Complexity Theory: The system that unites us all.

In brief:

Economics is undergoing a revolution. Our complex world, full of uncertainty, discovery, and change is only beginning to be understood with the tools of Complexity Theory. The static models of traditional economics are giving way to a dynamic view where ideas, firms, and economies evolve. Radical social entrepreneurs – those on the cutting-edge of this evolution – can’t afford to miss out.

What is it?

Social scientists have always envied the certainty and precision of physics. Unfortunately, their subject of study – living, breathing human beings – is far less stable and predictable than gravity.

But as modern physics has developed, new tools for understanding uncertain, indeterminate, wildly intricate systems have been crafted. This is Complexity Theory.

Many people have criticized traditional economics for living in a world where people are perfectly informed and rational, where firms merely make a few simple calculations to ‘maximize profits’, and governments effortlessly turn democratic desires into sound policy. Of course, reality is far more complex.

Perhaps the most important feature of the real world that challenges traditional economic models is uncertainty. We all live in an uncertain world. We learn by doing and reflecting on our actions. Then we use our memory to change our expectations of the future. But even then, we may still be wrong.

Our lives are constantly evolving. This conjures up images of Charles Darwin and fossils, but it need not. We ‘evolve’ different behaviors in our own lives as we try to successfully adjust to the things around us. We get faster and more efficient at our job, or we discover a new shortcut on our daily commute.

This adjustment process is evolutionary without ‘biological’ overtones: philosopher Daniel Dennett calls it a search algorithm that “finds needles of good design in haystacks of possibility.” It’s a universal process: adjusting in different ways to different things.

Indeed, this ‘trial and error’ method of learning and change is what Complexity Theory generalizes throughout our world. Traffic flows, urban sprawl, financial markets, wars, and – yes – the economy all feature individual agents who are acting within a larger system. Even your mind itself is changing according to your learning and the feedback you receive from people and objects around you.

This is true whether we call the system we’re studying “the German Autobahn”, “the New York stock exchange,” or “the Japanese economy.” All of these are complex systems.

It makes little sense then, as traditional economics routinely does, to think of a business firm as an all-knowing calculating machine for profit maximizing. Firms do seek positive profits – any entrepreneur would tell you that – but the route to ‘maximum profits’ is a nonsense idea.

Profits are gathered by a firm grasping out into our uncertain world by changing their products, or innovating, or cutting production, or building a new factory. These are all behaviors that a firm uses to adjust to the world around it. Profits signal “positive feedback” – the adjustments are correct to the conditions of the system; losses signal “negative feedback” – the firm is doing something wrong.

Economist Armen Alchian, one of the earliest proponents of complexity theory in economics, writes:

Positive profits accrue to those who are better than their actual competitors, even if the participants are ignorant, intelligent, skillful, etc. The crucial element is one’s aggregate position relative to actual competitors, not some hypothetically perfect competitors. As in a race, the award goes to the relatively fastest, even if all the competitors loaf.

This new view of economics has radical implications. It means that we need structures which create dynamic, socially-conscious, and innovative firms – we need to make sure the race is run by sprinters, not loafers.

Complex systems, like an economy, are by their very nature beyond the control of a single actor or mind. Indeed, the order and cooperation that emerges in complex systems is a direct result of the spontaneous, decentralized actions of all the individual agents at once. This complexity need not lead to chaos or disorder. Rather, the free activity of agents adjusting to their environment leads to the order that builds our world.

Complexity theorist Eric Beinhocker, author of “The Origin of Wealth,” asks us to run a thought experiment to understand this point. Imagine that the inhabitants of a town

have made you their benevolent dictator, but in exchange for your awesome powers, you are responsible for making sure the town is fed, clothed, and sheltered each day. No one will do anything without your say-so, and therefore each morning you have to create a to-do list for organizing all the town’s economic activities.

You have to write down all the jobs that must get done, all the things that need to get coordinated, and the time and sequence of everything. No detail is too small… even for a small town, it would be an impossibly long and complex list.

Yet there is no one in charge of the global to-do list. There is no benevolent dictator making sure that fish gets from a fisherman in Mozambique to a restaurant in Korea to provide the lunch for a computer worker who makes parts for a PC that a fashion designer in Milan uses to design a suit for an interest-rate futures trader in Chicago. Yet, extraordinarily, these sorts of things happen every day in a bottom-up, self-organized way.

This does not mean that complex systems like the economy are ‘beyond control’.

Indeed, the initial conditions of a system will determine what kinds of behavior arise from the interactions of those within it. For instance, a system with institutions where agents face high rewards to violence and theft and low punishments will lead to perverse, exploitative emergent behavior. A system that allows people to cooperate peacefully and punishes violence will lead to beneficial emergent behavior.

Many national economies around the world are tragic examples of the way that poverty and violence can evolve from poor system structure. Systems can be ‘biased’ towards certain kinds of behavior, like how an oppressive government can snuff out grassroots movements for political reform, or a cultural tradition of trust leads to strong trade relations within the system.

When a system creates an environment where people get ahead through violence and exploitation, only a few will win… at the expense of everyone else. But the win-win arrangements of trade, free association, and open institutions mean that people benefit by creating value for others.

Entrepreneurs are the change-agents of our complex world – and it will be entrepreneurs who lead the systematic reform necessary to better evolve our societies.

What does Complexity Theory mean for Radical Social Entrepreneurs?

Complexity theory challenges oversimplified ideas of “market” versus “government” efficiency. Our political ideologies — especially simple frames of Left versus Right — have not kept pace with these advances in social science.

Complexity theorist Eric Beinhocker writes, “the Complexity approach to economics has the potential to make the historical framing of politics obsolete… the fundamental question isn’t Left versus Right; it is how best to evolve.” Explorers of a better world must look without ideological blinders for the best ways to evolve our society.

The complexity approach also suggests that changes in the set-up of systems will have wide-reaching impact on what emerges. While tinkering ‘within’ the system can bring about good things, to harness the full power of our complex economies requires structural change. Insights from law, history, experimental and New Institutional economics all point to the importance of good rules, governance, and innovative markets in creating wealth and opportunity.

To change our complex system, we need entrepreneurship in fundamental categories like law, community, major technologies, culture, and education. These are the areas that can shift the initial conditions of our systems and, as Beinhocker says, help us find out “how best to evolve” our societies.

The complexity outlook also challenges ‘profit maximization’ as the ultimate goal of all firms. Positive feedback can take many forms, and a good organization needs a clear method of checking the feedback that their efforts are getting.

Social entrepreneurship projects are uniquely situated to use both social returns (how well is this project solving a world problem?) as well as monetary returns (what is our bottom line? Are we sustainable?). This makes radical social entrepreneurship projects especially adept at coping with our rapidly changing world.