Complexity and Evolution Need to Play a Foundational Role in the Next Economic Paradigm

The neoclassical economic doctrine Is over. Evolution and complexity Is the future

Share with your friends

More share buttons
Share on Pinterest

By Robert D. Atkinson

If there was any possible upside from the destruction stemming from the financial crisis and Great Recession it was that neoclassical economics’ intellectual hegemony began to be more seriously questioned.  As such, the rising interest in complexity theory is a welcome development. Indeed, approaching economic policy from a complexity perspective promises significant improvements.  However, this will only be the case if we avoid a Hayekian passivity grounded in the view that action is too risky given just how complex economic systems are. This would be a significant mistake for the risk of non-action in complex systems is often higher than the risk of action, especially if the latter is informed by a rigorous thinking grounded in robust argumentation.

The flaws of neoclassical economics have long been pointed out, including its belief of the “economy as machine”, where, if policymakers pull a lever they will get an expected result. However, despite what Larry Summers has written, economics is not a science that applies for all times and places. It is a doctrine and as economies evolve so too should doctrines. After the Second World War, when the United States was shifting from what Michael Lind calls the second republic (the post-Civil War governance system) to the third republic (the post-New-Deal, Great Society governance structure), there was an intense intellectual debate about the economic policy path America should take.  In Keynes Hayek: The Clash that Defined Modern Economics, Nicholas Wapshott described this debate between Keynes (a proponent of the third republic), who articulated the need for a larger and more interventionist state, and Hayek (a defender of the second republic), who worried about state over-reach. Today, we are in need of a similar great debate about the future of economic policy for the emerging “fourth republic.”

Get Evonomics in your inbox

If we are to develop such an economic doctrine to guide the current socio-technical economic system, then complexity will need to play a foundational role.  But a risk of going down the complexity path is that proponents may substitute one ideology for another.  If today’s policy makers believe that economic systems are relatively simple and that policies generate only first-order effects, policymakers who have embraced complexity may believe that second, third, and fourth order effects are rampant. In other words, the butterfly in Mexico can set off a tornado in Texas. If things are this complex, we are better off following Hayek’s advice to intervene as little as possible. At least with a mechanist view, policymakers felt they could do something and perhaps they got it right. Hayekian complexity risks leading to inaction.

This gets to a second challenge, “group think.”  Many advocates of complexity point to complex financial tools (such as collateralized debt obligations, CDOs) as the cause of the financial crisis.  Regulators simply didn’t have any insight because of the complexity of the instruments.  But these tools were symptoms.  At the heart of crisis, at least in the United States, was mortgage origination fraud.  The even more serious problem was intellectual: virtually all neoclassical economists subscribed to the theory that in an efficient market, all the information that would allow an investor to predict the next price move is already reflected in the current price. If housing prices increase 80 percent in just a few years, then their actual worth increased 80 percent. So any reset of economics has to be based not just on replacing many of the basic tenets of neoclassical economics, it has to be based on replacing a troubling tendency toward group think.  Yet, replacing the former may indeed be harder than the latter.

So where should we go with complexity? I believe that a core component of complexity is and should be evolution.  In an evolutionary view, an economy is an “organism” that is constantly developing new industries, technologies, organizations, occupations, and capabilities while at the same time shedding older ones that new technologies and other evolutionary changes make redundant. This rate of evolutionary change differs over time and space, depending on a variety of factors, including technological advancement, entrepreneurial effort, domestic policies, and the international competitive environment.  To the extent that neoclassical models consider change, it is seen as growth more than evolution. In other words, market transactions maximize static efficiency and consumer welfare. As Alan Blinder writes, “Can economic activities be rearranged so that some people are made better off, but no one is made worse off? If so we have uncovered an inefficiency. If not, the system is efficient.”

In complexity or evolutionary economics, we should be focusing not on static allocative efficiency, but on adaptive efficiency. Douglass North argues that: “Adaptive efficiency…is concerned with the kinds of rules that shape the way an economy evolves through time. It is also concerned with the willingness of a society to acquire knowledge and learning, to induce innovation, to undertake risk and creative activity of all sorts, as well as to resolve problems and bottlenecks of the society through time.” Likewise, Richard Nelson and Sidney G. Winter wrote in their 1982 book An Evolutionary Theory of Economic Change, “The broader connotations of ‘evolutionary’ include a concern with processes of long-term and progressive change.”

This provides a valuable direction. It means that a key focus for economic policy should be to encourage adaptation, experimentation and risk taking. It means supporting policies to intentionally accelerate economic evolution, especially from technological and institutional innovation. This means not only rejecting neo-Ludditism in favor of techno-optimism, it means the embrace of a proactive innovation policy. And it means enabling new experiments in policy, recognizing that many will fail, but that some will succeed and become “dominant species.” Policy and program experimentation will better enable economic policy to support complex adaptive systems.

Originally published at OECD.

2016 October 1

Donating = Changing Economics. And Changing the World.

Evonomics is free, it’s a labor of love, and it's an expense. We spend hundreds of hours and lots of dollars each month creating, curating, and promoting content that drives the next evolution of economics. If you're like us — if you think there’s a key leverage point here for making the world a better place — please consider donating. We’ll use your donation to deliver even more game-changing content, and to spread the word about that content to influential thinkers far and wide.

 $3 / month
 $7 / month
 $10 / month
 $25 / month

You can also become a one-time patron with a single donation in any amount.

If you liked this article, you'll also like these other Evonomics articles...


We welcome you to take part in the next evolution of economics. Sign up now to be kept in the loop!

  • X-7

    Think our problems are beyond policy. Think they’re structural, deep and fundamental.

    I’ve tried to include physics, evolution & complexity in looking at code, including monetary code.

    I contend that exponentially accelerating complexity has crushed the efficacy of humans using monetary code to calibrate value in-and-across geo eco bio cultural & tech networks, and across time as well. The information processing mechanism lacks computation reach, speed, accuracy and power.
    The Price Is Wrong:

  • Yes, organizational, institutional and economic complexity driven by evolutionary processes, but no not an “organism” argument!

    However, based on a precise argument how economic and political complexity arises from human psychology in information gathering, perception and interpretation via various social interactions under constraints of modular organization, transaction cost, limited information propagation, in (dis)continous markets and organizations acting under specific norms, rules, values, some of them instituted as laws in a political arena that is often self-serving instead of following democratic ideals.

  • lambdoid
  • Great article Robert, as far as it goes.
    It just doesn’t go anywhere near deep enough.

    When dealing with complex dispositional systems, one cannot predict what they will do. Action in such an environment requires constant monitoring at many levels to assess developing trends. It requires active interventions to dampen down trends for which there exists good evidence or argument that they are dangerous, and active support to amplify trends that have good evidence that they are beneficial. That has to be a continuous iterative process.

    Complex systems are by definition, not predictable.
    One has no option but to join the dance, making instantaneous decisions of when to lead and when to follow, moment by moment.
    Welcome to life!

    And there is another view of the evolution of life that is worth thinking about.

    If you take a deep systems view of the evolution of life on this planet, it is possible to characterise all major increases in the complexity of biological systems (from the atomic up through many levels) as the emergence of new levels of cooperation (about 20 levels in us as highly cooperative human beings). And cooperation requires attendant strategies to prevent being overwhelmed by cheating strategies.

    If you look at the human body as an example of a complex highly evolved cooperative system, every cell in the body has all the essentials it needs to function. Cells do not compete for water, oxygen, or nutrients – every cell gets what it needs. Many different levels of systems are in place to ensure that happens.

    An economic system that delivers to every individual what they need would be a system capable of sustaining cooperation at the highest levels. We do not currently have that – our systems have institutionalised poverty and insecurity that work against cooperation.

    We have the technology to deliver such a system.
    We also have many barriers, in terms of beliefs, dogma, habits of thought, laws and institutions etc to the emergence of such a system.

    Delivering such a system, is the only real option to ensure the long term security of any.

    Automation, with the ability of fully automated systems to deliver universal abundance, really does change everything.

    And it can be very difficult to even conceive of such a possibility if one is fully invested in the scarcity based paradigm of money and markets.

    • Duncan Cairncross

      This article was a lot of unclear blather – yet you praise it?
      And criticize other articles – like the Steve Roth one

      You have a strange way of looking at things!

      • Hi Duncan,

        I can accept that.
        We all have our unique ways of constructing meaning from the words of others.

        I sometimes wonder if we ever actually get what the other intends.

        For me, I can see in this article pointers to the sorts of complexity that I see in reality, something far beyond classical or neoclassical economics.

        For me, the entire paradigm of exchange, of using exchange in markets to set values, has passed its use by date.

        It is kind of like the 9 dots problem. One cannot solve it from within the implicit box framed by the nine dots, one must go outside of that frame to find a solution.

        Similarly, I see in Atkinson an attempt to go beyond the implicit box of market thinking, and such attempts are worthy of praise.

        I gave Steve some stick for the lack of respect he demonstrated for those using different paradigms from his own.
        My paradigms are often much closer to his than those he called unkind names, and I can understand why many people have the heuristics that they do. I can simultaneous see them as having less utility for me than the paradigms I am using, and acknowledge the utility those paradigms have for the people using them, and work to find common ground we can agree on.

        For me, having more powerful tools brings with them a responsibility to use them in the interests of everyone – which is nothing at all like self sacrifice, and it is social responsibility that is in one’s own long term self interest.

        So yes – I readily admit I am well outside the normal distribution in many metrics – which is a reasonable working definition of “strange”.

        And I am clear that if we are to have any sort of real freedom and security in our future (and I have had an expectation of living a very long time for over 40 years), then we will all need to work on radical tolerance of diversity. That means accepting that others have different views and are still human beings worthy of respect (however archaic some aspects of the paradigm sets they use may seem to us).

        I had no shortage of school yard bullies calling me names (and much worse) as a kid. I never liked it.

  • Robkall-opednews

    Science has shifted from a Newtonian, mechanistic model focusing on counting and identifying parts, to a systems theory/non-linear dynamic model which focuses on relationships and patterns, which is, naturally, more inclined to evolutionary, ecosystem thinking. Economics should be approached the same way, also considering it to be biological in nature, with multiple systems, organs, etc.