Is Complexity Economics the way to implement Climate Economy?
The COP15 and COP27 meetings in 2022 led to the establishment of loss-and-damage funds and to quota systems. This triggered critique from climate activists and NGO's that this retains a traditional environmental economic thinking. They believe that instead the economy should be designed according to the ecological boundaries.
The critique emphasized that the use of coal in EU and China increased in 2022 while the use of the more climate friendly natural gas fell. Environmental economics does not prevent such a development, and there will always be extraordinary conditions, as the current war in Ukraine, that is counterproductive to climate change.
Something is missing
Many ecological economic theories have proven unsuccessful due to lack of technology, to implement and assess their practicality. This however raises the question whether the algorithms from artificial intelligence (AI) may change this.
This has caused many NGO’s and politicians to consider an ecologic economic theory by the name of Complexity Economics. These thoughts are still being developed, but were initially phrased about 35 years ago (Santa Fe Institute). Status today can thus be summarised as: we don't know, what it is that we don't know, but we know, that what we know, does not suffice.
According to Complexity Economics it makes more sense to examine the relations between parties in a system, than to study the conditions of the individuals. The total is more than the sum of the individuals. The thesis is thus, that we should drop the thoughts on stable economic equilibriums and optimums. Instead, we should view economy as an ever evolving organism. Companies, consumers, investors etc. constantly adapt their actions and strategies, as the actions of others produce new advantages etc. Analyzing this requires a lot of data power.
In classic economy the rationality is instead based on all agents having the same acces to knowledge and largely the same prioritization. All thus seek the same ideals, albeit with some game theory modifications. There is emphasis on order, determination, stasis and deduction. In total this produces an equilibrium and again enables all of us to produce simple and unambiguous analyses.
The simplicity of these analyses are a main reason for their success. What we measure determines, what we understand, and thus what we do.
Complexity Economics is a possibility
In Complexity Economics a system is defined from its outer bounds rather than by its inner rules. Emphasis is thus on contingence, indeterminacy and openness to change. If you set the goals, the system will find the optimal ways to these. The more rules (up to a certain extent), the less complex the system becomes, but the more dynamics are lost. The limits and rules of the system should thus be carefully considered and defined.
In general, Complexity Economics will thus argue that consumers' free choice should be limited. A recent NGO proposal for how to reduce airline CO2 emissions, may illustrate the dynamics:
- A global system is introduced whereby every citizen is allotted a certain amount of airmiles per year. This principle corresponds to the Emissions Trading Systems and in particular to the Social Climate Funds of Sweden and Switzerland. After this, citizens can sell their allotted airmiles to others. This will e.g. enable wealthy citizens to continue doing remote tourism.
- The outer boundaries thus control the system. Furthermore social inequality is levelled off through compensations between those, that endure the climate effects and those, that cause it. At the same time, the immediateness of the market mechanism is secured: Those that optimize their actions according to their needs, are financially rewarded.
- In principle the solution is simple. But in reality the solution is very extensive and complex and will take a long time to implement. All citizens should e.g. be included, including those that are IT-challenged or have no IT access.
Complexity Economics thus retains the organic element of reality, but at the cost of overview. Simplicity is lost and thus the general understanding and objectivity is challenged. In the long run, this will affect the implementation. If citizens' should take on this extra and sometimes complex task, they should be able to clearly see the benefits hereof.
The good becomes dynamic and therefore complex
Whether something is good is thus no longer a question of whether it is in a state of equilibrium (the simplicity). On the contrary, it is determined against a limit, dependent upon time and other agents. It therefore quickly becomes complex to use as a measure of justice and fairness for at country. The more complex, the more difficult it is becomes to understand and communicate unambiguously. It therefore also becomes more difficult to agree when something is more fair and something else. When we lack objective bases for comparison, we instead rely on all interpreters to be objective and free of bias and thus share the same altruistic assessments. Are any interpreter/agent omnipotently free from opportunism and bias?
Complexity Economics will on the other side claim, that such a goal is neither met by neoclassical economy, for in that case economies and financial markets should in theory never move - an equilibrium should long have found a way and brought all to peace. This is not the case in reality where we see increasing entropy over time like e.g. recessions, rising wealth inequality, bear markets, boom/busts etc.
Economy should be simple
Economic methods and paradigms will most likely evolve in the coming years. Complexity Economics could find a roll in understanding how economies evolve, because the starting point is the relative reality between the agents rather than the absolute ideas (equilibriums). It can therefore prove a useful tool for macro forecasting, also in environmental economics, where increased development is much needed in the coming years.
But an economic paradigms basic success is a result of all agents being able to comprehend and apply it in everyday small decisions of whether something is desirable or not. Here, Complexity Economics lacks the necessary aesthetics and simplicity. It is probably the main reason why the concept has been 35 years in the making.
See also blog on climate economic theories
as well as blog on climate economy