The Macro-Institutional Delimitation of Economic Complexity

A while back, Brian Arthur of the Santa Fe Institute wrote a short piece on complexity economics (h/t Tom Hickey). I find much of the work Arthur and others have done on increasing returns, path dependence and related phenomena very interesting. At the same time, I think the basic outlook of complexity theory can be (though need not be) problematic if its emphasis on micro-level behavior is allowed to obscure the delimiting role of macro-level decisions, institutions and the socioeconomic system itself. The outlook, when this occurs, can become akin to the way economists traditionally (though less so now, at the cutting edge) depicted money as emerging spontaneously out of barter rather than recognizing its likely historical emergence in coercive debt relations and the central role played by the state, particularly through its imposition of tax and other obligations denominated in a state money. Certainly, those debt relations came out of prior micro-level and macro-level interactions, but once they are embodied in a society’s legislative and political framework, they significantly shape the parameters within which further behavior, complex or otherwise, plays out.

In the third paragraph of the linked article, Arthur writes:

To see how complexity economics works, think of the agents in the economy – consumers, firms, banks, investors – as buying and selling, producing, strategizing, and forecasting. From all this behavior markets form, prices form, trading patterns form: aggregate patterns form.

Arthur’s piece is only short, so not everything could have been covered, but I find this brief description of the economy quite telling. There is no state. Or, at least, the state is too insignificant to mention. There are no institutions. No system as such. There are just patterns that emerge out of spontaneous behavior.

Above all, in this description, the macro emerges out of the micro, and the (likely to be significant) impact of the macro on the micro is left out of view.

If we consider actual economies, this picture seems quite removed from reality. How, to take just one example, did we get suburbia? Was it the outcome of a discovery process of individual agents acting as if independently but with interdependent effects? One day they paused to take a look around and realized they’d created suburbia?

More likely, a relative handful of institutionally powerful actors, with influence inside the corridors of state power, took a decision with the intention to create a mass market for new housing and automobiles, with flow-on demand created for a variety of other consumer durables.

Within the overriding framework of suburbia, there was plenty of room for individual discovery processes to take place. But to suppose suburbia emerged out of spontaneous micro-level behavior would seem farfetched. The decisions taken were almost certainly deliberative, involved a rather small number of individuals and required exertion of state power to put in place. Once the tracks (roads) were laid down, the trains (demand for new housing, automobiles and household appliances) followed. And consumers “spontaneously” discovered a longing within themselves for these things.

The very basis of path dependence – a sensitivity to initial conditions – points to the critical role played by those who set the parameters within which spontaneity is given free play. The formation of those parameters is very far from a spontaneous micro-level activity. It is deliberative, planned and applied at the macro level with the intention of delimiting micro-level behavior, sometimes within quite narrow confines.

It is similar with much of economics.

Does unemployment emerge as the result of the effectiveness of, or interdependencies between, individual actions? No. It is created at the macro level. Job search and matching processes occur within that aggregate constraint, which is imposed by macro-level action.

Is inflation due to complexity of spontaneous behavior? Not really. Regardless of such complex behavior, inflation ultimately depends on macro-level decisions and actions.

Did basic infrastructure or the internet spontaneously emerge? Hardly. The state, with a view to long-term planning, was heavily involved.

The interdependent effects of micro-level discovery processes, which certainly play a significant and interesting role, do so within a framework set in place through macro-level decisions and actions. Within that framework, spontaneity is then free to occur.

I think the most important economic questions concern how to create a macro and institutional framework within which maximal scope is provided for the kind of free (including exploratory) individual and voluntary collective behavior we think should be facilitated or encouraged. In the ideal institutional framework, it would largely be unimportant what patterns of activity actually emerged. After all, those patterns of behavior would be emerging as the result of choices freely made within the framework, as expressions of agents’ desires.

When, in reality, patently negative behaviors are found to thrive within the prevailing framework, that points not only to micro level failures but above all to a flaw in the macro framework that needs to be addressed. Such flaws will not be most effectively removed by waiting for spontaneous changes in behavior at the micro level. The agents whose behavior is most responsible for the negative outcomes might have no personal interest in altering their behavior and might be perfectly satisfied with behaviors or outcomes that society as a whole regards as unsatisfactory. Key changes will be called for at the institutional and systemic levels. Coordination is required.

We can of course say in such a case that the need for macro-level change is revealed by the emergence of unsatisfactory behaviors at the micro level, and that appropriate changes at the macro level will ideally be responsive to, and so be affected by, what is happening at the micro level. But because the micro-level behavior is always embedded within a macro framework, the latter will need addressing.

None of this is to suggest that individual liberty should be given a low priority or that freedom for individual and group expression is not to be highly valued. The opposite is the intention. A central purpose of the institutional framework and macro-level decision-making should be to provide as much scope as possible for freedom of self-expression, subject only to the proviso that as far as reasonable such behavior should not be harmful to others. (I say “as far as reasonable” because not all conceivable types of harm should necessarily be avoided, such as, for example, the offended sensibilities of Amartya Sen’s Prude when learning of Lewd’s freedom to read a racy novel.)

The better the macro framework, the more freedom is opened up at the micro level for socially beneficial behavior and exploration.

We are not enslaved by the collective provision of public infrastructure or the internet. Quite the contrary. These assets dramatically broaden the scope for micro-level discovery and expression.

Similarly, the maintenance of full employment through appropriate macro measures would enable all individuals who desired a job to obtain one, while at the same time enabling the expression of individual preferences over consumption and saving. Only macro policy has the capacity to enable individual saving preferences to be expressed without impacting negatively on the employment prospects of others.

And so on.

Macro policy and macro institutions, appropriately designed, enhance space for spontaneity at the micro level.