Complexity scientists have long argued for the use of concepts such as nonlinearity and interconnectednesss to better understand economic phenomena, including growth, market failures and crashes. Ongoing research at the Harvard Center for International Development is taking this area of work forward in very promising ways.
In some ways, as Tim Harford has argued, the notion of complexity resonates closely with the classical roots of economic thinking. Adam Smith emphasised the importance of specialisation as a source of the wealth of nations, and “specialisation and complexity are closely linked: an economy with more specialists is one that requires more teamwork and more distinct interactions between individual activities.”
However, this is not how most economists – development or otherwise – have traditionally thought about growth. This may be about to change following ground-breaking work by researchers at the Harvard Center for International Development. Ricardo Hausmann and Cesar Hidalgo have been looking at economic complexity in a rigorous fashion in order to develop testable hypotheses about products, networks and self-organising processes of economic wealth creation.
The best introduction to this work is a thought-provoking TEDx talk Hidalgo gave in August 2010:
As Harford noted in his piece:
Development economists may find themselves paying more attention to such issues in future. We know very little about how to encourage an economy to become more complex and acquire new product capabilities. That may explain why we still have so much to learn about how to make poor countries rich.
There are of course downsides to complexity and interconnectedness, as the credit crunch and resulting global crisis has shown. Andy Haldane, director of the Bank of England, put the case forward compellingly in a 2009 speech covered in a previous Aid on the Edge of Chaos post:
…interconnected networks exhibit a knife-edge, or tipping point, property. Within a certain range, connections serve as a shock-absorber. The system acts as a mutual insurance device with disturbances dispersed and dissipated. Connectivity engenders robustness. Risk-sharing – diversification – prevails. But beyond a certain range, the system can flip the wrong side of the knife-edge. Interconnections serve as shock-amplifiers, not dampeners, as losses cascade. The system acts not as a mutual insurance device but as a mutual incendiary device. Risk-spreading – fragility – prevails. The extent of the systemic dislocation is often disproportionate to the size of the initial shock…” (emphasis added)
The key may be to find the balancing point between the two: the point of ideal trade-off between creativity and resilience – or what some theorists describe as the ‘edge of chaos’. This would seem to carry implications for economic development strategies used by international agencies. A follow-up post will look at how these ideas are being taken up in the IMF’s work on economic recovery in the wake of the crisis.
NB Interested readers can see previous Aid on the Edge of Chaos posts on the topic of complexity and economics here.