Tuesday, August 09, 2011

More on complexity economics

Since my complexity economics I have been making slow progress on the underlying paper.

I've turned up a couple of interesting papers in the Review of Political Economy by Holt, Rosser and Colander.

The first in 2004 is The changing face of mainstream economics which is a description of the study of economics itself as a complex system, and that it is changing into something new.

This year they have followed it up with The complexity era in economics in which they argue that the new thing they wrote about is "complexity economics", how it has grown out of the neoclassical and heterodox schools and how it will change the way we understand economic phenomena.

What I want to do today is just give some simple practical examples of what complexity economics can look like. The examples are all drawn from Physica A which is actually a journal of statistical mechanics. The examples I'm choosing are ones that could be relevant to our understanding of telecommunications markets.

The first is Evolution of cooperation among mobile agents with heterogenous view radii which isn't even from the econophysics section but the dynamical processes section of the journal. The paper is interesting because it is an advance on the Axelrod work and the way to explain co-operation using a more intricate model of agents which interact with a group of other agents. A conclusion is that co-operation is best facilitated by small interaction "circles" and a slow moving speed. This raises the potential issue that a fast moving networked economy DOESN'T facilitate co-operation as much as our older economy.

The second is A Markovian model market—Akerlof’s lemons and the asymmetry which models the degree of information assymetry (as measured by a consumer's perceptive capacity) and shows that Ackerlof's complete market failure occurs at a computable value for this. A potentially very important conclusion for industry is that;

When β is closer to 1 (symmetric information), the market becomes more profitable for high quality goods, although high and low quality markets coexist.

That is, co-operative effort by industry to improve consumer understanding of product offerings INCREASES INDUSTRY PROFIT.

The other two examples are ones that help with one of my favourite issues - understanding market structure and adoption rates.

In Dynamics of market structure driven by the degree of consumer's rationality the model shows how market structures evolve where the degree of consumer "rationality" (meaning how bounded it is) determines how the market evolves. It makes predictions that the size distribution of firms follows Zipf's Law and that the growth rate distribution follows Gilbrat's law. There is a perfect data set of firm size distribution over time for Australian carriers - but it is Zipf like but not actually Zipf in its distribution.

In Evolutionary model of an anonymous consumer durable market an evolutionary dynamic is set-up to explain purchase and innovation in consumer durables markets in which equilibrium is a special case. This I find of interest because in the global comparison of broadband take-up rates it is the different shapes of the S shaped diffusion curves that needs to be "explained", not the penetration at any point in time.

Two things need to be noted here.

The first is about the relationship between "complexity economics" and "econophysics". They are in essence the same thing, only the latter come to it through maths and physics. Econophysics does spend a lot of time discussing stock-markets - these are where all the infamous "quants" came from that got the investment banks into some of their trouble. But it also discusses complexity using dynamic models.

A word of caution has been issued by Steve Keen reminding the econophysicists that much of the economic science from which they wish to build has no foundation.

But equally the econophysicists need to recognise that what they are doing is still really economic science - not, as argued in Is econophysics a new discipline? The neopositivist argument, a new discipline. That thesis firstly completely misrepresents physics as "positivist" science, and ignores the claims made by the likes of Friedman that they were engaged in positive science.

As my larger piece argues we do blur the boundaries between economic science and political economy, the latter being prescriptions based on the former and an ethical stance on what our goals should be.

So what should be done. As I also noted recently complexity economics needs to be married to good maths. But I also note that the University of Melbourne seems to have had a foray into econphysics entirely from the Physics and Maths Departments. Meanwhile UQ has an ARC Centre for Evolutionary Economic Systems.

In the words of Steve Keen;

The most important thing that global financial crisis has done for economic theory is
to show that neoclassical economics is not merely wrong, but dangerous.

To replace it we need to apply mathematics to heterodox economics. It is forgotten that the original neoclassical "revolution" came about by the application of the then current maths of physical systems to economics. (see How Economics became a Mathematical Science and More Heat than Light)

Novae Meridianae Demetae Dexter delenda est

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