Tag Archives: Complexity

Complexity Economics Shows Us Why Laissez-Faire Economics Always Fails

By Eric Liu and Nick Hanauer – Over the last three decades, an unprecedented consolidation and concentration of earning power and wealth has made the top 1 percent of Americans immensely richer while middleclass Americans have been increasingly impoverished.

Traditional economic theory is rooted in a 19th- and 20th-century understanding of science and mathematics. At the simplest level, traditional theory assumes economies are linear systems filled with rational actors who seek to optimize their situation. Outputs reflect a sum of inputs, the system is closed, and if big change comes it comes as an external shock. The system’s default state is equilibrium. The prevailing metaphor is a machine.

But this is not how economies are. It never has been. As anyone can see and feel today, economies behave in ways that are non-linear and irrational, and often violently so. These often-violent changes are not external shocks but emergent properties—the inevitable result—of the way economies behave.

The traditional approach, in short, completely misunderstands human behavior and natural economic forces. The problem is that the traditional model is not an academic curiosity; it is the basis for an ideological story about the economy and government’s role—and that story has fueled policymaking and morphed into a selfishness-justifying conventional wisdom.

It is now possible to understand and describe economic systems as complex systems like gardens. And it is now reasonable to assert that economic systems are not merely similar to ecosystems; they are ecosystems, driven by the same types of evolutionary forces as ecosystems. Eric Beinhocker’s The Origin of Wealth is the most lucid survey available of this new complexity economics. more>

updates from Chicago Booth

Why it’s so hard to simplify the tax code
By Dee Gill – Simplifying the tax code ostensibly has bipartisan backing. Both the Bush and Obama administrations advocated for simplification, in reports, as have House Speaker Paul Ryan (Republican of Wisconsin) and Senator Elizabeth Warren (Democrat of Massachusetts). But when the Senate passed a tax bill this past December, there was no postcard.

What happened? The same thing that always does, suggest researchers. While simplicity is a stated goal, complexity wins the day. Hence companies and individuals will hire accountants to wade through the latest bill, interpret the new rules, offer guidance, and help work through the inevitable corrections and amendments.

And this comes at an economic cost. Research by James Mahon and Chicago Booth’s Eric Zwick, and others, collectively indicates that the complexity leads individuals and companies to fail to take advantage of billions of dollars in offered breaks, many of them presumably intended to stimulate the economy. In this way, complexity undermines what tax incentives are purported to accomplish. more>

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The Profit Motive Behind Financial Complexity

BOOK REVIEW

Phishing for Phools, Authors: George Akerlof and Robert Shiller.

By Noah Smith – Economist George Akerlof has spent much of his celebrated career thinking about how trickery and deceit affect markets. But in his book “Phishing for Phools,” written with fellow Nobelist Robert Shiller, Akerlof goes one step further.

Much of the actual, real-world economy, he says, involves trickery and deception.

Outright fraud is supposed to be dealt with through the legal system. But what about subtler forms of deception?

Many people suspect that large swathes of the U.S. financial industry make money not by allocating capital to productive uses, or by helping people hedge their risks, but by tricking normal people, businesses and local governments into making poor decisions.

Even without blatant fraud, financial companies might use their superior intelligence, insider knowledge and deep pockets to create complex products that naturally tend to lure their counterparties into making bad decisions.

That kind of thing might not be moral, but it’s often perfectly legal. How widespread and effective is it? more> http://goo.gl/UrHVP6

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