Chapter 8: On Simplicity and Macroeconomic Complexity
Richard H. Day By complexity we mean phenomena generated by interacting parts, all of whose causal connections are not easily discernible, whose behavior over time exhibits disorder and behaves unpredictably or chaotically.1 Our concern here is with macroeconomic complexity. The remarks that follow briefly consider some sources of complexity involved in science generally and in economics in particular, and the strategies used to overcome them. Then several examples from macroeconomics are summarized. 8.1 Sources of complexity 8.1.1 Multi-level causality Theoretical analysis requires the identification of variables that describe attributes of a system at a given level in the hierarchy of causal structures. The causal structure that is discerned at a given level emerges from structures at a “lower” level and provides the foundation out of which “higher” levels of causal relationships emerge. As one goes “down” in the hierarchy of relationships to successively more micro, successively more “fundamental” structures, the number of distinct entities becomes larger, at very micro levels so large that the representation and analysis of relationships among individual entities is not possible. The multi-level nature of matter and energy begins with subatomic particles, continues through atoms, molecules, material objects made up of them, planets, solar systems, galaxies, and, some speculate, universes. For each level there is a special set of physical concepts and principles. The multi-level economic activity of nations rises out of the behavior of individual people interacting with one another in homes, stores, factories, farms, and within a panoply of political and socioeconomic organizations. Individuals’...
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