I’ve been reading an interesting, and non-technical, overview of complexity theory as applied to economics, [amazon_link id=”1781951969″ target=”_blank” ]The Rediscovery of Classical Economics: Adaptation, Complexity and Growth[/amazon_link] by David Simpson. As the title indicates, the book looks through the complexity lens – the economy as an evolving, self-organising system –  at classical (as distinct from neoclassical) economics and at ‘Austrian’ business cycle theory. By classical he means not the specific body of thought of the 19th century, but rather the general perspective on the economy as dynamic and in disequilibrium.

[amazon_image id=”1781951969″ link=”true” target=”_blank” size=”medium” ]The Rediscovery of Classical Economics: Adaptation, Complexity and Growth (New Thinking in Political Economy Series)[/amazon_image]

The introduction states:

“Equilibrium theory has focused the attention of academic economists on issues surrounding the efficient allocation of a given set of resources among a number of competing uses at a single moment in time. While such questions have engaged the best brains of at least two generations in a number of intellectual conundrums, it has diverted them from an analysis of those features of a market economy that have impressed themselves on human history.”

Or in other words, the mainstream of economics, with its focus on the moment of equilibrium, along with the assumption of a common stock of knowledge and rational choice, has bypassed the most striking characteristics of actual economies – growth, uncertainty, and human unpredictability.

There are a few other books that serve as good introductions to complexity in economics, such as Paul Ormerod’s very accessible [amazon_link id=”0571197264″ target=”_blank” ]Butterfly Economics[/amazon_link] and Alan Kirman’s [amazon_link id=”0415594243″ target=”_blank” ]Complex Economics[/amazon_link]. The contribution of David Simpson’s book is to link the tools of complexity thinking to a particular tradition in economic thought that has always emphasised growth, uncertainty and the problem of knowledge. Even the thickest-skinned of mainstream economists is probably aware of Hayek’s work on knowledge, or rather the impossibility of knowing everything, and of [amazon_link id=”0415567890″ target=”_blank” ]Schumpeter’s ‘creative destruction'[/amazon_link]. One chapter quotes Paul Krugman saying: “Is the economy a self-organising system? Of course it is!” The problem is that most economists, even if they acknowledge the general point, haven’t been doing that kind of economics – Krugman’s macroeconomics is back-to-the-sixties Keynesian analysis, and happens in a different part of his brain from his 1996 book [amazon_link id=”1557866988″ target=”_blank” ]The Self-Organizing Economy[/amazon_link].

[amazon_image id=”1557866996″ link=”true” target=”_blank” size=”medium” ]The Self Organizing Economy[/amazon_image]

Simpson brings in Austrian economics to consider the business cycle and particularly the present recession. I’m not at all familiar with the Austrian approach, so can’t really evaluate how well it fits into the complexity/uncertainty framework; but the narrative here emphasises the role of technology as the initial trigger, credit expansion in the boom, and the financial causes of the crisis. Simpson writes: “The business cycle carries many of the characteristic signatures of a complex process.” The economy self-organises then self-disorganises.

He concludes: “The marginal revolution of the last quarter of the 19th century had focused attention on the theory of value at the expense of the theory of growth. …. The end result of assuming away so many important aspects of reality is that the theory is not operational. It is impossible to relate equilibrium theory to the empirical processes of an actual market economy. …. Equilibrium theory has reached a dead end.”

My sense is that mainstream economists were already waking up to the irrelevance of much of the post-war work in the subject even before the Crisis. The collapse of the communist regimes, the dramatic impact of technology and globalisation, the steady adoption of behavioural research were all contributing to a shift in the mainstream back towards reality. Events since 2008 have accelerated the move, for all that many economists remain in denial, to the point that curriculum reform is now well under way, as I’ve noted before.

David Simpson’s book is a clear and readable introduction to complexity in the specific context of the history of economic thought, and can thus fill a gap in far too many economists’ knowledge of their own subject. It’s unfortunately a pricey Edward Elgar book, so most readers will need to order it from their library.