Equilibrium is a basic assumption built into most economic models. It allows toy models to respond to external shocks…and find a new equilibrium. “But no matter how much these models are perturbed, they cannot generate the strangeness of economic events seen in the real world,” writes The Economist, in a feature about complex systems approaches to economics.
Read the article in The Economist (April 4, 2019.)
"Complexity Economics" is SFI's earliest research program, intiated in 1987 when Nobel prize-winning economist Kenneth Arrow joined scientists at the Institute to see how a complex systems approach could benefit economics research. According to External Professor W. Brian Arthur, who helped to pioneer the program, it could become the new core economic theory.
This approach eschews the assumption built into many economic models that humans act rationally and a purely self-interested, but rather “reason with limited information and follow rules of thumb. Those rules evolve as people learn from and adjust to the world around them.” And from the myriad, eovling interactions between the billions of people on the planet emerge complex structures like firms and political institutions.
The article goes on to cite work by SFI External Professors Arthur and Ricardo Hausmann. “Complexity has yet to up-end economics. It still provides more metaphors than results,” writes the magazine. “But it offers new approaches to hard questions.”