The Coming Revolution in Complexity Economics
Standard neoclassical economics (SE) is a failure and is driving many of the crises facing our world.
A new approach for studying the economy and developing policies is needed to guide society forward in the ways we organize transactions relating to production, consumption, finance, diversity, the environment, time frames, relationships, power, and more.
This is the starting point and the conclusion of the very engaging 2019 Fall Symposium of the Santa Fe Institute (SFI).1 The edited transcript of the symposium appears in Complexity Economics: Dialogues of the Applied Complexity Network (SFI Press, 2020), edited by Brian Arthur, Eric Beinhocker, and Allison Stanger. (The transcript of a conference makes for much more entertaining reading than a collection of papers.) There were 25 participants in the symposium, mostly academics, but only three were part of an economics faculty, and only one from a major American economics department. The others included people focusing on epidemiology, complexity science, physics, machine learning, computation, and investing.
Two themes dominated the conference: What are the problems with standard economics (SE), and how can complexity economics (CE) do better? Since applications in finance are a focus of many readers of this publication, I will present them below.
Participants considered the assumptions and intellectual framing of SE as false or inadequate, and therefore unlikely to lead to useful conclusions and policy recommendations. Economic theory, they asserted, is based on assumptions not founded in reality, including system-wide equilibrium as an outcome, and quantifiable utility maximization as a universal goal of the uniform, individual, rational actors in the system. SE assumes that actions and outcomes can be aggregated into measures like the GDP through continuous linear functions where there are no physical limits to the system, many subjects can be dismissed as externalities, prices are a reliable measure of value, and markets are good and central to all actions. The economy is a stable structure and exists outside or above the rest of the world.