Is the economy complex and evolving?

Brian Arthur, World Economic Forum,

The economic meltdown in 2008 has made it essential to change the way we look at economics.Β In this short video Brian Arthur explains the inner workings of the complex system:

When we study economics we are taught that the markets are perfect and correct themselves. But that approach proved to be wrong when Lehman Brothers collapsed. Economists hence had to start looking at how we approach economics in a world that is not orderly.

Events can multiply swiftly

Brian Arthur, as opposed to many economists, don’t believe the world is orderly. According to him, standard economics leave out a lot of issues . Complexity economics consequently looks at the same world from a much broader context that include what’s not perfect and allows the kind of domino effect that happened when Lehman Brothers collapsed.

The Eurozone didn’t balance out

The current crisis in the Eurozone shows that the belief in economics that everything balances out is wrong. The fact that Germans are well off didn’t spread to the rest of the member states. Brian Arthur believes that it’s time to stop looking at the economy as a perfect machine and accept that it’s complex, alive and vital. That will enable us to adjust and re-architect economics which will be beneficial.

Do you agree with Brian Arthur that complexity economics will enable us to make the economy perform better? Would such an approach have enabled us to foresee what would happen when Lehman Brothers collapsed? Would the Eurozone be in better shape today if it had not been presumed that German affluence would spread to the rest of the member states? Is it time for economists to stop presuming that the markets are perfect and will correct themselves? Would you like economics to be re-architectured to take imperfection into account? Or maybe you believe that the markets are perfect and the economic crash in 2008 was just a one-off?

Video & Picture: World Economic Forum

56 thoughts on “Is the economy complex and evolving?

  1. I very much agree with William Butler above. It’s refreshing to hear the ideas of a man such as Brian Arthur, who both expands his view of economics and explores its nature beyond the box.

  2. After what happened in 2008 it would be naive to think the markets were perfect, nothing is. Hopefully much has been learned since then and we can adjust accordingly as we see the economies in other countries move and flow. Everything we thought about the economy before 2008 needs to be reevaluated to avoid a repeat of that mess.

    1. Exactly. Truly wish that politicians, not least in your country, would pluck up the courage and stop implementing Milton Friedman's version of economics. But unfortunately it's like a religion for his followers so it's hard for them to break the habit.

  3. Any reasonable model, on economics or otherwise, needs to take imperfection into account. Nothing is ever “perfect.” Black and white thinking does no great favors to anyone.

  4. I am not highly knowledable in economics to provide an argument. I do know that the economy is ever changing and we are still bouncing back from the crash in 2008. Just look at house prices in the UK, specifically London. House prices are just not comparable to average salaries.

  5. I don't believe for a moment that markets are orderly and rational, Catarina. They are subject to the same 'butterfly effect' as most things in life. While they might have appeared more orderly decades ago, that was really more about the relative slowness of reaction to events due to slower information flow.

    In today's hyper-connected, always-on, instant-info world, reactions are instant and further complicated by having both human responses and computer-programmed responses acting alongside each other, so exaggerating the effect of almost any piece of information.

    Just as global warming will exaggerate the intensity of storms, so will this information glut exaggerate the response of the markets.

  6. There are so many variables with predicting economics. It is true an economic model, left by itself would be self correcting. However, that is never the case. If you take one country, the tries to modify, or manipulate that model, then it is no longer self correcting and benefits some, and not others.
    As for the EU, not all countries have the same economic requirements. Some countries might benefit from keeping their money going overseas, another country might benefit more from tourism, these two conflict.
    I think any model for economics is very limited in how it predicts the future. Since it is evolving and changing by the time you create a economic model for forecasting, it is then obsolete.

    1. Absolutely. That's why our global world have to move away from Milton Friedman's version of economics. Pity that the top 1%, not least in the US, use their influence to lobby politicians to keep on implemeting his ideas. The Euro was doomed from the beginning because of what you say. One of my exes was a top guy on Wall Street and the City of London and an advisor to the governor of the Bank of England. They understood that and, as you know, Britain did not join the Euro.

  7. I was really interested in this video and like his approach to complexity economics. It seems as though too many of us, including economists who should know better, have tried to use simplistic models to explain complex changes They don't work. And they also tend to see economic trends as always recurring. Thus they can't deal with changes, with ways in which the downturn in 2008 was different that than the downturn earlier in the decade for example.

    1. Used to personally believe in Milton Friedman's approach to economics. But in 2008 I realized that his theories were wrong and have never looked back. Pity that most people still listen to the ideas that come out of the University of Chicago.

  8. Interesting post, Catarina. Since 2008, I noticed the economics of the different countries are more influenced by one another than ever before. I agree with Brian that after 2008, we need to look at the other countries economics to really see the big picture of the world economics and determine what to do about it. I hope economists are starting to understand this more.

  9. I don't know anything about complexity economics to have an opinion on whether it would enable us to make the economy better. I do know that the world is complex and many things often interact together to cause events and outcomes. One aspect of economics is using historical trends to predict the future. I think that means it has to be continually re-architectured with an open mind, not using preconceived theories to interpret events.

  10. Glad, and not surprised, we agree, Patricia. The top 1% in the world is not letting go of Friedman's version of economics. There will however at some stage come a time when they will be forced to. Maybe because of the number of refugees being so astronomical that they are losing money? Something needs to happen that have a really negative impact on their wealth.

  11. I never thought of economics as a 'thing' but rather considered it a subject manipulated by people and greed. Germany may have a strong economic base build on strong fiscal management making the Euro strong but other European nations have not applied the same economic principles or mindset and that is why they are in trouble, defaulting on debt and weakening the Euro. I think it would have been better if, with the implementation of the Euro, they also had all participating countries agree to the same fiscal policies.

    1. Economics are a variety of different ideologies. The father of capitalism, Adam Smith, was not greedy. On the contrary, he emphasized the importance of taking care of your fellow man. Milton Friedman's version of economics though is pure greed. And it's the latter that's a problem on a global scale. The concept of the Euro was flawed from the beginning because economies as different as Germany and Greece can not be treated the same way. The reason the Euro was created was purely emotional because former German Chancellor Helmut Kohl wanted to celebrate the union of Eastern and Western Germany to one country.

  12. How sad to know that this advice may not being heeded. While I'm fairly confidence many everyday citizens, USA and worldwide, might be changing their personal approach to their household economics, our political leaders are still scheming for themselves, and likely don't care (let alone realize) that events are going to repeat themselves. Isn't there a saying, "history repeats itself'?

  13. The phrase that history always repeats itself comes to mind here. That doesn't mean it is an exact replica. However I think that perhaps we have reached a time when we are changing faster than those who can evaluate those changes. Technology is just one factor that has changed the marketplace faster than that marketplace has been able to adjust. Our so called experts have fallen short in their knowledge of how to make appropriate adjustments to these changes. It is both interesting and a bit scary to see what will happen going forward. "Is the economy complex and evolving?" Yes is the short answer.
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    1. it's definitely complex and evolving, Cheryl. It's just that mainstream economics have decided it's perfect and correct itself. Even though the recent economic meltdown proves that's not the case they keep on presuming it is:-)

  14. I’m glad to see discussion on whether there is a standard or, even less achievable, a perfect model for economics. I doubt that equilibrium is likely to appear after a disruption. I agree that economies are imperfect and complex and that we should react to the current variables.

  15. It’s not a perfect world, i.e. economics wouldn’t be either. To think otherwise is foolish. We have seen the consequences of that. If we can learn to adjust as the economics of different countries move and flow I do believe it will be better of all concerned. I realize that isn’t an easy task but it would certainly be easier than facing another melt down. Just my thoughts. πŸ™‚

    1. True that the economy is constantly changing, AK. But the economic theories coming out of Chicago are fairly new. Unfortunately they don't work but are still implemented all over the world. Sad but true:-)

  16. Interesting discussion, Catarina. With so many moving parts to the economic puzzle, it would be difficult to make a case for the blind faith approach of a 'standard' economy – where everything will happily work out in the end – versus the 'complexity' argument Brian Arther eloquently makes. As forewarned by Churchill, "those who fail to learn from the past are doomed to repeat it."

    1. Absolutely, Derrick. But economic theories coming out of Chicago is of the opinion that markets are perfect and correct themselves. And despite the fact that what happened after Lehman Brothers collapsed show they are not governments all over the world keep on implementing ideas coming out of Chicago.

  17. Catarina – I agree that economy is complex and evolving all the time. Living in UK we tend to blame the Euro and dollar for the fluctuations in the economy and I suppose the Americans blame the pound and euro. It’s amazing that some of us have survived through all the changes and still manage to live a good life compared to the people living in the third world.

    1. Mina, the economic meltdown wasn't caused by the currencies but Lehman Brothers collapsing and the realisation that the markets are not perfect and do not correct themselves.

  18. Hi Catarina,
    I really enjoyed the video. I think the starlings are a perfect example of economic complexity, in terms of fluidity and fluctuation in the markets. I agree with Brian Arthur, and it takes genius like his to inspire people to adopt methods that allow the issues to be examined from many perspectives.
    Old school status quo is broken and dysfunctional.

    Kind Regards,
    Bill
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  19. I basically agree with Jacquie's comment – we need to consider the human factor. That's really what was behind the Lehman Brothers collapse. As far as Europe goes, my aunt in Holland thinks many of the economic problems in Europe are connected to the implementation of the Euro. When that was done, a standard economic policy for all of Europe should also have been implemented but with each country in charge of their own economic policies, there was bound to be chaos. Will we learn moving forward – I have my doubts.

    1. Lenie, unfortunately Lehman Brothers didn't collapse because of the human factor. It collapsed because of the neo liberal belief that markets correct themselves. But as we found out, they don't. It's correct that the Euro is the main reason for the problems in Europe. Add to that successful lobbying by banks in Brussels as well as austerity and you will understand why fascism is beginning to be popular in Europe.

  20. I don't know enough about economics to really speak to the issue with any insight, but it seems a bit naive to assume that any system (artificial or natural) will remain the same when change is a natural and unavoidable part of how exist. Just goes to show how strong personal paradigms can be. Hard to believe that in the face of overwhelming evidence people stick with theories or approaches that no longer make sense.
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  21. "The world is inherently not so orderly, not so perfect."

    It is very hard not agree with what Brian is saying, when you look at economics as a whole. We must keep in mind that it is run by people. People are by far not perfect, and tend to react or in certain cases overreact to things based upon their own beliefs.

    Until people recognize that a change is necessary, the cycle of ups and downs and overreactions will continue.

    1. True, Michele. Pity the doctors keep on giving the patient the same medicine over and over and are surprised it doesn't work. Or maybe it works according to their plan?:-)

  22. I completely agree with Mr Arthur and also am part of his camp in terms of thinking about the economy. It does seem unrealistic these days that anyone could continue with the thought that the world economy is a perfect well oiled machine given the many environmental catastrophes, political catastrophes, and corporate philosophical catastrophes that have occurred since the bubble bust in 2001.

    1. Glad you agree. But reality is that neo liberalism has the world in a firm grip. Any ideas coming out of The Chicago School of Economics is likely to be implemented.

  23. I agree with Brian Arthur that complexity economics will enable us to make the economy perform better. Spain and Italy, and Greece had built up debt from companies and like the US mortgage borrowers where interest rates had fallen So the debt was helped from the imports of these countries where Germany came out on top. Just like the US the wages went out of hand but the Germany unions keep those in track. The other countries don't have the strength or the discipline of Germany, and understanding them as a whole will make the difference

    1. Yes, Arleen, Brian Arthur is correct about the complexity of the economy. But what happened in Europe is mainly down to implementing the Euro. If all those countries had still had their own currencies they would not have the problems they have today.

  24. It would be difficult to NOT agree with Brian Arthur as indeed history continues to show us that economies are complex. It is high time that economies are not perfect or self-correcting. Nothing is life is orderly…why would any economy be different from the humans who run them?

    1. Yep, Jacqueline. But despite knowing that neo liberalism doesn't work politicians world-wide keep on implementing those principles. Maybe they are trying to prove Einstein wrong when he defined insanity as doing the same thing over and over and expecting different results:-)

  25. Love this post Catarina. It's time not just for economists to look at the "real world" differently but for all of us to do this. It's hard to say, what would have been. And it seems to be as hard for us to say what could be. But when Arthur says to look at things in a way to rearchitect (I like that word) going forward, if we just LOOK at the economy differently, that is an easy step and we can start changing.
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    1. Glad, but not surprised, you agree with me, Pat. Pity governmments world-wide keep on implementing policies based on the kind of economics that made the world economy collapse. They know, beyond doubt, that those theories are flawed but keep on pretending, or hoping, they will work.

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