Bulletin: Brian Arthur Has Just Invented Austrian Economics

9 October 2013 at 11:48 am 12 comments

| Dick Langlois |

Surprisingly, the following passage is not from O’Driscoll and Rizzo (1985). It is the abstract of a new paper by Brian Arthur called “Complexity Economics: A Different Framework for Economic Thought.”

This paper provides a logical framework for complexity economics. Complexity economics builds from the proposition that the economy is not necessarily in equilibrium: economic agents (firms, consumers, investors) constantly change their actions and strategies in response to the outcome they mutually create. This further changes the outcome, which requires them to adjust afresh. Agents thus live in a world where their beliefs and strategies are constantly being “tested” for survival within an outcome or “ecology” these beliefs and strategies together create. Economics has largely avoided this nonequilibrium view in the past, but if we allow it, we see patterns or phenomena not visible to equilibrium analysis. These emerge probabilistically, last for some time and dissipate, and they correspond to complex structures in other fields. We also see the economy not as something given and existing but forming from a constantly developing set of technological innovations, institutions, and arrangements that draw forth further innovations, institutions and arrangements. Complexity economics sees the economy as in motion, perpetually “computing” itself— perpetually constructing itself anew. Where equilibrium economics emphasizes order, determinacy, deduction, and stasis, complexity economics emphasizes contingency, indeterminacy, sense-making, and openness to change. In this framework time, in the sense of real historical time, becomes important, and a solution is no longer necessarily a set of mathematical conditions but a pattern, a set of emergent phenomena, a set of changes that may induce further changes, a set of existing entities creating novel entities. Equilibrium economics is a special case of nonequilibrium and hence complexity economics, therefore complexity economics is economics done in a more general way. It shows us an economy perpetually inventing itself, creating novel structures and possibilities for exploitation, and perpetually open to response.

Arthur does acknowledge that people like Marshall, Veblen, Schumpeter, Hayek, and Shackle have had much to say about exactly these issues. “But the thinking was largely history-specific, particular, case-based, and intuitive—in a word, literary—and therefore held to be beyond the reach of generalizable reasoning, so in time what had come to be called political economy became pushed to the side, acknowledged as practical and useful but not always respected.” So what Arthur has in mind is a mathematical theory, no doubt a form of what Roger Koppl – who is cited obscurely in a footnote – calls BRACE Economics.

Entry filed under: - Langlois -, Austrian Economics, Evolutionary Economics, History of Economic and Management Thought, Methods/Methodology/Theory of Science, Nothing New under the Sun. Tags: .

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12 Comments Add your own

  • 1. Jingjing Wang  |  9 October 2013 at 12:28 pm

    It reminds me the lost period that I followed Sante Fe Institute by reading COMPLEXITY: THE EMERGING SCIENCE AT THE EDGE OF ORDER AND CHAOS at the corner of train.

  • 2. Peter Klein  |  9 October 2013 at 12:48 pm

    I was sympathetic to his project until he mentioned sensemaking. Even I have my limits.

  • 3. Bob Wayland  |  11 October 2013 at 8:05 am

    Called to mind Krugman’s devastating critique of Arthur’s reinvention of increasing returns http://www.slate.com/articles/business/the_dismal_science/1998/01/the_legend_of_arthur.html

    It sounds as though Arthur has read Vernon Smith’s Rationality in Economics and seen a new trend.

  • 4. Rafe  |  11 October 2013 at 7:26 pm

    He is probably only trying to be helpful. It is just a pity that nobody told him about the Austrians. Perhaps he can’t read German?

  • 5. Barkley Rosser  |  12 October 2013 at 12:22 am

    Bob Wayland, Sorry, but Krugman’s critique was not remotely “devastating” and ended up being a major public embarrassment. Krugman has had a major track record of failing to cite others who did things before he did, such as his Nobel Prize winning application of the Dixit-Stiglitz model to economic geography, which was done earlier by Fujita. OTOH, Arthur was always scrupulous about citing his predecessors on increasing returns, with Krugman only ticked off that Arthur did not cite his work on the D-S model, which was irrelevant. In fact, after Krugman issued his public blast, Kenneth Arrow of all people wrote a letter defending Arthur and very sharply taking Krugman to task for his completely out of line behavior. On this matter, as usual, Arrow was right.

  • 6. Rafe  |  12 October 2013 at 1:03 am

    Straight as an Arrow?

  • 7. buckeye9  |  12 October 2013 at 8:11 am

    Barkley Rosser, thanks for the information and correction. I will revisit the issue.

  • 8. Barkley Rosser  |  12 October 2013 at 11:49 pm

    Krugman’s main paper applying Dixit-Stiglitz to econ geography appeared in the JPE in 1991. Fujita’s paper that did so appeared in Regional Science and Urban Economics (RSUE) in 1988. Krugman’s failed to cite Fujita’s. Fujita and Dixit deserved to share Krugman’s Nobel.

    On the matter of Arthur and Krugman and Arrow, see http://www.pkarchive.org/cranks/Brian.html . For some period of time Krugman somehow thought posting this on his website made him look good, but if Arrow ever wrote a letter telling me off like that I would be seriously ashamed and hide my head. If link does not work, it is the top hit if you google “Arthur Krugman Arrow.”

  • 9. SkepticProf  |  13 October 2013 at 12:09 am

    @Barkley: Are the Walsh critiques wrong, then? I know that Paul K. is not the only one who has critiqued Brian A. on this matter. While I don’t believe Brian A. was attempting academic fraud, I can see how the publicity campaign about IRTS would rankle some (even if they weren’t intellectual competitors in the IRTS field.)

  • 10. Rafe Champion  |  13 October 2013 at 5:46 pm

    As Barry Smith said, if Austrian economics did not exist, it would have to be invented.

  • 11. Barkley Rosser  |  13 October 2013 at 11:15 pm


    What “Walsh critiques”?

  • 12. Jon Finegold  |  15 October 2013 at 8:20 pm

    What about Krugman’s 1979 and 1980 papers on increasing returns, monopolistic competition, and international trade? That latter one also uses a Dixit-Stiglitz model.

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