“The Microeconomics of Complex Economies”

by Sebastian Benthall

I’m dipping into The microeconomics of complex economies: Evolutionary, institutional, neoclassical, and complexity perspectives, by Elsner, Heinrich, and Schwardt, all professors at the University of Bremen.

It is a textbook, as one would teach a class from. It is interesting because it is self-consciously written as a break from neoclassical microeconomics. According to the authors, this break had been a long time coming but the last straw was the 2008 financial crisis. This at last, they claim, showed that neoclassical faith in market equilibrium was leaving something important out.

Meanwhile, “heterodox” economics has been maturing for some time in the economics blogosphere, while complex systems people have been interested in economics since the emergence of the field. What Elsner, Heinrich, and Schwardt appear to be doing with this textbook is providing a template for an undergraduate level course on the subject, legitimizing it as a discipline. They are not alone. They cite Bowles’s Microeconomics as worthy competition.

I have not yet read the chapter of the Elsner, Heinirch, and Schwardt book that covers philosophy of science and its relationship to the validity of economics. It looks from a glance at it very well done. But I wanted to note my preliminary opinion on the matter given my recent interest in Shapiro and Varian‘s information economics and their claim to be describing ‘laws of economics’ that provide a reliable guide to business strategy.

In brief, I think Shapiro and Varian are right: they do outline laws of economics that provide a reliable guide to business strategy. This is in fact what neoclassical economics is good for.

What neoclassical economics is not always great at is predicting aggregate market behavior in a complex world. It’s not clear if any theory could ever be good at predicting aggregate market behavior in a complex world. It is likely that if there were one, it would be quickly gamed by investors in a way that would render it invalid.

Given vast information asymmetries it seems the best one could hope for is a theory of the market being able to assimilate the available information and respond wisely. This is the Hayekian view, and it’s not mainstream. It suffers the difficulty that it is hard to empirically verify that a market has performed optimally given that no one actor, including the person attempting the verify Hayekian economic claims, has all the information to begin with. Meanwhile, it seems that there is no sound a priori reason to believe this is the case. Epstein and Axtell (1996) have some computational models where they test when agents capable of trade wind up in an equilibrium with market-clearing prices and in their models this happens under only very particular an unrealistic conditions.

That said, predicting aggregate market outcomes is a vastly different problem than providing strategic advice to businesses. This is the point where academic critiques of neoclassical economics miss the mark. Since phenomena concerning supply and demand, pricing and elasticity, competition and industrial organization, and so on are part of the lived reality of somebody working in industry, formalizations of these aspects of economic life can be tested and propagated by many more kinds of people than the phenomena of total market performance. The latter is actionable only for a very rare class of policy-maker or financier.

References

Bowles, S. (2009). Microeconomics: behavior, institutions, and evolution. Princeton University Press.

Elsner, W., Heinrich, T., & Schwardt, H. (2014). The microeconomics of complex economies: Evolutionary, institutional, neoclassical, and complexity perspectives. Academic Press.

Epstein, Joshua M., and Robert Axtell. Growing artificial societies: social science from the bottom up. Brookings Institution Press, 1996.

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