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Published April 1, 2020

In April 1987, Brian Arthur, then a Professor of Human Biology at Stanford University, was walking toward his office. He ran into a helmeted Kenneth Arrow, the late Nobel Laureate who won the Prize in Economic Sciences in 1972 along with John Hicks, swinging by on his bicycle. Arrow was gathering a group of economic theorists for an upcoming conference at then a small institute in the Rockies – the Santa Fe Institute. The idea was that Arrow’s counterpart, Philip Anderson, another Nobel Laureate who won the Prize in Physics in 1977, would gather a group of scientists. And these two groups would exchange ideas and raise questions that were usually avoided in their corresponding professions.

Word quickly got out after the conference that something exhilarating happened at the young Santa Fe Institute, which was hardly a surprise given the caliber of the economists and scientists attended. Two most notable attendees were Lawrence Summers, 27th President of Harvard University and a former chief economist for the World Bank, and Thomas J. Sargent, yet another Nobel Laureate who won the Prize in Economic Sciences in 2011 along with Christopher A. Sims. The Science Board at the Institute then decided to initiate a long-term follow-up research program: The Economy as an Evolving Complex System. Arthur was asked to direct the program the following year, and he accepted the position since he had a sabbatical coming from Stanford. So Arthur found himself heading to the Rockies in August 1988. At the time, Arthur had been studying and polishing the concept of “increasing returns”– the notion that if a company or group gains an advantage, by any means, it gains further advantage. Increasing returns seemed rare, if not impossible, when Arthur first introduced the concept – it was not part of “mainstream economics.” Arthur had wanted to publish a paper on that topic in 1983. But, several prestigious academic journals turned down his request over six years thanks to the esoteric nature of the concept. Fortunately, the Economics Journal finally published the paper in 1989.  

Over the next few decades, however, increasing returns would become prominent and eventually accepted by many. At the heart of Silicon Valley, tech companies proved Arthur’s wisdom in their competition for the user base. As companies such as Myspace and Yahoo exit the stage, Facebook and Google seize and absorb more users to become the Goliaths in their fields. The rise of Amazon has taken so much space in the retail sector that small businesses are closing due to a lack of competitive edge. The fewer players left in the arena, the fiercer the competition becomes. People have come to realize the values of increasing returns and its applications in the technology sector. “Now this approach is thriving, and younger people are coming along. But the Santa Fe group was the first coherent effort in this area, and laid down much of the approach,” Arthur recalls. Based on the notion of increasing returns, Arthur continued his research and pioneered the field of complexity economics, or “nonequilibrium- economics” as he prefers to call it. The significance of complexity economics is that, pedagogically, it illustrates the workability and credibility of an alternative to existing paradigms of economic studies.

Complexity economics differentiates itself from traditional approaches by emphasizing disruption. “Complexity economics is based on the proposition that the economy is not necessarily in equilibrium,” says Arthur. Over the years, mainstream economists have collaborated with political scientists, physicists, engineers, and people from many other professions. However, economists themselves have not contributed much to economic studies. (Ross 6). The biggest shortcoming of mainstream ideas is that they derive validity from simplifying complex systems and modifying collective behaviors. It seems everything can be reduced to one graph with two curves: supply and demand, wage rate and labor employed, interest rate and loanable funds, and many other relationships. Thus, even with advanced mathematical models and statistical analyses in hand, our general understanding of economics stagnates. Complexity economics, on the other hand, captures the quintessence of real-world economy – uncertainty. “With the economy, agents – whether they are banks, consumers, firms, or investors – continually adjust their market moves, buying decisions, prices, and forecasts to situations,” Arthur explains.

The argument above does not suggest that a more narrow, specific approach to examine economic issues is necessarily detrimental. On the contrary, economists need specificity when they investigate individual behaviors and decisions. Realistically, however, the global economy does not operate in a perfectly harmonic fashion. Such assumptions can be deleterious because errors of all types ensue from falsely established premises. And the bigger the discrepancies between a theoretical model and the reality, the further economists drift away from explanations they seek to justify. If different markets were to run by such equilibria, Wall Street Journal and Bloomberg would probably declare bankruptcy as people would no longer require their content and services. A market in equilibrium becomes static, which implies that news becomes nonexistent, and market data remains unchanged. Mainstream economics ideas are not wrong; they are not applicable. Hence, the necessity of a paradigm shift in economics.

Complexity economics offers a compelling theoretical framework insofar as to articulating the significance and consequences of worldly events. However, complexity economics has yet to be integrated into mainstream economics fully. But, a particular type of excitement compensates for the prolonged period of integration – the freedom to explore uncharted water and supply one’s analysis without being reprimanded or restricted by well-established and revered doctrines. “It takes about a generation or more for any science to change…By that measure, complexity economics still has a good twenty or thirty years to go,” says Arthur. If the trailblazer himself does not worry about the future, nor should we. After all, behavioral economics, which first received people’s attention in the 1960s, has just become a branch of the mainstream economics and secured its position in economics departments across universities.

To expand the above argument further, Arthur sees the development of complexity economics as an inevitable event rather than a “temporary fad” as he describes it. Interestingly, this belief comes from Arthur’s understanding of technology as opposed to economics. Currently a Fellow at the Center for Advanced Study in the Behavioral Sciences at Stanford University, Arthur is studying Combinatorial Evolution. Summarily, Combinatorial Evolution suggests that the accumulation of small and past technologies does not lead to newer and better technologies. In other words, a change in quantity does not necessarily lead to a change in quality. In his research, Arthur discovers similar patterns in many other sciences, such as physics, chemistry, geology, and mathematics. The nature of perpetual discovery inherently contradicts that of an orderly and mechanical world in eternal stasis. As such, the study of economics should and will become an organic one, a discipline that evolves continuously. And pupils of economic studies certainly should carry the torch forward and pass on the spirit of innovative and critical thinking.   

Though Arthur pioneered complexity economics, he does acknowledge a specific branch of the mainstream economics – behavioral economics, which, as aforementioned, first rose to prominence in the 1960s. Behavioral economists concern themselves with the effect of psychological and cultural factors on economic decisions. In short, it is all about decision making – an avenue of investigation through which people can make sense of incidents, uplifting and disheartening ones alike, they see in the world. And above all, what can people do to improve, if not correct the outcomes of those incidents (O’Donoghue 2). For instance, why do people prefer Coke to Pepsi or vice versa? The answer to that question and its implications carry tremendous potential for restaurants, fast food chains especially, with beverage stations. Arthur believes the salient point is to “make sense” because the premise supposes people do not move along predefined paths; people adjust their behaviors by reinforcing strategies that have worked well in the past. In other words, actions performed are driven by “weighted-experiences” rather than assumed rationality (Camerer 3). “So this brings us into the world of cognition, and of behavioral economics,” says Arthur. 

Truthfully, many people, some academics included, view economics as a subject as a closer relative to or a branch of philosophy – a discipline that has departed from reality (Foster 5). And this view enjoys some degree of popularity. When the utterances of economic ideologies overwhelm candid, crucial discussions about the purpose of Economics – to understand events, trivial or magnificent, happening around us – the subject begins to lose its pertinence. One might argue that economics has yet to lose its relevance. Economics remains a viable and highly favored subject pertaining to job prospects. Many estimates project the demand for economists to grow at approximately eight percent from 2018 to 2028, a faster-than-average growth. Moreover, the median wage for an economist sits comfortably above one-hundred-thousand dollars (Bureau of Labor Statistics). The above line of logic, coupled with statistics, is perfectly sound and valid. However, embracing complexity economics and abandoning mainstream economics are not mutually exclusive. Instead, complexity economics takes us from equilibrium to nonequilibrium; it extends the reach and scope of economic studies. Overall, complexity economics should be an intellectually widening experience for students and academics alike. Thus, Arthur responds to the question “why complexity economics” by saying “this view gives us a world closer to that of political economy than to neoclassical theory, a world that is organic, evolutionary and historically-contingent.” 

Considering Arthur’s response, we note two principal aspects of education, in any discipline, namely understanding the structure of the curriculum and developing an intuition for the “so what” question. Therefore, we now focus our attention on the pedagogical paradigms in economics. Amazingly, a two-part communication from a vintage edition of The American Economic Review provides some fascinating insights. In March 1938, Frank W. Tuttle, then a professor at the University of Florida, shared his insights, as part of an ongoing discourse initiated the year before, into the content of economics courses for college freshmen. Thus far, the main idea was substituting what had hitherto been a rather dry, elementary economic history course with a social survey course that would draw upon other social sciences. Tuttle seemed to support the approach of teaching students one system of economic analysis. Only a handful of sophomores were ready to delve into the mysteries of development of economic thought since many lack both the interest and the power of discrimination to benefit from studying more than one school of thought (Tuttle 106). However, many agreed that presenting (note its difference from teaching) a wide array of economic thoughts is never superfluous. Students who are better equipped with a robust theoretical foundation are more capable of evaluating different theories.

In September, E.F. Beach, then a professor at M.I.T., in response to several misgivings about Tuttle’s comments, contended that elementary economics courses should teach a multitude of economic theories to students. If we recall, only a few paragraphs ago, that people behave according to their past experiences, we may observe that if a student understands only one theory as the explanation to a particular phenomenon, that one theory will quickly become the theory. In other words, teaching students only one theory risks cultivating an implicit bias as students become more reluctant to accept different perspectives (Beach 515). The lack of intellectual diversity will limit students’ capacity to critique economic thoughts, thereby hindering students’ ability to discern contrasting ideas. Ultimately, students will fail to realize that a single idea does not constitute the whole truth. As such, complexity economics should be a welcoming addition to different schools of thought, given its unorthodox approach. Akin to its emphasis on disruption on an ideological level, complexity economics heralds a disruptive force on a scholastic level at a propitious time.

Perhaps for the first time, the proletarians should care about progress within Academia. Elites from Wall Street and Washington D.C. and Academia are the primary beneficiaries of globalization, ergo the advocacy for it. However, we have seen a surge of populism across western societies – people taking their rage to the streets and expressing their resentment of the elites sometimes in demonstratively violent manners. But the bitterness and frustration do not come as a surprise. Economists working in Academia supplied and supported many decisions that led to deregulations of the banking industry and caused, at least partly, the Financial Crisis in 2008, which enriched the bankers and hedge fund managers but exacerbated finances of ordinary people. And complexity economics, albeit a recondite subject, shines with all its might. As we witness the unfolding of an increasingly globalized and perplexing world, complexity economics could provide a refreshing perspective on many pressing issues such as combating income inequality and making substantive structural changes to the underregulated financial market. Traditional mainstream economics can no longer provide sufficiently accurate and informative responses to a web of interconnected and interdependent questions situated in a broader social and political context. Complexity economics, by comparison, suggests that even if we take into consideration factors such as endowments and preferences, we cannot predict the path of the Economy with absolute confidence and certitude (Arthur 18).

Thus, the rise of complexity economics bears extraordinary importance. At first glance, Arthur seems to dispute widely recognized and unchallenged theories and assumptions. Upon further scrutiny, we find him outlining a new landscape where latitudinarians celebrate the unbounded spirit of creative but critical thinking. As for the protesters, they are not attempting to overthrow the study of economics altogether. They are doing essentially what Arthur is doing – trying to make sense of why the economy has not worked in the ways delineated by neoclassical economists and hopefully finding an answer along the way.

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