New views of the economic bust consider finance as a dynamic ecosystem.
Some time in mid-2008, mortgage defaults reached a critical mass. Wall Street went into free fall, and the US economy began to unravel. Then, like tumbling dominoes, economies around the world followed suit.
How could a few Americans defaulting on mortgages send the world economic system into a tailspin? There are probably as many answers as there are economists – maybe more. But for one school of economic thought, the more fundamental question is, why did almost no one see it coming? For these economists, the recent collapse reveals problems not just with the financial structure, but with how people conceive of and model the economy. A myopia pervades mainstream economic thinking, they charge. It fails to capture the dynamic – and somewhat chaotic – nature of what’s essentially a living system.
“We’re moving from looking at the economy in equilibrium to looking at the economy as a dynamic system that’s always changing,” says W. Brian Arthur, an external professor at the Santa Fe Institute in New Mexico. “It’s very much alive, ever-changing, and it’s never at equilibrium.”
Mr. Arthur envisions the economy as an ever-evolving ecosystem. With this as a starting assumption, it’s immediately clear that examining any part of this ecosystem in isolation, the reductionist approach that has dominated scientific inquiry since at least the Enlightenment – and which dominates economic theory now – will miss potentially game-changing interactions. That’s because self-organizing systems – the neurons that constitute your brain, the bees that make hives, and the humans that create markets – have what are called emergent properties. And it’s near impossible to predict these supremely important emergent behaviors by examining just the parts of the whole.
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