The traditional framework in economics portrays economic activity within an equilibrium steady state. The interacting agents in the economy are typically homogeneous, solve well-defined problems using perfect rationality, and act within given legal and social structures. The complexity approach, by contrast, sees economic activity as continually changing—continually in process. The interacting agents are typically heterogeneous, they must cognitively interpret the problems they face, and together they create the structures—markets, legal and social institutions, price patterns, expectations—to which they individually react. Such structures may never settle down. Agents may forever adapt and explore and evolve their behaviors within structures that continually emerge and change and disappear—structures these behaviors co-create. This complexity approach does not replace the equilibrium one—it complements it.
The papers collected here originated at a recent conference at the Santa Fe Institute, which was called to follow up the well-known 1987 SFI conference organized by Philip Anderson, Kenneth Arrow, and David Pines. They survey the new study of complexity and the economy. They apply this approach to real economic problems and they show the extent to which the initial vision of the 1987 conference has come to fruition.
The Economy as an Evolving Complex System II will fascinate economists of all types.
This slim but densely-packed important book is a joy to read. Technology is a crucial feature of our lives, and the genesis of certain individual artefacts are well-studied, yet technology as a whole is little studied. Arthur sets out to discover just what technology is, and how it changes.
He gives three definitions of technology, covering three different scales (p28): technology-singular, a means to fulfil a human purpose, where the means is a device, method or process; technology-plural, an assemblage of practices and components; and technology-general, the entire collection of devices and engineering practices available to a culture. The book is about examining these definitions, and examining how technology changes at each of these scales.
Technology does not exist in isolation from the physical world: it crucially comprises artefacts that harness natural phenomena. Those phenomena themselves need technology in order to be harnessed, particularly the more "advanced" ones.
He considers mainly physical phenomena in the natural world. He later touches on, but not in much depth, more abstract phenomena of mathematics, information, and computation.
Once technology has started, it can bootstrap by combining components in many ways, to fulfil more and more human purposes (some of which are themselves created by technology). And as we get more technologies, we can combine them in more ways. Soon the potential combinations outnumber the base components.
Once combinations outnumber components, we are in the realm of infrastructure, where the technology can be used in ways never intended, or foreseen, by its inventors.
I am going to stop including quotations at this point. The whole book is so rich with ideas and illustrations that I would end up quoting a large proportion of it. Just read the whole thing.
The trip through technology-singular, -plural, and -general is fascinating, and should be required reading for anyone with an interest in living in modern society. Towards the end, where Arthur is considering technology-general, and how its ever-changing nature generates a necessarily ever-changing economy, is particularly important today, when governments seem to be hell-bent on restoring some non-existent equilibrium state after the recent economic collapse. His description of "deep craft", and why technologies cluster in geographical locations, is important for people interested in "technology transfer" (short answer: it's really difficult). And his comments on the need for a fundamental science base to provide the seeds of the next generation technology and deep craft are a crucial message for today's short-termist, make everything have a return in the next quarter, policy makers (not that they will listen).
As Arthur explains it, standard economics sees people in the economy as facing perfectly well-defined problems using perfect deductive reasoning and arriving at equilibrium outcomes; but complexity economics sees people as trying to make sense of the situations they face, exploring choices using whatever actions or strategies they have at hand. The resulting economy is not a perfectly ordered and rational system but an ecology of actions, forecasts, and strategies that are always changing and adapting to each other.
In this book, Arthur collects many of his pioneering articles on this new theory. The papers, beautifully written, were among the first to use evolutionary computation, agent-based modeling, and cognitive psychology. They cover topics as disparate as how markets form out of forecasts and beliefs; how technology evolves over the long span of time; why systems and bureaucracies get more complicated as they evolve; and how financial meltdowns can be foreseen and prevented in the future.