When Santa Fe Institute scientists first started working on economics more than thirty years ago, many of their insights, approaches, and tools were considered beyond heterodox. These once-disparaged approaches included network economics, agents of limited rationality, and institutional evolution — all topics that are now increasingly considered mainstream.
In a new book published by the SFI Press, editors W. Brian Arthur, Eric Beinhocker, and Allison Stanger (all members of SFI's external faculty) explore the paradigm-busting influence of complex systems science on economics. Based on the 2019 Applied Complexity Network Symposium, a meeting that was dedicated to complexity economics, the volume pairs newly written introductions and reflections with never-before-published proceedings from the event, which are now available publicly for the first time. It is the inaugural book in a new series, "Dialogues of the Applied Complexity Network."
Gathering insights from the first agent-based models of the late 1980s up to current and cutting-edge research on collective intelligence and organizational scaling, Complexity Economics explores the history and frontiers of complexity economics in a broad-ranging, accessible manner.
Complexity economics views the economy as a system not necessarily in equilibrium, but rather as one where agents constantly change their actions and strategies in response to the outcomes they mutually create. It holds that computation as well as mathematics is useful in economics, that increasing as well as diminishing returns may be present in an economic situation, and that the economy is not something given and existing, but forms from a constantly developing set of actions, arrangements, and technological innovations. The economy is thus comprised of evolving networks of interacting agents, institutions, and technologies — networks of networks. The macro- level patterns of the economy — growth, innovation, business cycles, market booms and busts, inequality, and carbon emissions—then emerge from these dynamic micro- and meso-level interactions. From the complexity economics perspective, change is largely an endogenous phenomenon, not simply the result of unexplained shocks from outside the system.
The complexity viewpoint has modern roots in pioneering work in the physical sciences conducted decades ago by groups in Brussels, Stuttgart, Ann Arbor, Los Alamos, and elsewhere. But the ideas have even earlier precedents in economics. Adam Smith had a deep, intuitive understanding of emergence and was arguably the first complexity economist. Smith and other early economists were aware that aggregate patterns emerge from individual behavior and interactions, and that individual behavior responds to these aggregate patterns. Smith’s famous metaphor of the “invisible hand” of markets is popularly misinterpreted as a message that “greed is good” (something Smith did not believe), but in reality was a statement about emergence — how individual actions “without intending it, without knowing it” lead to collective outcomes which feedback to influence further actions.
There is thus a recursive, reflexive loop at the heart of the economy. Complexity economics asks how this loop drives the behavior of the system over time, i.e., how will the pattern of the system today shape individual decisions which will then collectively create the pattern of the system tomorrow.
This is an obvious question, but a difficult one…
Listen to the interviews with W. Brian Arthur on SFI's Complexity Podcast.