Prior Commitment and Uncertainty in Complex Economic Systems: Reinstating History in the Core of Economic Analysis
28 Pages Posted: 24 Jan 2017
Date Written: January 22, 2017
Conventional ‘neoclassical’ economics is very useful in understanding how prices are determined but less so as a general basis for understanding the economic behaviour we observe. What is not taken into account is that economic systems are dissipative structures that are complex, but incompletely connected, networks of rules. It is explained why a degree of prior commitment in decision-making is inevitable in complex economic systems and the implications of this are examined. It is argued that economic analysis must begin with the reality that choices are made in relation to pre-existing commitments, both with regard to economic structures built in the past and to prevailing systems of belief, when deciding what to do in a future characterised by uncertainty. It is explained how conventional economic incentives can be dealt with in such a complex historical context building upon the neoclassical perspective of Alfred Marshall over a century ago. It is argued that econometric modelling remains viable and useful in understanding behaviour in complex economic systems. It is shown how we can design and interpret time series econometric modelling from a complex systems perspective.
Keywords: complex economic system, uncertainty, network, rules, innovation diffusion, dissipative structure, economic evolution, econometric modelling, time series data, economic history, methodology, Alfred Marshall, neoclassical economics, macroeconomics, beliefs, time irreversibility, lock-in
JEL Classification: B41, C51, D03, D80, E03
Suggested Citation: Suggested Citation