Foundations of Complexity Economics
nature.com
nature.com
In mainstream economics it is treated as just another good, such as break or milk, but somehow it behaves differently. The dynamics of the market are driven by monopoly pricing and mortgage and rent are paid more like a tax than a payment for a yoghurt that you can choose not to buy or buy an alternative. You can't choose not to be housed.
Since its monopolistic nature the house/land market works like a gravity for excess money and endless bubble which keeps inflating and bursting forming a housing cycle, which many confuse with a business cycle.
Real estate is literally where money go to die. Excess money or surplus and corrupt money gets parked in it and unless additional money is used for repairs it actually loses value. It acts as a sink of money flow in the economy.
Classical economists in the 19th century were actually aeare of this. Ricardo and his law of rent actually really describes what is going on with the economy. It explains what wages even mean, instead of just payments for work, based on margin of production. It's actually one of the few law of economics which actually behaves like a law of gravity in physics, being consistent globally, unlike the rest of them resembling the theory of epicycles.
Since the marginal revolution housing, land and rents were abstracted away and economics started resembling some mathematical system for an imaginary game world with researchers being drowned in neverending epicycles.
If the theory doesn't model land and house speculation then it will fall into the same traps and will be chasing parameter tuning to ever more complex equations forever since it will never understand the actual money flows in the economy.
Your gripe with "all schools" of economics is a straw man then. Land (and the wider concept of rent) features in an enormous number of economic models, from externalities to explicitly location-based theories like Hotelling's Location Model to Keynes' desire for macroeconomic policy to "euthanize the rentier". Ricardo didn't propose a "housing cycle"; claims (good and bad) made about real estate markets and the economy are all the work of economists writing a very long time afterwards.
And Ricardo's concept of economic rent is one of the first things you learn as an undergraduate. It's just it's applied to non-land factors of production and products with inelastic supply curves now too.
Since we're no longer living in an primarily agricultural/mining society, the Ricardian notion that most of the fruits of all economic progress accrue to large scale landowners isn't a particularly realistic one. You could have made a lot of money investing in Bay Area real estate in the nineties, but an order of magnitude or three more investing in the tech companies whose growth made Bay Area real estate more valuable.
Then you don't know much about mainstream economics. Don't learn economics from news, pundits or other shallow sources.
(1) Mainstream Economists strongly agree with you with large consensus. Yes there is consensus among mainstream economists about land/property.
(2) They have a solution and they agree even on that. Property tax is considered the least harmful tax because it taxes rentier. Adam Smith would also strongly agree. He made this tax proposal to solve the issue already in 1776.
(3) Urban economics has even more nuanced view.
When mainstream economists agree on something, there is little talk about it.
The real issue is the people. Either they own property and don't accept tax, or they can't understand simple reasoning with 2 or 3 steps. If the first step is to increase property/land tax they stop thinking and react with statements like: "It would increase rents" or "Price of food would increase."
You also can't choose[0] to starve to death, and yet your use of the choice to buy, or not buy, yogurt isn't counted as a monopoly of the food industry. Housing isn't a monopoly. We have plenty of choices, from buying a house to renting a house, or we can build our own mansion or vanlife van. We can live in a hight Cost of Living environment like NYC or Singapore, or we can live in a Low Cost of Living environment like the middle of Alabama or Bali. Shelter is a necessity for live, just like food. And just like food, we have lots of choices to choose from.
[0] *choose may be a poor choice of words for both our arguments, as lots of people choose every years to be homeless, and some people choose to starve to death. But that's semantics and not the spirit of either of our statements. :)
"For the past 150 years, economic theory has viewed agents in the economy (firms, consumers, investors) as perfectly rational decision makers facing well-defined problems and arriving at optimal behavior consistent with — in equilibrium with — the outcome caused by this behaviour."
The formal definition of rational actor is not nearly 150 years old. It's heyday was probably in the time of Becker, in the 70's. The study of equilibrium refinement concepts practically died before the 90's, as did General Equilibrium theory (actually before that). The straw man has seen better days.
Also, in parallel, Herb Simon started in the earnest in the 1960's and, a short time later, so did Kahneman & Tversky. Experimental and behavioral approaches, by this point, have primacy in legitimacy in all literatures where they apply.
Is it fair to converse with academic literature that is 40 or more years old - as the author does when referring to the "standard model of financial markets"? Perhaps more relevant: Is is useful?
After all, the tennet is similar to the Carnegie school around March, who already articulated all concerns the author brings to the table. However, March did so with more humility and also 50 years before the present article - arguably when the issue was more pressing.
"Complexity economics", in form of dynamic systems and chaos theory (for example) had its time in the sun, since the 70's actually, without leading to convincing new insights. Indeed I would struggle to think of any result from this literature that is as significant as Auction Theory, Behavioral Econ / Nudging, Mechanism Design & Implementation, Networks and other things that quite literally shape our daily lives (all while apparently stemming from a deficient science).
One issue with complexity as an approach is that it does not in itself get to the core problem social science faces: Agents are decision makers that can not be modeled by simplistic choice rules or analogies to physical phenomenon. The system faced by and thrust upon the actor is not independent of or impenetrable to his machinations. Every literature attempting to box human actors into the confines of behavioral laws leads nowhere - ironically a problem that representative agents and econophysics share. Such attempts, even though they pop up frequently, are always a step back. Although to be fair to the author, this is an issue he does talk about. Nevertheless, complexity economics as proposed here does not, in itself, promise to be a solution. Rather, it is an approach that equally will have to wrestle with this core issue. Perhaps then the author should acknowledge that the economist's gambit of using preferences and equilibria was an attempt, certainly an imperfect one, to face into this core issue of modeling human behavior. It is precisely not an approach ignorant of it, rather it is a reaction to it.
In any case, the straw man looms large. With his eyes open, the author would have to acknowledge that preference-based specifications and complex systems are not as different at it may seem. However, adding a diffuse element of complexity as framing to dynamic modeling and worse, co-opting other sciences such as sociology and social psychology under one's own umbrella, does not a new science make.
The heart of it is whether we wish to predict outcomes from assumed behavior, or whether we wish to characterize outcomes as consistent with agents' wants. I personally have used both approaches, but see no need to call one classical and the other complexity economics. Indeed, both coexist in a social system, they just elucidate different properties of it.
Whenever I talk to someone who flat out states that only one of the approaches has merits, then this is a person who has not read enough. The primacy of Becker is long gone. A primacy of "complexity economics" will never exist. I personally can't wait until we no longer find every discussion being framed in opposition to a now non-existent orthodoxy. I also dislike seeing approaches I personally respect being humiliated by its proponents when they show such misunderstandings of the literature.
A cynic would react differently: publishing this article in a physics journal, as opposed to addressing economists, may play to the sympathy and goodwill of physicists. Such a cynic may wonder what the author stands to gain from the inevitable applause of his non-economist peers. Especially since the same article could have been desk rejected by an economics journal with the comment: "We are keenly aware, and have been for decades, that models from the 60's have their issues".
One can voice many concerns of other points. For example, the author alludes to power laws in network diffusion, apparently unaware that research in this area has since shown that not everything that looks like a power law is in fact a power law.
Even sympathetic to the approach, I wonder whether the paper would not have deserved further revision.
> Also, in parallel, Herb Simon started in the earnest in the 1960's and, a short time later
It's actually worse than you've stated. Herb Simon was working at Carnegie Mellon on bounded rationality and a student of his, John Muth, studied a special, unrealistic case called rational expectations. The topic was basically ignored until the early 1970s when Lucas (working at CMU) familiarized himself with Muth's work. After a great deal of opposition, and some years, rational expectations became the dominant paradigm in macroeconomics. You have to be willfully ignorant to claim economists have always assumed rationality. Simon had his Nobel for his work on bounded rationality long before Lucas got his, and Muth never even got a Nobel.
I mean, Karl Marx and people like Veblen would also fall under this umbrella.
Truly, the author has an ego, we can say that much.
This is really interesting. The system dynamics folks at the MIT would probably disagree. The extent to which dynamic systems explains outcomes of fluctuating forces in the economy is certainly useful. That said, SD has a communication problem: even if models can explain system behaviour and pinpoint required corrective action, people have difficulty internalizing these. Humans are not very good at applying differential equations to their everyday lives. So maybe this is why the field can be said not to have "lead to convincing new insights" in economics?
The examples cited in the Wikipedia article do also appear to be clear examples of cybernetic governance, so it would appear less that nudge theory is influenced by cybernetics and more that it is just a form of cybernetic praxis.
As your good man Herbert Simon showed, we are chimps with 6 inch brains dealing with many a problem that require slightly to hugely more than that. When the upper bound of Rationality gets hit all chimps blunder. Dont waste your time analysing the blundering.
- the "credibility revolution" in econometrics, with its laser focus on good research design to uncover causality
- the rise of randomized controlled trials in development economics, discovering "what works" to help the poor
- behavioural economics, a bit long in the tooth now, but still with enough insights to support a lot of government Nudge Units
- Thomas Piketty and his coauthors' long work at building a sound evidence basis on inequality
- auction theory, which helped make the UK government several billion GBP in designing spectrum auctions
- new work bringing rigour to economic history, and often giving precise answers to questions like the effect of Protestantism on economic development
None of these are perfect but all are interesting. I haven't mentioned macro because I don't know enough to talk about it.
> The formal definition of rational actor is not nearly 150 years old. It's heyday was probably in the time of Becker, in the 70's. The study of equilibrium refinement concepts practically died before the 90's, as did General Equilibrium theory (actually before that). The straw man has seen better days.
I believe you missed the point. Arthur was discussing the phenomena's overall history, not its formal comeaboutance. I.e, "economic theory has viewed agents in the economy (firms, consumers, investors) as perfectly rational decision makers facing well-defined problems and arriving at optimal behavior consistent with — in equilibrium with — the outcome caused by this behaviour." not "economic theory has specifically labeled its views that agents in the economy (firms, consumers, investors) as perfectly rational decision makers facing well-defined problems and arriving at optimal behavior consistent with — in equilibrium with — the outcome caused by this behaviour."
> Is it fair to converse with academic literature that is 40 or more years old - as the author does when referring to the "standard model of financial markets"? Perhaps more relevant: Is is useful?
Nay, I say. Literature (even more specifically scientific and technical) starts to become unintelligible nonsense after the 1950s. This is true for economics, as it is for any other discipline that was long-standing before this time. We are starting to see a reversal -- and some sense is coming back to academia -- but it's simply the beginning of the rise, and not worth mentioning.
Frankly, I have lost the will to continue (it is a Friday night, after all). But, do you see merit in the two points I've made so far?
The statement he leads his paper with is clearly wrong if read literally. Others follow that are simply not fully correct or intellectually honest.
The overall history includes the works of scholars who have shaped the field, be it 150 years ago or 50 years ago and at least, were influential. I am clearly still missing the point, but I can not see any way to read this sentence in a way that would be correct.
Are the scholars mentioned as counter examples and the people who draw upon them to tackle their research not doing research in the field? What are they doing, then? What have they been doing for the last 60 years? I specifically take issue with eliminating people like Jim March, who has thought very deeply about rationality and actual human behavior in the context of complex systems aka organizations.
Or see it from my view: I have published work with Agent Based complex models, interdisciplinary work with psychologists, sociologists and mathematicians, that should be looked upon favorably by the author of this article. Am I doing complexity economics in the sense of the author now?
Because the academic lineage I draw upon includes (though not exclusively) a good amount of economists that the author so malignes. And not obscure ones either!
It seems like the author wants to co opt the many exciting ideas in economic theory and approach that are still ongoing - but in reality they also have been ongoing for decades, in parallel to what he sees as economics.
If the author sees himself part of this scientific conversation, why not represent it fairly? I know one has to frame a paper like this against something, but this is just overdone.
But alas it’s a Friday night and I am on my phone and I just don’t have it in me to type out a detailed rebuttal with my thumbs.
I am however curious about your background as you’re clearly well informed despite my violent disagreement.
What is your background in economics and do you have a school of thought, author, etc that you would use to describe the alternate point of view you’re presenting here, for further reading?
Your comment, as it stands, says nothing substantive.
Complexity theory is a useful thinking tool, but has yet to bear fruit when it comes to making statements about future system behavior.
Likewise, econophysics was a thing fifteen years ago, but now only survives in academia.
The neoclassical preference for negative feedback, ergodic models doesn't match reality.
It would be great to have objective measures of happiness, satisfaction, enjoyment. Some people are actually pursuing attempts in that direction for instance look [1]
Thing is, prices are a proxy of that. If you earn 30 USD an hour, then being ready to pay something 30 USD means you evaluate it at about an hour of work worth.
Perhaps it’ll be an interesting exercise to think about two experiments, one asking for valuations of things, and one asking whether one thing is preferred above the other.
Then, consider how these outcomes may be related!