“Complexity” in economics

Maria Alejandra Madi

This blog has been extracted by the author from her longer article which appeared in Real World Economic Review, issue 106.

“ Anthropogenic climate change and ecological breakdown are now major threats to human life and other species. It is now widely acknowledged that mainstream economic theory and especially neoclassical theory lack adequate concepts to address these problems and arguably have contributed to them through misdirection and delay. “Complexity” sciences, however, are now widely adopted but have as yet made little impact on economics. In this short article I advocate the widespread adoption of ‘complexity’ in the field of economics. Complexity means more than just acknowledgement that ‘it’s complicated’. Its greatest attraction in our current ‘climate emergency’ is that it is capable of dealing with the interconnection and interdependence between the biosphere and economic systems. I draw attention to several significant aspects of complex systems for economics:
a. The lack of homogeneity among the elements of the system in terms of the characterization of agents (attributes, rules of behaviour, cognitive rules, strategies, learning capacity) and the environment where patterns of interaction occur;

b. The adaptive nature of an agent’s behaviour in interaction with their environment;

c. The concept of emergence as the property of novelty, change, and innovation of complex systems that exhibit a wide range of aggregate patterns.

“ Theory and policy that fail to consider a) to c) in the context of the impacts of economic systems on the biosphere are deficient and as Winkelman et al argue, there is a need to ‘close this loop’ (Winkelmann et al., 2017)

Incorporation of complex economic and biophysical systems in Eco 001
“ While founding economists such as the physiocrats and John Stuart Mill had some concept of the material impact of economic activity, mainstream economics has since become divorced from the physical world. Its main focus is exchange valuations including at the macroeconomic, national accounting, circular income flow and trade balances levels (for discussion of the issues see Naredo, 2012; Green 2012).

“ Mainstream economics exemplifies a mechanistic cause-and-effect perspective which was prevalent in the 19th century. Simple linear cause-effect relations and recourse to ceteris paribus clauses don´t allow for realistic representation of the economic system (Madi, 2020). Mainstream economics has attempted to adapt itself through ‘environmental economics’, but as ‘ecological economists’ argue, this remains incapable of appropriately incorporating material flows and energy use in ways liable to lead to a rational conception of ‘biophysical limits’. Moreover, Econ 001 courses and textbooks still treat the environment as a specialist issue rather than a subject of basic concern. This state of affairs reflects a deeper problem of unrealistic knowledge, mainly predicated on homo economicus (with a few modifications) and Cartesian reductionism (Fullbrook, 2016). Worse, a mainstream economics education imposes implicit norms that prevent students cultivating a critical mindset. In a time of ‘climate emergency’ this is a major problem (Reardon and Madi, 2020).

“ Earth systems scientists have developed a ‘planetary boundaries’ framework which seeks to model the interactions between human activity and different systems – of which climate is only one (Steffen et al. 2015a, 2015b). Earth system scientists work with a concept of ‘safe operating space’ and report that multiple systems have now exceeded this (Steffen and Morgan, 2021). It is partly because of such changes that Earth systems scientists have also coined the term ‘Anthropocene’ (though others, such as Jason Moore, prefer the term ‘capitalocene’) (Donges et al., 2017).

“ It seems clear that economics needs to adopt an appropriate variation of the kind of complex systems approaches that are now available. “

Comments from Dr Geoff Davies
There is plenty of observable evidence that modern economies are far from equilibrium with strong positive and negative feedbacks operating. They are therefore sensibly regarded as complex systems.

In fact large parts of modern economies are living (people, food sources …) and living systems are complex.

A complex economy must be approached differently, with different questions. See more in Economy, Society, Nature – green
cover in the right-hand-column.

Source: https://rwer.wordpress.com/2024/02/06/complexity-in-economics-2/
Dr Maria Alejandra Madi has outstanding research and publication records, and she specialises in the financial and social challenges of globalization, as well as realism in economics and the methodology of economics within the wider context of the philosophy of science. She is currently visiting professor at the Green Economics Institute