How has this all been accepted
or not accepted by the mainstream economics community?
For me, personally, that’s a long
story. I think all I can do is
I feel strongly
personally about it, but rather than go into history, I’ll simply
say that
the field of economics
has long thought this way, of seeing the economy
as evolving and complex, but it was never able to mathemetize
that point of view, so what became
accepted as theory in the 20th century was this
stasis, and equilibrium, and all
problems being extremely well defined, and all
the agents in the economy being deductive geniuses
who can solve these well-defined mathematical problems.
Now, with these new tools, we’re coming back to an earlier
view of economics, where it’s evolving and changing
and perpetually giving new patterns, more like the game of life
if you like, where you see quite new patterns
and yet these are structures you can
isolate and study. Economics
is having a bit of a difficult time
absorbing this. I would say the people who are
middle aged and trained in the mainstream are
intrigued by it, but they’re not quite sure whether to accept it or not.
People under 30, graduate students, postdocs
are wide open to these ideas, and there’s a lot of work
getting done in that. The other thing I want to point out is
that the crash in
2008 helped this point of view enormously.
We had to rethink a lot of
sort of, ‘truths’, quote unquote. Yeah, that’s right.
The Economist magazine pointed out that
the US economy wasn’t the only victim
of the Wall Street meltdown. Neoclassical or standard
economics was another victim, and I think that’s probably
too strong a statement, because standard economics will be around
for a long time. It’s well
understood, it may be something of a simplification, but
it’s got a benchmark and it works fairly well.
After 2008, 2009
a lot of the assumptions were questioned, and rightly so.
People began to say, well, is it true
that all these interactions among economic agents
all the little investors are perfectly independent, therefore
we get normal distributions and normal deviations
as we’re in the financial models, of course
that’s not true. And people should be aware that
financial system was set up of networks of banks
and other financial institutions, and
if one bank got into trouble, that could affect another bank in the node
next to it, which could affect other banks
and so you get propagations of difficulty
or propagations of distress spreading across
those networks, so
for quite a long time, for the least 3 or 4 years, 5 years,
economics has been open to different points of view
for the first time, I would say, in decades.
One of the interesting points of view
is behavioral economics, and that’s asking
actual people, consumers, or
people who run companies, what are you likely
to do in such and such a situation, how
would you react in this or that situation
and it’s accepting that not all problems in economics
are well-defined logical ones -- And that people are not
necessarily rational decision-makers -- Exactly.
So we’re backing off from those assumptions as well,
and so economics I think is making major moves
to encompass reality, and
we’ll never finally get there, but
rather than say, imagine a perfect world,
where people are perfectly deductive, problems are perfectly defined,
everything is perfect, everything is in balance,
we’re saying imagine an organic world where the types
of situations I’m facing are not
that well defined, how do people behave and how do they interact
and what sort of patterns would we see. I keep coming back
to patterns or structures, and I’m sure that’s a theme
for your course. Right, we talk about emergent phenomena
as being patterns. That’s right.
So I’m sitting here in Silicon Valley, I'm
in Palo Alto here, and if I work for a high tech company
which I do, PARC, if we launch
some product, it’s not that well defined,
we don’t know how the product will work technologically
two years in advance, we don’t know who will enter that space
we don’t know what our rivals are going to do, we don’t know how the government will
regulate this or that, yet we have to make decisions.
So economics is becoming very aware that
it’s not just solving --
consumers or firms are not just solving well-defined problems
the big thing is figuring out what the problem is
in the first place, or what the situation is in the first place.
And we can start to think about that, and model that
as well. I want to make one other point,
and say this, that there’s an idea
out there that complexity economics
is really doing economics the same way as
before, but having -- doing agent-based modeling
and throwing a computer at all of this, no, that’s not the point.
The point is to see that
agents, the players in the economy, are creating
some situation that they may always have to react to
that changes their behavior again, that changes
the situation or the ecology that’s mutually created
and have to re-react. All of that may never settle down
perpetual novelty -- In a constantly
highly dynamic state, instead of at an equilibrium. Yeah,
and so we’re doing nonequilibrium
economics and beforehand a lot of people
would have said well we can’t do that, you know, you can’t capture
it’s too complicated -- You can’t do the math -- Yeah.
It’s too complicated to capture in pencil and paper. Maybe
But again this is like the game of life or it's
like some very fancy or weird cellular automaton. What
you can do is study outcomes, look for patterns,
isolate the phenomena that you want to see
and then make toy models, or make very particular
models that you can study, possibly using mathematics, sometimes
using the computer. So it’s not just throwing a computer
blindly at it and simulating, it's
much more using many different tools
including computation to study
phenomena that might arise and then maybe melt away
it’s -- one
analogy that fascinates me is that
from afar, the sun in the solar system
the sun looks as if it’s in equilibrium,
92 million miles away, or whatever it is, and
but if you get up close, or if you look closely at the sun,
you’ll see that there’s all sorts of phenomena happening
temporarily, there’s x-ray bright spots, there’s magnetic
loops, there’s plasma ejections, all
kinds of things are bubbling and boiling and going on
The economy behaves like that. Maybe grossly it looks
as if it’s in some sort of equilibrium, but there’s all kinds of
bubble and boil phenomena in the economy, and as it happens
those are the very phenomena, those are the
things that people make money out of, those are where the
investments are going, those are where the new technologies are launched.
Those are where all the action is, and that’s where all the trouble happens.