Sunday, January 22, 2012

Economics at a turning point

Economics is at a point where physics was some 100 years ago. We think we have solved all the mayor issues and that there is just some small details to be solved before we can complete this chapter of knowledge. This in fact is like physics 100 years ago not true, as the current crisis showed and keeps showing us. Therefore it is time for a new paradigm: complexity economics (my expertise)

First lets discuss some history of economics(the really short version): the foundation of our current thought of economics comes from Walras. His thought that economics are the result of general equilibria (e.g. between supply and demand) are still common good in economics. But that was not the only thing that he did, thanks to him (and others) also the mathematical description of economics was introduced. The main thought for this all was the description of economics as a kind of phyiscs. After him other economists have shown that economics is not only about equilibrium's (notably Keynes) but the two other points (mathematics and physics) have stayed.

What we see in the world now is that economics is actually quite far from physics: unlike physics, all parts of the economics system (that's you and me) are not the same. Also the different parts of the system think and plan strategic behavior, thus undermining general equilibria. These two small arguments make that economics cannot be simply seen as a physical system which can be described by nice differential equations and integrals but is rather a complex system in which modelling is more the way to go. Recently the economic science has kinda acknowledged this and introduced behavioral economics

I believe that this acknowledgement is not enough: economics needs to be transformed into a science that is based on complexity rather than just makes a complexity addition. With this new economics the results of classical economics are not waisted, nor untrue. They are stylist versions of the real complex system that hold true in limit situations. Just like classical physics is a limit situation of relativity and quantum theory.

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