Why Is Economics Not a Complex Systems Science?
Foster, John, Journal of Economic Issues
In 1898, Thorstein Veblen posed a fundamental question: "Why is economics not an evolutionary science?" Following dramatic advances in evolutionary biology in the latter half of the nineteenth century, this was a question that a number of economists were beginning to ask, including Alfred Marshall, one of the founding fathers of neoclassical economics. (1) While Veblen's insights led to the emergence of one of the two main strands of American institutional economics in the twentieth century, Joseph Schumpeter (1950) offered an "evolutionary economics" which had at its core entrepreneurship and innovation, both technological and organizational. However, despite the considerable influence of American institutionalism in the early decades of the twentieth century and the high profile of Schumpeter's writings, economics never became an "evolutionary science."
The objective of this article is to argue that economics will have to become a "complex systems science" before the valuable insights of institutionalist and evolutionary economists can be incorporated into the mainstream. First, the complex adaptive economic system, as defined in John Foster (2005), is compared with the view of a system that is embodied in standard economic theory. Second, this difference is illustrated through an examination of the role of the familiar production function construct in economics. As Zvi Griliches and Jacques Mairesse (1995) stressed, the production function began its life as a macroeconomic construct in the work of, most notably, Charles Cobb and Paul Douglas (1928). With this in mind, the macroeconomics of John Maynard Keynes is then revisited to examine the extent to which his non-neoclassical approach contains features that we might expect to find in modern complex economic systems theory. As is well known, modern macroeconomics with its neoclassical micro-foundations has largely set aside the revolutionary insights of Keynes (1936). So it is instructive to see if these insights can be placed within a complex adaptive system perspective, raising both the possibility of a new macroeconomics and of new links with institutionalist and evolutionary economics, as foreshadowed in Foster (1987).
The Resurgence of Evolutionary Thinking in Economics
In the post WWII period, evolutionary economic thought gradually became confined to the margins of economics as neoclassical theory began to form the analytical core of the modern discipline. However, in the early 1980s, there was something of a resurgence of interest in evolutionary perspectives on economics, following the publication of prominent books by Kenneth Boulding (1981) and Richard Nelson and Sidney Winter (1982). What these contributions gave rise to was a coherent "neo-Schumpeterian" approach to evolutionary economics that grew out of studies of innovation, technological change and the behavior of firms and centered on the analytics of "replicator dynamics" in the presence of variety (or heterogeneity). (2) This dynamic mathematical representation of competitive selection was borrowed directly from neo-Darwinian evolutionary biology (Fisher 1930) and suitably adapted for economic application settings. (3)
Although aspects of this new evolutionary economics could be represented in formal mathematics and closely connected to vast and informative empirical literature on entrepreneurial and innovation processes in a range of industrial settings, it never succeeded in penetrating the mainstream of the economics discipline to any significant extent. Despite this, lip service was sometimes paid to "Schumpeterian" ideas through modifications of conventional economic models, particularly in the field of economic growth. For example, Philippe Aghion and Peter Howitt (1998) provided an extended "Schumpeterian" model of "endogenous growth" building on the neoclassical growth model. Replicator dynamics are absent for reasons that seem clear: the conventional economic paradigm cannot easily accommodate such dynamics and, in any event, the timeless construction of conventional economic theory renders it malleable enough to provide a theoretical explanation of almost any economic behavior that we might observe. …