Background on Economic Theories
Discuss About The Complex Systems Theory Development Practice.
Economic theories are paradigms to try and describe an economic phenomenon. The foundation of modern economics dates back to the 18th century (Puttaswamaiah & Samuelson, 2018). At first, the complexity theory was developed to explain phenomena in physical and biological sciences but has since advance to serve other fields such as economics (Allen, 2010). This paper provides an insight of the basic workings of the economic complexity theory in particular. In the initial section, the essay will outline an overview; background, characteristics and the key elements of the complexity theory while at the same time explain how global integration fits with the theory. Further on, evidence in support and against the theory shall be summarized. The proceeding sections will explain how the theory can inform policy-making. The next section of the essay will describe the limitations of the theory. And finally, in the last section, the essay will provide concluding thoughts on the outlook of the theory.
The complexity theory is a new paradigm within the economic theory (Gabbay, 2011). It is one of the alternative economic theories that have arisen over the past decades due to the growing awareness of the existing limitations of our existing economic theories. Other theories include the neo-classical growth theory, the endogenous growth theory, theory of institutions as a source of growth, and theory of cooperative group selection. For instance, one shortcoming of the neo-classical theory was its belief that the same economic solutions could be applied in all situations to get an expected result. Such limitations are part of the reason why the economic complexity theory was formed.
The economic complexity theory sees the economy as a complex adaptive system composed of several agents interacting through networks that are constantly evolving (Helbing & Kirman, 2013). Instead, through these interactions, emerging enterprises and markets arise by looking at the economy as a product of isolated individuals making an economic decision. The complexity theory sees individuals as embedded within social and cultural networks that influence their behavior and with limited information that often leads them to make irrational decisions leading to suboptimal markets. Faggini (2016) describes complexity systems as that which contains a set of components interconnected that work to produce non-obvious unique functions. In the complex systems, when one element changes, other components are also expected to change.
From the various definitions and explanations, it is possible to derive various components encompassed in the complexity theory. One is that systems are dynamic. There is high interconnectivity of elements yet the elements are relatively independent. The relationship between components is orderly though unpredictable but not chaotic. According to Faggini (2016), systems of an economy are susceptible to environmental constraints and are likely to adapt accordingly depending on the interaction of individual components of the systems. A visible focus of the complexity theory in economics is on adaptive efficiency to the evolution of economics. North (2017) maintains that the adaptive efficiency is all about what directs the economy to evolve throughout the ages. It is also about the openness and keenness of a society to acquire new concepts, knowledge, to be innovative and more willing to take risks in finding solutions to problems through time.
Overview of Complexity Theory
Recently there has been a shift of interest towards the study of complexity and emerging order in globalization (Cole, 2010). Globalization refers to the interconnectivity and interaction of markets around the world. People and businesses interact with each other through complex telecommunication systems, supply chain systems, trade networks and financial institutions all within the evolving global processes (Cole, 2010). The world has become increasingly seamless where physical boundaries are no longer a limitation for trade. The mobility of capital has enabled investors to move funds across the world as they explore markets with the highest returns for their money. Communication has become easier and less limiting with various alternatives. There are lower logistics costs aided by the diversity in transportation systems as well as increased competition from different players in the logistics industry. All this is enhanced by a complex global order that allows the interaction of nations into an integrated global economy where geographical boundaries are invisible.
The reduction of these boundaries increases interdependence of nations through a set of complex systems. This is added by the advancement in technology, infrastructure, telecommunications, and international trading organizations. The Complexity theory offers a set of modern tools to address issues of diversity and change to aid in the process of globalization.
Within the bounds of systematic relationships, sociology is pre-eminent. Globalization being a large-scale process, there is a need to address social issues in a systematic way on a global level. The complexity theory constitutes a wide scope of different approaches. (Bryne 2015) states that there are two prominent ways of addressing issues using concepts in the complexity theory. One is the assessment of the complex adaptive systems. The second method is the consideration that a small change gives rise to the development of new paths. This revolutionary theory is uniquely important to multinational corporation participating in global trade as it can explain any kind of complex system.
The characteristics of the complexity theory appear to be applicable in several fields of economics. For example, in dynamic markets, the markets continuously change and there are asynchronous interactions between businesses. When we consider a micro-economic level of this, it is possible to fit key variables in the market such as supply, demand, price, and quantity to capture the overall behavior and trends in the market. However, there is need to understand the intrinsic factors that bring about fluxes in commodities and profit beyond the general view presented by the market.
Evidence in Support and Against Complexity Theory
As already indicated earlier, the complexity theory helps us understand the complexities of the world (Byrne, 2012). This understanding comes to aid in designing and intervention of public policy. Experts in the public policy are attentive to developing the ideals of interaction between various actors to produce a predictable result (Gerrits & Marks, 2015). For instance, a government may form a set of different institutions. The interactions between the different institutions are then expected to give a particular outcome. Moreover, policymakers trying to avoid negative outcomes and amplify the positive outcomes could also exploit an understanding of these complexities (Eppel & Rhodes, 2017). The negative and positive incomes are part of the key elements of complex systems. Geyer & Rihani, (2012) tried to explain the relevance of the negative and positive outcomes to policy framing. They proposed that policy makers have limited cognitive ability to gather information. Thus, Policy makers can only pay attention to a fraction of issues and select only a small fraction to the top of their agenda. For this reason they are likely to pay attention to the positive feedback and ignore the negative feedback (Geyer & Rihani, 2012).
Notably, within the last 20 years, there has been a pertinent increase in the use of the complexity theory concept to explain the workings of the public policy world (Gerrits & Marks, 2015). These concepts are particularly important to better the design and management of change in the world of public policy. Scholars such as Room (2011) advocate that the complexity theory can be employed to mitigate the ambiguity and uncertainties that come with the complex world that we live in. He further suggests that merging the complexity theory with other theories such as the institutional theory would provide greater comprehension of public policy. By the same, he adds that the two theories are complementary to each other in that, each supplying aspects that the other lacks. The essay shall, later on, further dissect the institutional theory. Morc?o?l (2012) argues that the complexity theory offers instruments key in the comprehension of micro and macroeconomic problems necessary in the public policy process. Additionally, other authors including Rhodes in London (Rhodes, 2012), and Teisman, Gerrits, and Buuren in NewYork (Teisman, Gerrits & Buuren, 2010) similarly support the use of the complexity theory to provide governance and practice guideline. Further, the theory is applied in policy formation, decision-making, and implementation.
How Complexity Theory Informs Policy-Making
Other authors utilize the concept of unpredictability to inform the process and design change of public policies (Boulton, Allen & Bowman, 2015). They emphasize the use of experimental approaches for the policy process while making the assumption that there will be an emergence of new outcomes with every new approach. The literature on complexity acts as a guide for governments to navigate through complex systems and uncertain situations (Boulton, Allen & Bowman, 2015). On a related note, all scholars and authors mentioned contributed invaluable explorations of how the complexity is interrelated with the decisions of making policies. The theory stimulates policymakers to formulate alternative perspectives and practices for each problem and design policies correspondingly to equal the complexity of the various environments (Morc?o?l, 2012).
With the complexity theory becoming increasingly popular there is a need to examine whether the theory offers anything substantial. A basic understanding of the complexity theory equips individuals/groups/economists/nations with innumerable insights, analytical methods, conceptual frameworks and a synthesis of perspectives on how to adapt to dynamic environments. Rihani ( 2010), advocates for the complexity theory as a displacement from the previously flawed mechanist view of the world. Walby (2011) likewise asserts that the complexity theory, other than overcoming challenges posed by previous approaches, advances a dynamic process as well as co-evaluation of systems. Other advocates of the theory view it as a technique to simplify apparent complex systems. Be that as it may, the theory has its shortcomings Practitioners in different fields will argue that the theory may at times be difficult to apply in the real world (Ambrose, Sriraman & Pierce, 2011). Eagerness to accept the complexity theory as a new outlook on the world could lead to a complete dismissal of previous paradigms. In most instances, the complexity theory seems to be summing up by devoting to positivism and universalism (Ambrose, Sriraman & Pierce, 2011). In real sense, the practice of the conceptual theory is not as simple as advocators portray it to be. First of there are no identifiable complexity theories. And due to large extent to which concepts of complexity across different disciplines are exchanged, it is strenuous to unearth the precise nature of complexity.
Often the complexity theory is seen to encourage a combination of disciplines such as language, research methods, and a theoretical outlook. However, this interdisciplinary approach presents a number if issue (Ambrose, Sriraman & Pierce, 2011). First of, language can be ambiguous or different across different discipline. A similar world could have a different meaning in a different field. By way of illustration, a term used in politics could have a totally different meaning in the physics field. For instance, the term “emergence”. In biology, it represents a confined interaction without a focal point. While on the contrary, in politics we focus on emergence but there is the central government acting as the focal point (Cairney and Geyer, 2015). The two went on to declare that, perhaps the complexity theory does not give a new way of looking at the world, it plainly offers a right way of doing things.
Limitations of the Theory
Other theories closely related to the complexity theory include the aforementioned institutional theory. In better comprehension of policy formation, Room (2011) had mentioned the need to integrate certain aspects of the complexity theory with other attributes of the institutional theory. This is a theory that probes into how an organization can increase their ability to maintain competitiveness in rivalrous industries (Gross & Krieger, 2013). The institutional theory attempts to understand how institutions interact with their surrounding. On top of that, it is about the organization’s desire to grow and develop. A number of strategies can be employed in order to grow. The organization may adopt a number of strategies but the ultimate goal is to acquire resources and market share (Gross & Krieger, 2013).
Complexity does not unify the different aspects of economics, but it helps in establishing a platform for interaction as well as methods and terminologies useful in explaining and analyzing complex systems. It is evident from the essay that the complexity theory plays a unique role to inform policy by providing a set of alternative solutions to suit the dynamic environment. Whereas complexity does not answer all questions about the economy, it certainly helps us deal with our ever-changing environments. What’s more, progress in the economy is the ability to create and build an emerging global society that registers changes in human potentials. It is not just about the globalization process. The complexity theory facilitates the conceptualization of the interconnection of processes involved in globalization, a process that involves large-scale procedure of actions. That much explained, the value of complexity lies in the eyes of the beholder. In as much as in this essay, the complexity theory is a trailblazer breaking away from the previous mechanic worldview, to some, it is just but a passing infatuation.
Endogenous growth theory was developed in the field of economy. The theory mainly proposes showing that economic increase or growth is brought about or generated in the sector from direct results of micro procedure or activity (Atcouffe & Kuhn, 2014). It dictates that improvement or enrichment of the national stock of competence brings about increment in growth of economy through the way of augmentation of more perfect and imperative technological production.
Under this theory, it puts allot of stress in technical progress that comes from the amount of investments, stock competence and the supply in store (O’Brien, 2016). This theory is based on several assumptions which are; more firms are in the market or business arena, the know-how or advancement in technology is a non-rival good it is the inventions and innovation of many parsons and organizations in the arena that makes them to get more returns, the growth in technology is as a result of what individuals are involve in and lastly.
Concluding Thoughts on the Outlook of the Theory
The theory operates on three models which form the basis of its argument. The arrow model Arrow [1962) this model tries to show that at any given instance, brand stock competence consumes all the relevant perception/ understanding through experience but immediately they have acquired the skills, the setbacks in production becomes difficult to correct through the use of continuous education. This model can be represented in the form of equation as illustrated below.
Yi=A (K) F (Ki, Li)
Yi stands for output of the organization I, while Ki represents the organizations’ stock of capital, Li stands for stock competence, K represents aggregated stock of competence while A is the factor of technology. This equation asserts that if human capital remains the same then it will result to a stop in growth (Simmie & Carpenter, 2011). The second model is Levhari-Sheshinski Model which was developed from the first model. It gives emphasis on the overflow effect that comes from increasing understanding as the source of knowledge. This model holds the supposition that the origin of understanding of every organization is getting a line through doing is each organization’s input.
When the organization’s input goes up, it results to equal rise of understanding. It also assumes that the know-how or information of any organization is free for any other organization to utilize without paying a penny. In this case, knowledge cannot be rivaled on. In tis case the income rate is at the same level with competition ////. There is also the Romer mode. This model concerns itself with the spillover that closely relate to firms. This model closely links with the nations which are still developing. According to this theory, organizations output is majorly driven by the level of imperative competition. It goes further to suggest that the level of structured capital influences the turn over. It also considers understanding and knowledge as a public good that can be used by any firm in the long run
Yi=AKia Li1-Ak-β
The third model is King-Robson model. This model puts emphasis on getting in line by paying keen attention and watching the technical progress (Simmie & Carpenter, 2011). The firm can incur input to solve its problems through creativity and other firm thus can copy invention if it manages to solve its problem through the invented solution.
This theory tries to show globalization in the economic growth through Romer’s technological change model. The specialization of productivity concepts through the importation of equipment from other nations to work with the present stock competence to increase output. The human workforce takes the imported machinery and develops knowledge of how they function then come up with their own original or mastermind machinery to work for their firm.
The exchange of concepts and ideas during international conferences and the presence of cross-cultural businesses clearly depict globalization in the research sector. Many large firms take a major part in creating and bringing together all the new technologies the changes in innovation trends as fur as technological advancement is concerned. The contemporary inventions and innovations of things such high speed computers and other electronic devises has improved the lives of people globally but it has also come with its challenges and setbacks. It has led to increment in salary and inequality in income and high rates of unemployment, replacement of stock competence and increased recessions.
Human capital or stock competence refers to employees’ level of experience and knowledge thus organizations have to work smart in order to find more stock competence and add to the existing workforce in the organization (Izushi, 2018). Level of knowledge and the workforce is taken as something which value can be added into and be exchanged with better ones. A risk also arises in the fact that stock competence is owned by the worker and can move from place to place and not the employer. The stock competence can depart from the organization at any time any time thus calling for the firms to stand with their most elusive and useful workers so that they may not feel bored and leave the organization
This endogenous growth theory is radical in the fact that it tries to bring a forecast of greater economic expansion because of huge population and also shows the non-rivalry ability of using similar knowledge (overspill) by more than one firm to increase its productivity or solve the existing problem. The endogenous growth theory tries to give a forecast of the expenditure of the government’s and tax have got all long-term and short-term effects on expansion both in finance and trade
The theory holds basic effects on policy for both first world and third world nations’ economy. It tries to bring forth the coming together of expansion pace of capital of the growing and already mature nations are not expected to happen. Endogenous theory can be used to build up on growth regressions which we can use to address comfortably the issues of undeviating impact of varied institutions/ policies on growth (Sanaú-Villarroya, 2014). From the theory of endogenous growth, it clearly depicted that competition and injection of propels invention and expansion in sections of the nations are not distanced with technological frontiers. Therefore, it pushes for formation of policies that enhance for competition policy as this theory can be used to evaluate the economy of the nation and find its setbacks such as the Frazer index used to rank countries according to their performance in product market and try to create policies that will focus on its potentiality. The policies of the government have the potential to lift up the nation’s expansion rate provided they bring about stiff competition in the business arena and take the initiative of stimulating output and the creativity and invention progress.
Furthermore, the theory puts much stress on the importance of learnt knowledge and how it affects the turn over or returns of the firm (Izushi, 2009). This clearly shows that investment in education or knowledge would lead to turnover thus the government can come up with policies that put emphasizes on knowledge so that it can come up with more skilled manpower who will bring change in the thought pattern of the firm as education is the lever of growth. Policies should focus on investing in education. The percentage of learned interindividual who are knowledgeable in the firm will affect greatly the performance of the company. This will determine the creativity of the firm that makes it to build its reputation.
In a nutshell, this theory is trying to suggest the importance of education which is directly proportional to the performance of the firm. The policies made by the firm should focus on imparting knowledge that is relevant to its citizens. Furthermore, this theory shows that the more the number of people working in the intellectual sector of any given area, it raises the productivity level and chances of success in that area. In line with this, this gives insight in the policy section that it should encourage more people to invest in the intellectual level so as to build on the business sectors.in both academic sector, health sector and infrastructure will enhance the expansion of economy (Al-Ubaydli & Kealey, 2011). Changes in policies that may hinder growth of small firms’ due tough regulations on the stock competence leads to inflexibilities of the workforce which is responsible for the failure of firms and their success in the business arena. Thus, the theory may help the government to come up with more reasonable credit constrains so that it may not be an obstacle to entry and post entry in growth for both large and upcoming organizations.
No organization or firm can perform well in the absence of finance. When there is too much financial restriction there will be fewer firms in the business arena thus policies that put less constrains on capital will be favorable to firms leading to more injections in the economy. The policies of any given economy should be more compliant to enable firms to invest in various businesses (Izushi, 2018). The theory also gives insight to the importance of injecting in the privet sector especially on research which is the door way to expansion and steps closer to advanced technology. The government can inject finance on research work so that new knowledge can be developed to help come up with new ways of doing business. Necessity is the mother to invention thus when the research sector is well finance to do its work, it can yield much better results that can stir the development and invention of new ways of solving problems in the economy.
The theory is limited greatly in need of technical wants/demands included in the models. It has clearly projected out its unsanctioned or illicit unstandardized results leaning on the link between product, resources and its distribution of income which does not apply to models that have two or more sections. Thus, it results to fundamental overabundance when calculating total factor product /////. It is difficult to determine separately the growth path of endogenous steadiness and existence .it has got setbacks with conspicuousness and stability the assumption of diminishing income to stock competence. Endogenous theory unsuccessfully explains the income divergence between the first world and third world nations yet it is complicated in structure.
It is almost a tall order to check this theory using empirical evidence. It neglects/much part of the theory uses assumptions on how things that can not be measured affect those other variables that cannot be measured. This critique suggests that the theory does not give concrete facts on the variables that affect each other and hoe they can act outside the model they have been structured in (Dzielinski, 2011). There is nothing new in the endogenous theory since increased returns and the internal factors of variability have been developed from the older theory (neoclassical theory and the model of Kaldor). Furthermore, it depends largely on the production purpose and stability state. In addition to this, it puts to much emphasis in stock competence and leaves out the function of institutions.
There is no distinct difference between stock competence and tangible capital. It carries the assumption that stock competence adds up, when fabricated with tangible capital thus, resulting to actuation. Merely accumulating stock competence and tangible capital cannot automatically result to increase in economy expansion. On the contrary, to what this theory predicts, many nations are coming together to form a single or common growth speed in the course of existence.
The major pathway of endogenous growth theory is that it finds many of its bases from neoclassical assumptions that cannot be used by Brzezinski and Dzielinski (2009). Assuming that all the industries are alike, it does not consider powerful factors such as UDCs, weak infrastructure which affects the expansion of economy. it pays attention to the long run of expansion speed (Fagan, Gaspar, & McAdam, 2016). Alternatively, it is of great importance if the theory concerns itself with developing more effective and short-term goals that can be achieved within a given time frame. It should also try to build on facts that can be explained empirically. it should also be open enough to enable research be carried out for other countries and implement.
Conclusion
Several theories have been advanced to try and explain the relationship of growth in economy. Endogenous theory being one of them, it tries to bring out the picture of the relationships of things that can internally course a firm to grow or not. despite the fact that it helps to monitor the growth rate of firms, it also has its setbacks in the economy. It does cannot be used to empirically explain the resource for occurrence of other unmeasurable facts.
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