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Complexity, the Ideal “Market” and the Real-World Market

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By Wolfram Elsner, Torsten Heinrich and Henning Schwardt

[Adapted from pp.xiii-viv of Elsner, W., Heinrich, T., & Schwardt, H. (2015). The microeconomics of complex economies : evolutionary, institutional, neoclassical, and complexity perspectives. Amsterdam ; Boston: Academic Press (here at Elsevier, here at Amazon).

Complexity (micro-)economics implies that a real-world market economy will have to be conceptualized as a complex phenomenon, embedded in a set of mechanisms and entities that basically are its counter-principles, such as bureaucracies (hierarchy), networks, jointly learned (informal) social rules and institutions, and the state. Only all of these together give life, sense, meaning, and workability to a spontaneous, decentralized mechanism that we are used to calling a “market,” while both limiting and enabling the market to work at all, when otherwise it might not even come into being.

It is not that a decentralized economic system would not be adequate per se. On the contrary, decentralization may be one of the requirements for an economic system to deal with complexity, which, however, in turn, may itself stem from fragmentation and individualization. But assuming isolated selfishly maximizing individual agents, all being of one kind, is certainly not the answer to real-world direct interdependence and related complexity. Coordinating real-world agents and simplifying their often intricate decision problems, so that they become capable of and inclined to long-run learning, investing, innovating, or sometimes acting at all, might require a trinity of:

  • coordination through jointly learned institutionalized cooperative interaction to solve ubiquitous social-dilemma and collective-good problems (informal institutions);
  • discursive deliberation and agreed upon collective action through formal organization, namely, properly legitimized and formed public action (organization, planning, or the state);
  • decentralization with some spontaneous individualist reaction of agents to price changes (markets).

Therefore, a new understanding of the economy as a directly interdependent and complex system, where agents have different strategic options and mixed, and often intricate incentives to act, has been developed. Where agents are directly interdependent, they have to recurrently directly interact and learn from this experience, if they like it or not—uncertain as they are. In complex systems, effective coordination, thus, is all but obvious, trivial, simple to achieve, or self-stabilizing. Only real time, history, process, and recurrent interaction with learning and behavioural innovation will provide the frame for generating solutions to the complex coordination problem, involving perhaps, but not necessarily, reduced systemic complexity. This will also give room for search, innovation, joint learning, the creation of collective and shared information, cumulative process, and long-run development. Behavioural consequences of rationality may be completely different under such different settings, with learned and recognized interdependence and long-run perspectives (futurity). But there is no guarantee at all in complex structures and resulting evolutionary processes that an effective or instrumental coordination, i.e., coordination that serves problem solving, will actually emerge—or be stable.

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