Standard economic theory is struggling. It relies on faulty assumptions about the world, and it hasn't done the best job predicting the economic impact of major world events, including the global COVID pandemic, argues SFI External Professor Doyne Farmer (University of Oxford) in a new book.
But in Making Sense of Chaos: A Better Economics for a Better World, Farmer does more than criticize. Instead, he lays out a different theory — complexity economics — based on better assumptions about how people make decisions and on an entirely different set of tools, those of complexity science. Making Sense explains in accessible language how complexity economics works and how it could help policymakers make better decisions in the future.
The ideas of complexity economics aren't particularly new — the economist Herbert Simon proposed some of them as far back as the 1950s — but they proved difficult to implement. In contrast to standard theory, which assumes rational decision-makers and an economy in equilibrium, complexity economics treats the economy as a complex system featuring messy decision-makers and many moving parts. Modeling the economy that way takes data, powerful computer simulations, and an understanding of human behavior that didn't exist in Simon's time.
Making Sense argues that because our access to data, computing power, and knowledge of ourselves has grown, the time for complexity economics has come — and not a moment too soon. Mainstream economists' less-than-accurate predictions about the 2008 subprime mortgage crisis and COVID's economic impact suggest that policymakers need new tools to address major global issues, including how to address financial instability and the worst impacts of climate change.
Ultimately, Farmer’s vision is perhaps even more grand: Changing the way we interact with our world. “For better or worse, the world has become our garden, and we need to do a better job of tending it,” Farmer writes — and complexity economics might help us do just that.
Making Sense of Chaos: A Better Economics for a Better World (Penguin) will be published in the U.K. on April 25. The U.S. edition will be available August 6, 2024.