Complexity and Economics The lowest simplicity you can achieve is the complexity Jo˜ ao Basilio Pereima joaobasilio@ufpr.br Department of Economics Graduate Program in Economic Development Curitiba-Paran´ a-Brazil 13 de junho de 2016
Class01-Complexity Class02-Economics Referˆ encias Complexity and Economics Lecture 01 Complexity in General Science “Man has been impelled to scientific inquiry by wonder and by need. Of these wonder has been incomparably more fertile.” Hayek, 1967, p. 22 Complexity and Economics 13 de junho de 2016 2 / 39
Class01-Complexity Class02-Economics Referˆ encias Oppening Economics and Complexity is an introductory course for researchers and graduated students of economy who wish to comprehend the complex approach applied in economics and learn how to build agent based models. The curse aims to introduce ontological concepts and definitions, set out examples of what is a complex system and how these systems works and evolve in time. In a more pragmatic way the course aims to introduce two specific tools used to build up economic agent based models : the Laboratory of Simulation and Development (LSD) and Netlogo. Some economic and social models will be built by using computational resources intensively . Massive attention will be spent in theoretical questions in economics and programming methods and activities applied to the development of agent-based models (ABM). Complexity and Economics 13 de junho de 2016 3 / 39
Class01-Complexity Class02-Economics Referˆ encias Complexity - Motivations (Science with a pinch of emotion) I think the next century will be the century of complexity. Stephen Hawking - January 2000 Complexity and Economics 13 de junho de 2016 4 / 39
Class01-Complexity Class02-Economics Referˆ encias Complexity - Motivations (Science with a pinch of emotion) I think the next century will be the century of complexity. Stephen Hawking - January 2000 Complexity and Economics 13 de junho de 2016 4 / 39
Class01-Complexity Class02-Economics Referˆ encias Complexity - Motivations (Science with a pinch of emotion) Science has explored the microcosmos and the macrocosmos; we have a good sense of the lay of the land. The great unexplored frontier is complexity Heinz-Pagels: The Dreams of Reason Complexity and Economics 13 de junho de 2016 5 / 39
Class01-Complexity Class02-Economics Referˆ encias Complexity - Motivations (Science with a pinch of emotion) Science has explored the microcosmos and the macrocosmos; we have a good sense of the lay of the land. The great unexplored frontier is complexity Heinz-Pagels: The Dreams of Reason Economic science has explored the microeconomics and the macroeconomics; we have a (not so) good sense of the economic system. The great unexplored frontier is complexity Basilio, this economic course Complexity and Economics 13 de junho de 2016 5 / 39
Class01-Complexity Class02-Economics Referˆ encias Why economists do not understand Complexity well, if so? Our brains were designed to understand hunting and gathering, mating and child-rearing: a world of medium-sized objects moving in three dimensions at moderate speeds. Dawkins (1987) in The Blind Watchmaker Complexity and Economics 13 de junho de 2016 6 / 39
Class01-Complexity Class02-Economics Referˆ encias Frozen view? “Economic is not a evolutionary science - by the confession of its spokesman: and the economists turn their eyes with something of envy and some sense of baffled emulation to theses rivals that make broad their phylacteries [phylum] with the legend, ‘up to date’. Precisely wherein the social and political sciences, including economics, fall short of being evolutionary sciences, is not so plain. ” Complexity and Economics 13 de junho de 2016 7 / 39
Class01-Complexity Class02-Economics Referˆ encias Frozen view? “Economic is not a evolutionary science - by the confession of its spokesman: and the economists turn their eyes with something of envy and some sense of baffled emulation to theses rivals that make broad their phylacteries [phylum] with the legend, ‘up to date’. Precisely wherein the social and political sciences, including economics, fall short of being evolutionary sciences, is not so plain. ” Veblen (1899, p. 374-5) Complexity and Economics 13 de junho de 2016 7 / 39
Class01-Complexity Class02-Economics Referˆ encias Frozen view? “Economic is not a evolutionary science - by the confession of its spokesman: and the economists turn their eyes with something of envy and some sense of baffled emulation to theses rivals that make broad their phylacteries [phylum] with the legend, ‘up to date’. Precisely wherein the social and political sciences, including economics, fall short of being evolutionary sciences, is not so plain. ” Veblen (1899, p. 374-5) “The same reasoning applies today to the Complexity Theory context. 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 non equilibrium view in the past, but if we allow it, we see patterns or phenomena not visible to equilibrium analysis.” Arthur (2013) Complexity and Economics 13 de junho de 2016 7 / 39
Class01-Complexity Class02-Economics Referˆ encias Reductionism and Complexity Reductionism is the most natural thing in the world to grasp. It’s simply the belief that “a whole can de understood completely if you understand its parts, and the nature of their ‘sum’ ”. No one in her left brain could reject reductionism. Hofstadter (1979, p. 318) Complexity and Economics 13 de junho de 2016 8 / 39
Class01-Complexity Class02-Economics Referˆ encias Reductionism and Complexity Reductionism is the most natural thing in the world to grasp. It’s simply the belief that “a whole can de understood completely if you understand its parts, and the nature of their ‘sum’ ”. No one in her left brain could reject reductionism. Hofstadter (1979, p. 318) The scientific method: “To dive all the difficulties under examination into as many parts as possible, and as many as were required to solve then” and “to conduct my thoughts in a give order, beginning with the simplest and most easily understood objects, and gradually ascending, as it were step by step, to the knowledge of the most complex ” Descartes (1637) Complexity and Economics 13 de junho de 2016 8 / 39
Class01-Complexity Class02-Economics Referˆ encias Why Complexity • Many phenomena in the physic, natural and social dimension of the reality can not be explained with concepts of mechanical physic • Large structures are assembled from particles or individuals in a way far beyond that the simple aggregation and sum • Structures evolves to an unpredictable future and forms • The time arrow is not reversible and many traditional scientific methods fails to explain and forecast • Commonly the systems shows up heterogeneity and produces novelty • The system (societies) are populated by ± heterogeneous agent who interacts with the others • We are far from comprehend the World or the Reality with the newtonian machine or statistical viewpoint, mainly in social and economic science • Deterministic x Statistical x Complexity view of the world Complexity and Economics 13 de junho de 2016 9 / 39
Class01-Complexity Class02-Economics Referˆ encias Why Complexity • Many phenomena in the physic, natural and social dimension of the reality can not be explained with concepts of mechanical physic • Large structures are assembled from particles or individuals in a way far beyond that the simple aggregation and sum • Structures evolves to an unpredictable future and forms • The time arrow is not reversible and many traditional scientific methods fails to explain and forecast • Commonly the systems shows up heterogeneity and produces novelty • The system (societies) are populated by ± heterogeneous agent who interacts with the others • We are far from comprehend the World or the Reality with the newtonian machine or statistical viewpoint, mainly in social and economic science • Deterministic x Statistical x Complexity view of the world Despite the progress of science in the XX century, many questions and answers remains open and can not be thought with traditional viewpoint Complexity and Economics 13 de junho de 2016 9 / 39
Class01-Complexity Class02-Economics Referˆ encias From simple description of regularities to emergent properties Knowledge: • By deduction starting with intuition • By induction observing data with statistical lens and ending with some intuition too • By interactions playing - the evolutionary science with many agents living in and generating many worlds (Epstein, 2006, Generative Social Science) The advance of science will thus have to proceed in two different directions : while it is certainly desirable to make our theories as falsifiable as possible, we must also push forward into fields where, as we advance, the degree of falsifiability necessarily decreases. This is the price we have to pay for an advance into the field of complex phenomena. Hayek (1967, p. 29) Complexity and Economics 13 de junho de 2016 10 / 39
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