| It's the Economics Model, Stupid
"To them that hath shall be given"
--King James Bible
Brian Arthur was among the first economists to recognize that modern
economies are complex systems that at times may be governed by the law
of increasing returns. In a 1999 article for Science, Arthur notes
"...standard economics usually assumes diminishing returns. If one firm
gets too far ahead in the market, it runs into higher costs or some
other negative feedback and the market is shared at a predictable,
unique equilibrium. When we allow positive feedbacks, or increasing
returns, a different outcome arises....
"The outcome actually reached is not predictable in advance;... it is
not necessarily the most efficient economically; it is subject to the
historical path taken; [and] while the companies may start equal, the
outcome is asymmetrical." (Complexity and the Economy: Science, 2 April
1999, 284, 107-109)
Interestingly, Arthur's ideas on increasing returns, developed in the
early 1990's, were then shunned by most US economists. "I could talk
about these ideas in Caracas, no sweat whatever. I could talk about them
in Vienna, no sweat. But whenever I talked about these ideas in the
United States, there was hell to pay. People got angry at the very
notion that anything like this could happen." (Complexity: The Emerging
Science at the Edge of Order and Chaos; Mitchell Waldrop, Touchstone
Books,1992.)
Things are changing though. Arthur argues that Complexity economics is
more general than static Neo-Classical economics, and that the new
approach is making itself felt in every area of economics, including the
theory of money and finance, economic history, the evolution of trading
networks, the stability of the economy, and political economy. "It is
helping us understand phenomena such as market instability, the
emergence of monopolies, ... [and] the persistence of poverty...".
(Science, 2 April 1999, 284, 107-109). Could it be that our entrenched
Neo-classical economics model has obscured these phenomena?
Rodger Herbst
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