The approach, which has now spread throughout the economics profession, got its start largely at the Santa Fe Institute (SFI) in the late 1980s. Since the 1990s, economists have instead begun exploring the economy as an evolving complex system, and out of this exploration has come a different approach - complexity economics.Ĭomplexity economics sees the economy - or the parts of it that interest us - as not necessarily in equilibrium, its decision makers (or agents) as not super-rational, the problems they face as not necessarily well-defined and the economy not as a perfectly humming machine but as an ever-changing ecology of beliefs, organizing principles and behaviours. But many economists 1, 2, 3, 4, 5, 6, 7 have pointed out that it is based partly on assumptions chosen for mathematical convenience and, over the years, have raised doubts about whether it is universally applicable. The economy becomes something not given and existing but constantly forming from a developing set of actions, strategies and beliefs - something not mechanistic, static, timeless and perfect but organic, always creating itself, alive and full of messy vitality.įor 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 resulting outcome may not be in equilibrium and may display patterns and emergent phenomena not visible to equilibrium analysis. Agents explore, react and constantly change their actions and strategies in response to the outcome they mutually create. It assumes that agents differ, that they have imperfect information about other agents and must, therefore, try to make sense of the situation they face. Complexity economics relaxes these assumptions. This rational, equilibrium system produces an elegant economics, but is restrictive and often unrealistic. Conventional, neoclassical economics assumes perfectly rational agents (firms, consumers, investors) who face well-defined problems and arrive at optimal behaviour consistent with - in equilibrium with - the overall outcome caused by this behaviour.
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