We are so used to view a system as driven by a view dominant forces that would clearly define the direction of the system as a whole that it is difficult to see the system as a self organizing entity where the direction of the system is determine by the interactions between all agents, not just by a few major driving forces cast-out by some of the agents.
Comparison between standard economics and non-standard economics is basically comparison between simple systems and complex systems. This is by no means an easy comparison. People are not really sure as to what constitutes a “complex system”. This is –of course – is rather difficult to except, because if you can define what a simple system is, then you should be able to define what a complex system is!
What is System?
The word “system” has many definitions. Basically it is a collection of objects (particles, people, ideas, etc) which are interrelated to each other and form a whole which then could function as a unit.
What is Simple System?
Simple system: A system with a central controller, where the behavior of the system is arised as the result of the driving from the central contoller. Now, I realize that the above definition of a simple system is a bit …. too simple. The first question would be: How is it possible that the “central controller” can control the fate of the whole system? Let’s look at the economical systems for a second. Imagine that the members make decisions based on “what is rational” according to the common wisdom. The decisions also depends on the available information about the state of the system (which also includes the information about the interactions with the surrounding of the system).
In effect, each member makes decisions:
- Independently Based on common theories, rationality, or common wisdom.
- Based on information about the state of the system, or information considered relevant to each member’s interest.
- The decision of each member is deterministic.
- Given the information and the rationality, the decision is predictable.
The behavior of the system is basically the sum of the behavior of its member. Knowing all the information about the system and understanding the rationality of its member, the fate of the system is understood completely and deterministic.
The central controller we mentioned above is then understood as the common rationality and the information (available to everyone) that determine the decisions of the members.
What is Complex System?
Here is my own definition about what a complex system is:
A system without a central controller where the behavior of the system is the collective behavior of its members that emerge from the interactions between the members with each other and the interactions between the members with the surrounding of the system.
Here, some people would object. Surely, they say, each member has a certain theory or rationality which they based their decisions on. There must also be information available to everyone which can be used as an input to the rational wisdom. Well, if that’s the case then why is it that the great economical crises of our times always taken us by surprise?
If everybody based their decisions on (1) information available to everybody, and (2) some common wisdom or rationality, then surely the economics behaviour should be totally predictable! Economics to economy would be like newton laws to physical world. Economics agent would be like “objects” that are governed by a certain laws (economical laws), and the information that are available to them would be like the input to the variables in the “economical equations”.
The unpredictability of the economics system suggest that the system might not be as simple as we would like it to be. In simple system analysis the measurables are obtained with the assumption that the interactions between the members of the system is not included. Now if the relationships between dependent and independent variables are all there is to it, all economics modeling should be very simple. The predictions are going to be deterministic and accurate.
On the other hands, simple system modeling is actually quite useful because within some time windows the system approach the simple system behavior.