Re-Formation of Economies
In a previous article titled Complexity Economics, we covered the understanding of an economy and complexity’s philosophical approach to the economy. We understood that elements of the economy reacting to the patterns they create and form ever different patterns. Let us now shift our focus to the formation of economies. The economy continually creates and re-creates itself, and it does this by creating novel elements – often novel technologies and institutions – which produce novel structures as it evolves. How this the economy form itself and change structurally?
To understand this, we must look at how technology constructs itself and evolves over time. Technology has been considered by many as one of the most important agents of change.
The main stream view looks at technology only from the lens of the production function where output increases with the same or fewer amount of inputs being used. This creates wealth which is again put back into production. As newer technological changes enter, this process is further enhanced. Thus, we shift from one equilibrium to another. This puts technology in the background with output and prices in the foreground.
Complexity realizes that technology plays a critical role and that there is a structure to how technologies arise and enter the economy. It looks at the collection of technologies at a given time and tries to understand how it evolves. Thus, the focus is on how members of this collective come into being, how they create and re-create a mutually supporting set, and how this alters the structure of the economy over time.
Individual technologies can be defined as means to human purposes. These would entail industrial processes, machinery, medical procedures, algorithms, business procedures, organization, laws and institutions. All these are means to human purposes. Technologies are constructed and put together, combined always from parts. This means that they arise by combining existing technologies. The laser printer was a combination of existing technologies – laser, digital processor, xerography, etc.
An economy is a set of arrangements and activities by which society fulfills its needs. These arrangements are the economy’s technologies. Rather than the economy proceeding the technology, here the economy emerges from its arrangements and technologies. This it is an expression of its technologies. It is an ecology of the means of production where technologies are mutually supporting and economically consistent. The formation of economy can be viewed from an algorithmic approach.
i. A novel technology appears as a novel element having been created from existing ones.
ii. This novel element proliferates and replaces existing technologies and components.
iii. The novel element sets up further needs or opportunities for niches for supporting technologies and organizational arrangements
iv. Old technologies and their ancillaries fade away.
v. The novel element becomes available as a potential component in further technologies.
vi. The economy readjusts to these steps with changes being reflects in costs and prices.
The evolution of railways can be viewed from the above lens where it emerged from existing technologies, replaced the old modes of transportation of horse carriages, there was a massive need for inputs such as iron, etc. The old method of transportation faded away. Railways become critical in transportation of goods and services. This was finally reflected in the price. Thus, new opportunities appear as soon as new technologies appear.
This leads us to a never-ending process which always keeps going on. Add this a second layer of new technologies entering in groups in different sector creating new industries, new rules of business, new incentive and organization structures, etc. Each mechanism has a sub mechanism. Thus, we see a much more complex system evolving.
As novel physical technologies enter, novel forms of organization and novel institutions are called for and come into place, and these in turn call forth further new technologies— further methods, organizations, and institutions. Thus, we see this process being continued indefinitely. On a larger time scale, this gives rise to the concept of ‘eras’. We have the railroad era, the digital era, etc.
The important point to note here is that this process is algorithmic and not mathematical. We can see a set of events calling forth other events, but not equations. This is one of the critical differences in approach between mainstream economics and complexity economics.
Thus, having understood the nature of complexity economics, the next question follows: Where is it used?
Economics focuses on two main problems, allocation and formation. The equilibrium approach works well in the allocation sphere. Over the past century, a lot of focus has been given to allocation. The formation problem has been neglected. However, it can find its origins in most economic thought, including the classicals. The general-equilibrium revolution side-lined this sphere of formation and focused on the allocation problem as that was the need of the hour. However, many such as Schumpeter, Hayek and Veblen among others still studied the formation problem.
Complexity can help in some of the most pressing policy problems of our time and create solutions which ensure equity and justice. From the equilibrium approach, many of the underlying dynamics such as exploitation cannot be discerned easily. Complexity economics is still in its nascent stages. Perhaps with more researchers moving into the field, we could see more work coming into the main stream and witness an ear of mainstream adoption.
Why is it important?
There are a few practitioners in critical policy making spaces who do subscribe to this view of complexity. Sanjeev Sanyal is one such person in India. He has used complexity as the philosophical basis for his approach to history of economics. His books such as The Ocean of Churn show how this translates into a narrative form. This is ushering in a new way of understanding our economic history as well as the economic history of the world.
As we start collecting more data on economy, we will need a different paradigm to make sense of this data and derive insights. The Chief Statistician of India, T.C.A. Anant, also made a similar statement recently, referring to the impact of data generated from GST returns on policy making. Another article published here titled ‘GST Policy Implication’ looks at the uses of Complexity economics in understanding the economy using GST data.
-Contributed by Bhargav Dhakappa
Picture Credits: complexitylabs.io