Some complexity-based thoughts on macro

Lynne Kiesling

I am doing a lot of reading and thinking, trying to make some headway on a way-overdue paper, and have been reading a striking working paper from David Colander, Richard Holt, and Barkley Rosser, “The Complexity Era in Economics” (August 2009). Their insights are directed toward the evolution of economics methodology and the absorption of complexity-related concepts and techniques. In addition to being relevant to my own work on regulatory institutions and technological change, I found the paper insightful in the context of the discussion a couple of weeks ago about this year’s new institutional economics Nobel prize and the dominant methodological hegemony in economics.

One of their interesting observations is also pertinent to the reexamination of macroeconomic theory in light of the financial market context of the past year and a half. This quote, in particular, illustrates what I find especially striking in macroeconomics:

However, while the new theoretical models have done a good job in eliminating the old theory, it is less clear as to what the new theoretical work has added to our understanding of the macro economy. At best, the results of the new macro models can be roughly calibrated with the empirical evidence, but often the calibration of these new models is no better than any other model, and the only claim they have to being preferred is aesthetic—they have micro foundations. However, it is a strange micro foundation—a micro foundation based on assumptions of no heterogeneous agent interaction, when, for many people intuitively, it is precisely the heterogeneous agent interaction that leads to central characteristics of the macro economy.

It’s also interesting that in that section they footnote Leijonhufvud, who wrote the only macroeconomic theory that I ever felt like I had any kind of grasp on, On Keynesian Economics and the Economics of Keynes:A Study in Monetary Theory.

If you haven’t had you fill of current critiques of macro theory, and you are interested in reading their thoughts on the evolution of economics to incorporate the analysis of economic systems as complex adaptive systems, I recommend this short working paper.