Making Sense of Chaos: A Better Economics for a Better World

Absent further shocks, the economy would settle into a static equilibrium, but the blows from the stick keep coming, and the horse continues to rock as a result.

An attractor of this type is now called a chaotic attractor, and the motion it produces has come to be called chaos.18 Chaos is characterized by two essential properties: The first is sensitive dependence on initial conditions, and the second is endogenous motion, meaning that, even though there are no external shocks, the system never settles down

What is a complex system? By definition, a system is complex if it has emergent properties.5 I’ve already mentioned the example of the brain. We humans don’t just think – we are conscious, with a sophisticated model of ourselves, the world around us and how we fit into it. Consciousness isn’t present in the individual building blocks – it emerges f

The big question we pondered more than all others was the mystery of self-organization: How can disorganized configurations of matter spontaneously become organized?

The theory of ecology, which was developed in the middle of the twentieth century, is essentially a theory about specialists. Grass is a specialist at the job of converting sunlight, soil and water into grass. Zebras are specialists at the job of eating grass and turning it into zebras, and lions are specialists in eating zebras and turning them in

The financial crisis of 2008 is a good example where this leads to problems.14 All the models at the time ignored the possibility that homeowners and businesses might default on their loans. Economists knew that default was important, but including it in their models was difficult, so they left it out.

Complexity-economics models, in contrast, do not necessarily assume equilibrium, but regard it as an emergent property when it happens.

The simulations used in complexity economics are called agent-based models.9 As the name emphasizes, the individual building blocks of these models – such as households, firms or governments – make decisions; they have agency.10

There are many advantages to using simulations rather than mathematical equations, but one of the most important is the ability to model the diversity of the actors in the world – what economists call heterogeneity.12 Modeling heterogeneity is a hot topic in mainstream macroeconomics, but it is very hard to fit this into the standard framework. Com