The Economic Record, March 2003
The New Evolutionary Microeconomics: Complexity, Competence and Adaptive Behavior, by Jason Potts, Cheltenham, UK: Edward Elgar. Xii, 239 pp.
The various branches of heterodox
economics have lacked a unifying theme. Jason Potts argues that each branch has
attacked the orthodox neowalrasian model from a different perspective.
Schumpeterian's say it lacks imagination, Post-Keynesians say it lacks emotion,
institutionalists say it lacks structure (attention to habits and routines),
and the behavioralists say it lacks passion and an accurate picture of the
brain. Heterodox schools have attacked the axioms of continuity, completeness,
transitivity, reflexivity, montonicity, regularity, and convexity. Instead they
insisted on uncertainty, bounded rationality, disequilibrium, increasing
returns, and hysteresis. But Potts believes that all have missed the unifying
point, namely the geometry of economic space, which he observes is not that of
a integral field, but one of complex systems. And, the understanding of complex
systems requires nothing less than a revolution in ontology and methodology .
Potts, Lecturer in Economics at the
University of Queensland, Australia, argues that the following characteristics
of economic systems destroy the assumption of integral space. All elements
(such as products, consumers, firms) can't be connected because of uncertainty
and bounded rationality and cognitive, heuristic, organizational, spatial,
temporal, market, and social structures. At the level of the human brain, it is
composed of modules with varying degree of connections. At the level of the
supermarket, the consumer can't have a prior preference map of its many
products. Out of the few products, organizational forms, and institutions that the
brain can account for, the selection process can't be regarded as optimal
because fitness is local and time dependent. All elements are not and cannot be
connected. Uncertainty cannot be brushed aside by assuming a complete set of
forward contingent markets; rather cognitive imagination matters. Increasing
returns and path dependency destroy general equilibrium possibilities. Open
systems destroy positivistic and deductive methodology. Economic systems have multiple agents with
different mental maps of the world. This lack of homogeneity in cognition
(necessarily selective perception) means that connections of elements will be
differently made by different people.
"Heterodox economics comes together
about a single point, that systems exist and that the crucial fact of their
existence is structural incompleteness: that not every element is connected to
every other (182)," says Potts. What is the essence of a systems approach?
A system is made up of elements and connections chosen by the observer to suit a
purpose. Any system can be further disaggregated into subsystems and in turn is
a part of a higher order system. The connections within a particular system and
between it and other systems are not given, but generated endogenously.
"These dimensions do not exist a priori, but are created in the
process of economic coordination (79)." The whole can be greater (or less)
than the sum of its parts. Potts is frequently describing circular and
cumulative causation, but with only tangential reference to Gunnar Myrdal and
concepts of beneficial and vicious circles. This is the property of emergence.
The formation of new connections and switching from one regime to another is
typical of complex systems, not an aberration. A system evolves by changing
connections.
Learning
and knowledge are at the heart of emergence and the formation of new
connections. This conception unites technology, institutions, organizations,
and cognitive processes. New technology makes new connections among materials.
New institutions and organizations make new connections among people and
between people and materials. Thus Potts brings together such otherwise
disparate topics as strategic planning and other entrepreneurial processes,
imagination, and creativity, in the face of uncertainty. All are evolving,
emerging connections. "Change and existence are the same thing (39)."
While
Potts argues for an evolutionary perspective, he warns of narrow Darwinism. We
must be careful of attributing any special standing to existing connections.
Fitness and optimality have questionable meaning when the connection and the
environment are both changing. Conception of both fitness and the environment
are both cognitive acts, not simply givens. Prior preferences influence
choices, but preferences are worked out in the act of choice. Institutions
affect individuals and individuals affect institutions.
Systems thinking with real time leads to
a different conception of efficiency. One system could make an efficient
combination of resources at each point in time, but be inferior to another
system over time. The latter could be more flexible in adapting to
unpredictable events. There is a continual tension between order and change.
Stable systems are more predictable and perhaps less stressful. But, Potts suggests
that systems can be so stable and appropriate to a given environment that they
are destroyed by small changes from outside. On the other hand, they can be so
interconnected that small changes are so magnified that chaos ensues.
Potts suggests that graph theory is
appropriate to model the connections of complex systems. The density of
connections can thus be seen and related to evolutionary paths. He goes so far
as to say, "Systems are characterized by their diversity not so much by
what they are made of but by how they are connected together (198)". Potts
leaves the reader thinking that the only thing that matters is what is
connected to what (on or off) and not the character of the connection. But
surely in the human brain, some people have connections across the synapses
that are so strong that it leads to addiction while it does not in others. The
parties exchanging goods behave differently when they have affinity or
malevolence toward each other. Any buyer or seller is connected, but it makes a
difference who is the owner of a particular opportunity.
Applications are brief in this
theoretical work, but the transaction cost minimization ( economizing)
explanation of the firm is critiqued by Potts using his emergent systems
perspective (98). If the firm already knew how to maximize profits, then it
could design incentive structures to achieve it and prevent costly
opportunistic behavior by its contractees made possible by unforeseen events.
But, if the organizational structure also produces benefits in the form of
knowledge about how to achieve profits, then the means and ends are both
products of organization. The problem is not merely to prevent shirking and
opportunism, but to create a competent organization that can learn and evolve.
Different organizational forms with different transaction costs create
different competencies and ideas on future products and technologies. One does
not just design institutions (connections) to implement a previously known
smooth running machine, but rather to build ( create) competence. This story
does not formalize and graph easily and Potts does not try .
Institutions
are clearly connections in Pott's view. Still, they are described at a very
abstract level. The reader is left to think about what kind of connections in
what context are important to evolution and performance (who gets
what). There is no typology of useful categories for particular systems within
systems. As noted above, there is some attention given to an environment marked
by uncertainty. Increasing returns is also mentioned. But, there are other
situations creating human interdependencies where the connecting structure
produces different performance outcomes. There is little blood in Potts-no
sense of how past systems created winners and losers or how these might be
changed in the future. Different interests struggle to make their preferred
connections count. Property rights are mentioned, but no taxonomy of
alternative structures is offered that are relevant to each source of
interdependence.
This is a deep and profound book that
deserves a deep reading. I have added it to the reading list for my graduate
seminar in institutional and behavioral economics.
Michigan State University
1 "a single (mathematical) operation
links any point in economic space with any other point (17)." If economic
space "is non-integral, in the sense that the set of interactions cannot
be collapsed to a field of actions, then the geometry of economic space must be
mapped by a set of specific connections (on a lattice.)" (19)