Monday, July 8, 2013

Complexity in Economics

The subject of my deep interest are Complex Adaptive Systems and the way this theory has developed over the years to be applied to a variety of subjects and situations. have recently become somewhat more informed on the subject of the recent global economic crisis and how it has been a breaking point for the redefinition of the complete economic system. The 2008 economic crisis has had such a deep impact on world economy, that after over 4 years of having passed through times of deep turmoil and uncertainty, I have found no conclusive evidence that any nations has taken any specific, solid action towards even implying that this will not happen again.

In fact, the foundations of the current economic system have been maintained as if nothing had happened. Gruesome assumptions which became clear in a somewhat pathetic fashion, were well reflected by Alan Greenspan, Head of the Federal reserve at the time (2008), when declaring in front of the US congress, stating bluntly that he did not anticipate institutions or private companies would proceed in any other direction than in the utmost benefit of its shareholders. He at that hearing accepted he believed in the markets and their supposed power to restore equilibrium, condition which never arrived.

If we consider Mr. Greenspan to be one of the most respected and powerful men in the world economy at the time, this statement is baffling. How could he not have seen this crisis coming? In the aftermath, from Chile, a corner of the world that has followed the Monetarist doctrines faithfully,and a country which has diligently opened up its economy to the world according to the school of Chicago's gospel, I can respectfully say that the due reflections on the real causes of the crisis have not yet been carried out. The crisis has somewhat been left behind, maybe because we did not experience it first hand, and due to soaring commodity prices and increased internal demand due to 2010 earthquake reconstruction activities.

Our main universities are still far away from having an independent knowledge generating process, and have since the time of the military dictatorship, been in charge of producing generation after generation of economists who firmly defend the dogma of the free market economy, without so much as a thread of doubt regarding the foundations of the doctrine. The reasons for this may be multiple, such as a high percentage of Catholicism in the country, the effect of a repressive regime in the formation of alternate theories or independent thought, and the overhanging shadow of the US over Latin America, both through international investment as well as in the formation of minds in their elite campuses, minds that have taken, and still hold the main administrative seats in the economic direction of the country and the education policies at Chile's main Universities.

The foundations of the doctrine are clearly shaky, have been for over 50 years, and these weaknesses have been much more evident since the crisis, and even more so after Mr. Greenspan's words before congress. However, Chile apparently has not taken notice so far.

During 2011 I was in my second year pursuing a master's degree in Industrial Engineering at one of the most conservative and traditional universities in the country, the Pontifical Catholic University of Chile. This University was the think tank of the military dictatorship's economic team, elite which was educated mostly at Chicago's school of Business. I will not easily forget a macroeconomics class when, driven by the evident accumulation of assumptions for the construction of the economic model, I felt compelled to ask whether the moral aspect was ever present in the formation of economic policies, since the discussion had got to the point where externalities were being explained as inevitably having to be absorbed and assumed by the community housing the generator of the externality. Additionally, and following strictly the "invisible hand" dogma, this externality generator only thought about what maximized his own position.

How could this be regarded as the intention of an economic model which is there to maximize the well-being of society? Clearly there were some big winners and some big losers, and in that aspect, following my own experience when confronted with situations where great inequality was caused by my doing, a sense of social responsibility (ethics), I considered also drove actions.

Much to my dismay, my question was quickly discarded by the professor, a middle-aged economist with the usual credentials for professor at the university, a PhD at a US university, many years of teaching experience and little to no published papers. His argument was simply that the ethical question was not something relevant at the level of policy making, where an ethical process was expected, and rather the ethical controls were mainly applied to the organization, the middle management and operators.

Well, that is just great, i thought to myself. What I carried out with me that day was the deeper conviction that the ethical aspect of business was being ignored by those who needed it the most, and this attitude of no ethics for me, but indeed to those who work for me, is something that can be felt at the worker level as actually widespread in the Chilean idiosyncrasy.

I have therefore welcomed the real-world economics review as a fruitful source of fresh thinking in regard with the economics which affects the people on the street, and urge anyone interested in educating him/herself into alternate ways of thinking about the society that should be built through the knowledge of relevant economics, to investigate further, keep a close watch over the World Economics Association (please note how suspiciously little information can be found in internet regarding this organization) and begin to take part in the discussion.

What does this have to do with Complexity? Well, the economy can also benefit very much from having a Complex adaptive system model approach, proposal still in a nascent state, but which has been explored so far by researchers such as Dirk Helbing in articles such as Rethinking economics using complexity theory .

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