Download this Paper Open PDF in Browser

Rethinking Economics Using Complexity Theory

real-world economics review, issue no. 64

29 Pages Posted: 11 Jul 2013  

Dirk Helbing

ETH Zürich - Department of Humanities, Social and Political Sciences (GESS)

Alan Kirman

GREQAM

Date Written: July 11, 2013

Abstract

In this paper we argue that if we want to find a more satisfactory approach to tackling the major socio-economic problems we are facing, we need to thoroughly rethink the basic assumptions of macroeconomics and financial theory. Making minor modifications to the standard models to remove “imperfections” is not enough, the whole framework needs to be revisited. Let us here enumerate some of the standard assumptions and postulates of economic theory.

1. An economy is an equilibrium system. In other words, it is a system in which all markets systematically clear at each point of time, but where the equilibrium may be perturbed, from time to time by exogenous shocks.
2. Selfish or greedy behaviour of individuals yields a result that is beneficial to society – a modern, widespread, but inaccurate reformulation of the principle of the “invisible hand”.
3. Individuals and companies decide rationally. By this it is meant that individuals optimize under the constraints they are facing and that their choices satisfy some standard consistency axioms.
4. The behaviour of all the agents together can be treated as corresponding to that of an average or representative individual.
5. When the financial sector is analysed, it is assumed that financial markets are efficient. Efficiency here means that all the relevant information concerning an asset is reflected in the price of that asset.
6. For financial markets it is assumed that they function better if their liquidity is greater.
7. In financial markets, the more connected the network of individuals and institutions the more it reduces risks and the more stable and robust is the system.

Below, we discuss the fundamental problems with these assumptions and outline some of the policy implications of improved assumptions.

Keywords: critique, homo economicus, invisible hand, representative agents, financial markets, instability, self-organisation, emergence

JEL Classification: A00, B00, D00, E00

Suggested Citation

Helbing, Dirk and Kirman, Alan, Rethinking Economics Using Complexity Theory (July 11, 2013). real-world economics review, issue no. 64. Available at SSRN: https://ssrn.com/abstract=2292370 or http://dx.doi.org/10.2139/ssrn.2292370

Dirk Helbing (Contact Author)

ETH Zürich - Department of Humanities, Social and Political Sciences (GESS) ( email )

ETH Zurich - Swiss Federal Institute of Technology
Clausiusstrasse 50
Zurich, 8092
Switzerland

HOME PAGE: http://www.coss.ethz.ch

Alan Kirman

GREQAM ( email )

Centre de la Vieille Charité
2, rue de la Charité
Marseille, 13002
France
+3391140770 (Phone)
+3391900227 (Fax)

Paper statistics

Downloads
318
Rank
79,087
Abstract Views
1,239