NOTES FROM COMPLEXITY AND THE ECONOMY
Conventional economic theory chooses not to study the unfolding of the patterns its agents create, but rather to simplify its questions in order to seek analytical solutions.
Thus it asks what behavioral elements (actions, strategies, expectations) are consistent with the aggregate patterns these behavioral elements co-create?
For example, general equilibrium theory asks: what prices and quantities of goods produced and consumed are consistent with—would pose no incentives for change to—the overall pattern of prices and quantities in the economy’s markets.
Game theory asks: what strategies, moves, or allocations are consistent with—would induce no further reactions to—the potential outcomes these strategies, moves, allocations might imply.
Rational expectations economics asks: what forecasts (or expectations) are consistent with—are on average validated by—the outcomes these forecasts and expectations together create.
Conventional economics thus studies consistent patterns—patterns in behavioral equilibrium, patterns that would induce no further reaction. Econo- mists at the Santa Fe Institute, Stanford, MIT, Chicago, and other institutions, are now broadening this equilibrium approach by turning to the question of how actions, strategies, or expectations might react in general to—might endogenously change with—the aggregate patterns these create . The result, complexity economics, is not an adjunct to standard economic theory, but theory at a more general, out-of-equilibrium level.