Complexity Economics

From the conclusions of an interesting paper by Brian Arthur

Complexity economics is neither an add-on to standard economics (see Fontana, 2010), nor does it consist of adding agent-based behavior to standard models. It is a different way of thinking about the economy. It sees the economy not as a system in equilibrium but as one in motion, perpetually “computing” itself—perpetually constructing itself anew. Where equilibrium economics emphasizes order, determinacy, deduction, and stasis, this new framework emphasizes contingency, indeterminacy, sense-making, and openness to change. There is another way to say this. Until now, economics has been a noun-based rather than verb-based science. It has pictured changes over time in the economy function as changes in levels of fixed noun-entities—employment, production, consumption, prices. Now it is shifting toward seeing these changes as a series of verb-actions—forecast, respond, innovate, replace—that cause further actions.

And

Complexity economics is still in its early days and many economists are pushing its boundaries outward. It shows us an economy perpetually inventing itself, perpetually creating possibilities for exploitation, perpetually open to response. An economy that is not dead, static, timeless, and perfect, but one that is alive, ever-changing, organic, and full of messy vitality.

HT: Matthew Baker

Harford on the Atlas of Economic Complexity

Tim Harford has a very good piece on the Atlas of Economic Complexity. He writes:  

The economist Ricardo Hausmann and the network physicist César Hidalgo have been trying to measure this complexity, and I’ve written before about their work. They argue that economies are collections of “capabilities”, building blocks that can be put together like Lego to produce different products. A trustworthy post office is a building block; so is high-speed internet; so are functional bankruptcy courts; so is a literate workforce; so is a fast lane at customs for processing perishable foodstuffs. It’s not clear how one would go about measuring all of these capabilities. Instead, Hausmann and Hidalgo measure them indirectly, tracking the shadows that they cast upon a country’s trade statistics.

[See an old post] What I found interesting about Harford's article is that he includes "functional bankruptcy courts." This suggests that the Atlas also has elements of institutional complexity. Hausmann and Hidalgo have done a superb job mapping the economic capabilities of countries. I wonder what the next steps are: mapping the economic capabilities of regions? An Atlas of institutional complexity? An Atlas of cultural complexity? And probably mapping the dynamic evolution of these different maps together through time?   

The Atlas of Economic Complexity - How do economies look like in a Product Space Map?

This is how the Economy of Guatemala looks like.

The green color represent "garments," you can see the meaning of the colors in the whole report.
You might wonder what the black boxes mean: 

To make countries and products comparable we use Balassa’s definition of revealed Comparative advantage or rCa. Balassa’s definition says that a coun- try has revealed Comparative advantage in a product if it exports more than its “fair” share, that is, a share that is equal to the share of total world trade that the product represents. For example, in 2008, with exports of $42 billion, soy- beans represented 0.35% of world trade. of this total, Brazil exported nearly $11 billion, and since Brazil’s total exports for that year were $140 billion, soybeans accounted for 7.8% of Brazil’s exports. this represents around 21 times Brazil’s “fair share” of soybean exports (7.8% divided by 0.35%), so we can say that Brazil has revealed comparative advantage in soybeans.

This is China

This is the US

This is Colombia 

This is Ghana

This is the ranking

Source.