Wednesday, September 9, 2009

Complexity in economic analysis (amv)

The global economy is a complex system. The microfoundation of macroeconomics is important, because it forces us to think of interdependencies. Below, you see a complex system (a spontaneous order). It is the visualization of the 'world wide web' at a given point in time. The global economy is even more complex since has more dimensions of which the internet is a subsystem.

The global coordination problem in economics is handled analytically by general equilibrium theory. The question of optimal allocation comes down to the construction of a complex economic system like the one on the picture. Policy is used to turn to economists for advice: 'If I do A, B, and C, what happens to X, Y, Z?' Hayek argued that in light of complexity the economist may have good reason to say: 'I just don't know'.