Humans Evolutionary Game Theory Behavioral Economics

• David Goldbaum University of Technology Sydney, School of Finance and Economics Heterogeneous agent models in finance and economics Learning and adaptation by economic agents

• Matthew Jackson, External Professor, SFI William D. Eberle Professor of Economics, Stanford University, Economics Social and Economic Networks Game Theory Voting and Social Choice Theory War and Conflict

Santa Fe InstituteResearch Fellows Economics

• Saibal Kar, Visiting Researcher, SFI Fellow in Economics (Associate Professor), Centre for Studies in Social Sciences, Calcutta, India, Economics Human capital Formation in Societies Occupational Choice Patterns Social and Economic Mobility

• John H. Miller, Professor, SFI Professor of Economics and Social Sciences and Head, Carnegie Mellon University, Department of Social and Decision Sciences Complex Adaptive Social Systems

• Susanne Neckermann • Universität Zürich, Institute for Empirical Research in Economics Role of social recognition for human decision making and differences across cultures

Santa Fe InstituteResearch Fellows Economics

• Kazuo Nishimura, External Professor, SFI • Director, Kyoto University, Institute of Economic Research Economic Theory

• Seung-Yun Oh U of Massachusetts, Amherst, Economics Family Economics

• Rajiv Sethi, External Professor, SFI Professor, Barnard College, Columbia University, Dept. of Economics Economics Group Inequality Martin Shubik, External Professor, SFI Seymour Knox Professor of Mathematical Institutional Economics, Yale University, Economics

• Peyton Young, External Professor, SFI Professor, Johns Hopkins University, Department of Economics

Santa Fe InstituteResearch Fellows from Arizona State• Carlos Castillo-Chavez, External Professor, SFI

Professor, Arizona State University, Mathematics and Statistics Biomathematics

• Marco Janssen Arizona State University Institutional innovation in commons dilemmas Robustness of social-ecological systems • Transitions of societies

• Charles Stevens, External Professor, Science Board, Science Steering Committee, SFI The Salk Institute, Molecular Neurobiology Laboratory Neurobiology

• Sander van der Leeuw, External Professor, SFI Professor of Archaeology, Director, Arizona State University, School of Human Evolution and Social Change Longer-term evolution of socio-environmental systems Innovation in urban contexts Evolution of human cognition over the last 3 M years Robustness, resilience and vulnerability of socio-environmental systems