Complex Economic Systems and the Role of Institutions  (CES) Session 1

Abstract: Risks of extreme weather events like floods, heat-waves, and storms are likely to increase under global warming. Since world markets are highly interlinked and local economies extensively rely on global supply and value added chains, local extreme weather events can have global repercussions.Accordingly, comprehensive climate risk assessment and cost estimation should take these interactions into account. Here, we present the dynamic agent-based loss propagation model acclimate. It describes the immediate response of the global supply network to local disasters as well as its recovery dynamics in the disaster aftermath. The model accounts for price dynamics and can thus base the decision rationale of the economic agents on clear and simple optimization principles. Furthermore, price effects like demand surge can be analyzed, which become important for large scale disasters. In contrast to most computable general equilibrium models, acclimate is not solved using inter-temporal optimization, but uses a recursive dynamic algorithm, i.e., the agents in acclimate do not have perfect temporal foresight. Instead, they base their expectations on future market developments on past information, and adapt them successively according to their gain in information. Instead of forcing the model onto an optimal equilibrium path, we resolve the complex out-of-equilibrium dynamics in the disaster aftermath as well as its decay towards a new macroscopic equilibrium state. This permits us to capture the nonlinear higher-order losses and their propagation after a disaster-induced shock.In our analysis, we introduce the economic amplification ratio measuring the importance of indirect losses with respect to total losses and study its dependence upon disaster size, network topology, and inventory size. Moreover, we study the dynamic economic resilience defined as the ratio of direct to total losses. We find a nonlinear dependence of the resilience on disaster size. Further, we analyze the influence of the network topology upon the resilience and discuss the potential of warehousing as an adaptation option. Close

Abstract: Formal organisations as manifestations of institutions have considerable impact on land use change dynamics. They affect productivity by the provision of knowledge and diffusion of technologies, control demand for services, improve infrastructure or manufactured capitals, and subsidise or prescribe specific land uses. Organisations have distinct objectives, actions and decision-making processes as they respond to socio-economic, environmental or climatic changes. Interactions between organisations with various objectives like governmental authorities and non-governmental organisations on regional, national and supranational levels affect the land use system in complex ways, and the interplay of these actions are important to consider in order to gain understanding of the system as a whole.Exploring the complex system of interacting organisations in land use demands a modelling approach that addresses temporal and spatial dynamics as well as the heterogeneity of involved actors and their actions. We present a spatial agent-based model of both land managers and organisations as autonomous agents and also represent the social network as an informal institution that is known to have an impact on the effect of formal institutions. Land managers produce services based on the natural, infrastructural and economic capital of their land and compete with other land manager types depending on demands for services. Organisational agents monitor land use dynamics and service provisions according to their objectives. Once a relevant metric like demand-supply gap exceeds a tolerated deviation, they apply modes of boundedly rational decision making, and take action accordingly. For instance, they promote innovations that spread through spatial social networks of land managers, affect productivity of certain land uses and thus influence the supply of specific services. Further represented objectives are connectedness of land and proportion of extensive land use, with restrictions and subsidies of certain land uses as potential actions.We investigate effects of noise in monitored data, variations in strength of measures like magnitude of subsidies, and planning horizons of organisations on connectivity of land uses, margins between demand and supply levels, and the degree of land use change. The impact of climatic changes (on capitals affecting productivity) as well as socio-economic and demographic drivers (affecting demands of services) is tested by analysing the difference between two IPCC scenarios. We find that strong subsidies may cause undesired outcome like strong perturbation through the decline of alternative service providers that become uncompetitive. Similarly, the land use system reacts sensitive towards the magnitude of noise in monitored data. Close

Abstract: A great number of real world networks are, in fact, one-mode projections of more complicated structures. Often, the network has an original bipartite architecture comprised of two different types of nodes. The topology of the projected network, and the dynamics that take place on it, can be highly dependent on the features of the original bipartite structure. Here we investigate how such structures might impact on the study of interactions among institutions regarding technological innovation.In a set of practices called open innovation, organizations may partner up with others for inter-firm cooperation in R&D. A good example of open innovation is the joint application for new patents by multiple institutions (e.g. corporations, universities, government agencies and so on). It is possible to construct, in such case, a bipartite network in which one set of nodes are institutions (agents) that are connected to patents they have developed (artifacts). The projection of such a network of innovation collaboration is the co-patenting network, connecting institutions who have join patent applications.One-mode networks, such as the co-patenting network, are often analyzed without taking into account the underlying bipartite network. However, network properties such as degree distributions, clustering, the distribution of components sizes, and the size of the largest connected component are affected by the structure of the underlying bipartite network. Here we investigate how such dependencies appear and how the statistical properties of the bipartite structure shape the topology of the projected network. A good understanding of the topology is critical for further studies of the dynamics on the network; in this case the potential flow of technological knowledge.We create an empirical bipartite network using the European Patent Office data dating back to 1978 for 40 countries with harmonized applicant names (OECD REGPAT and HAN databases). We project this network onto the agents. Thus, a new one-mode network is built connecting institutions that have patented together. We look at properties of the empirical network that may play a role in knowledge sharing. We compare these to the properties of synthetic bipartite networks and their projections. Synthetic networks are an important tool in understanding the processes that might operate on real world networks: they afford us the opportunity to study multiple versions of a network with supposedly similar properties.We create synthetic analogues of the empirical network by using a configuration model that preserves the original degree sequence of both sets of nodes and rewires the links randomly. We then compare the structural properties of the empirical network with those of the synthetic bipartite network and its projection. With both empirical and synthetic networks in hand, it is then possible to see, the role of the statistical features in shaping the topology of the projected collaboration network. Close

Abstract: The study of the causal determinants of economic growth and development has long aroused an intense interest amongst economists. Until recently, the heart of the debate has mainly focused on the role of capital accumulation, either physical or human, on the impact of institutional or geographical factors, on innovation and technological progress, or on the significance of other growth-promoting factors such as ideas, and even religious and cultural aspects.In this article, we focus on two different ?biological hypotheses? that have been recently made by two prominent cliometricians, Robert W. Fogel (post-1982) and Oded Galor (since 2013). Indeed, one of the most interesting aspects of both Fogel?s and Galor?s analysis of the dynamics of economic growth is that they rest upon biological explanations. More specifically, Fogel developed a physiological theory of economic growth, named ?technophysio evolution?, which is based on the synergism between physiological capital accumulation and technological progress. On the other hand, Galor has recently engaged in the search for deeper determinants of economic development, i.e. genetic factors.This paper is organized as follows. Sections 2 and 3 respectively present the genesis of these two approaches. Thus, in the case of Fogel, we show that this latest work of his academic career was clearly influenced by his previous work on slavery. Based upon interviews with some of his colleagues, i.e. Deirdre McCloskey, Richard Steckel, Stanley Engerman and Robert Margo, we also argue that Fogel did not have a full conception of his project at the beginning, but progressively discovered the potential of using heights data in order to assess human welfare, nutritional status and in turn economic growth. In the case of Galor, we argue that he is building a very coherent research project which does not only directly stem from his previous work on Unified Growth Theory, but which is also expanding it in a substantial manner. In the light of these historical developments, Section 4 then discusses the epistemological stances of these two scholars. We argue that, with respect to these studies, Fogel and Galor are both, first and foremost, empiricists. They both heavily lean on econometrics and statistics in order to address their research topics, and none of them has a very sophisticated conception of the relationship between economics and biology. Finally, in Section 5, we argue that the faith in the neutrality of statistical methods lead them to underestimate the political dimension of their own interpretation of the dynamics of economic growth. Section 6 concludes.In the light of this historical and epistemological analysis of Fogel?s and Galor?s, we strongly believe that materialist approaches based upon the resort to biological analogies, tools or concepts, are not problems in themselves. The limitations that we highlighted in this paper are primarily due to a rather na?ve epistemological stance about the exchanges between economics and biology. As Geoffrey Hodgson points out, ?biology is important for the social sciences because in both cases we have highly complex, variegated, interacting systems. The success of scientific explanation in biology, in its highly complex domain, is a lesson for economists? (Hodgson, 2010). The question is thus not whether it is relevant to have exchanges between economics and biology, because, we can get inspiration of all sorts from biology. Indeed, biology is not limited to physiology or genetics, but it is rather an enormous field, addressing very complex phenomena at many different levels of organization. The same is true for economics, and since these two disciplines are both dealing with living systems, as opposed to inert matter, there is no reason why further exchanges between these two disciplines would not provide useful insights for the understanding of complex and evolving economic and social phenomena. From a holist viewpoint, economic activities can be considered as a specific part of human biology. Therefore, the most important question is not whether economic growth is biologically driven, but which tools, which models, which methods of biology could enhance our understanding of these highly complex phenomena. From our viewpoint, there is little doubt that our understanding of both the functioning and the dynamics of economic growth and development will benefit greatly from further exchanges between economics and biology. Close

Abstract: This paper presents an agent based model for the study of coupled economic and climate dynamics that endogenously co-evolve across a range of different scenarios. The model offers a flexible laboratory to test various combinations of macroeconomic, industrial and climate policies both in the context of long run economic growth and medium run transition towards a greener economy. Furthermore, we propose a stochastic description of the feedbacks stemming from a warming and more volatile climate and study how such negative shocks propagate through the economy. For this reason, the model is particularly well suited for the study of extreme climate events, which are usually forgotten by standard integrated assessment models. Close

Abstract: This paper analyzes the performative impact of the European Commission?s model for estimating ?potential output?, which is used as a yardstick for measuring the ?structural budget balance? of EU countries and, hence, is crucial for coordinating European fiscal policies. In pre-crisis years, potential output estimates amplified the build-up of private debt, housing bubbles and macroeconomic imbalances. After the financial crisis, they were revised downwards, which increased fiscal consolidation pressures. By focusing on the euro area?s economies during 1999-2014, we identify two performative aspects of the potential output model. First, the political implications of the model led to a pro-cyclical feedback loop, reinforcing general economic developments. Second, the model has contributed to national lock-ins on path dependent debt trajectories, fueling ?structural polarization? between core and periphery. Close

Abstract: Economic theory has over the last few decades seen a transition from an almost total domination of the Neoclassical/Samuelsonian Paradigm (NSP), to an explosion of new approaches, leading to an era of unprecedented pluralism. Where there used to be only economics, the word is now prefixed by a plethora of specifications: experimental, evolutionary, behavioral, agent-based, complexity, computational, institutional, economic, feminist, agent-based, adaptive, and so on. The central question is how this will play out: (i) will these approaches be integrated into mainstream economics, as have alternative approaches in the past; (ii) will mainstream be replaced by some combination of these new perspectives; (iii) or have we enter into a permanent new era of economic pluralism?This question is fundamentally about the underlying epistemologies and ontologies of the approaches: is, for example, complexity theory merely a methodological toolkit, or is it a more profound ontological contribution? Can it be integrated into an NSP approach, or is it fundamentally incompatible?This paper proposes a way of mapping the plethora of disciplines in pluralist economics by characterizing the current state as a friction between three fundamentally incompatible epistemological perspectives: (i) the study of equilibria, (ii) the study of emergence and complexity, and (iii) the study of institutions and structure. Each of these are fundamentally unable to deal with the others: equilibrium theory is unable to handle both emergence and the role of social structures; institutional and structural perspective are unable to take into account the role of emergence and complexity; complexity theory has been limited in its capacity to account for downward effects of structure; and so on. Each perspective also points to valid observations about economic reality: institutions and social structures, equilibria, complexity and emergence, all play important roles in economics. But viewing economics through the lens of a single aspect is not enough. What is needed appears to be an integrated approach that balances and integrates all these aspects of reality - an approach that does not depart from the limitations of other approaches, but from an ontological description of economic reality.This paper argues that the combination between structure and emergence is more than the sum of its parts; it is "worse than complex" or "wicked" (Andersson et al. 2014). This suggests an approach to economics that does not confuse methodology with ontology, but that is, instead, question-driven and methodologically pluralist, reflexive and open, acknowledging the limitations of its methods while producing nuanced and contextualized accounts and conclusions. Close

Abstract: There are many avenues to analyze the role of competition. For instance, by means of its economic outcomes, its market structures, and its characteristics. The relationship between competition and its concrete economic outcomes, such as unemployment, growth, and income has been already extensively analyzed. Apart from the economic outcomes, different market structures have been also well described as to the amount of competitors, namely monopoly, duopoly, oligopoly, and polypoly. In comparison to that, only few contributions, however, scrutinize the characteristics of competition.This paper addresses that research gap by proposing an approach to the economic evolution of the characteristics of competition between firms. Competition among firms is a dynamic phenomenon. So, it is appropriate to take on an evolutionary perspective. The contribution arising from this approach is twofold. (i) various characteristics of competition, explained by various forms of selection, are presented. As a result, using analogy constructions to the biological sphere ? Darwinian thinking, economic competition may be characterized by genetic group selection. (ii) in order to expose the differences to the biological sphere, the naturalistic approach is considered, where culture additionally plays a major role. The quintessence of this paper is the deduction that competition among firms is a form of cultural group selection.The aim is to examine the characteristics of competition between firm organizations from an evolutionary perspective. For this purpose, a coherent approach is devised which not only draws on recent findings in that field as set out by Johnson et al. (2013), but also extend these findings by considering further evolutionary concepts. Cordes (2015) illustrates in his state-of-the-art article the most important evolutionary concepts, currently used and still emerging at the intersection of behavioral sciences, social sciences, including economics, and biology (van den Bergh and Gowdy, 2009; Stoelhorst and Richerson, 2013). Inspired by evolutionary theory, evolutionary concepts can be separated into two types (Cordes, 2015).First, Darwinian thinking is employed more commonly (e.g., Nelson and Winter, 1982; Johnson et al., 2013) and based on analogy constructions to the biological sphere induced by Darwinian ideas, embracing ?variation-selection-inheritance algorithms? (e.g., Campbell, 1965; Stoelhorst, 2008). Darwinian ideas capture natural selection acting on gene variation: genes with higher probabilities to be inherited spread, others tend to disappear. The probability of inheritance depends on relative reproductive success. Relative reproductive success depends on longevity, fecundity, and copying-fidelity (Dawkins, 2006). Second, besides selection processes that work on genes, there are additionally selection processes that work on culture in social organisms?, e.g., humans?, evolutionary history. Culture can be understood as knowledge, ideas, or belief (Richerson and Boyd, 2008). Some knowledge may survive, and other ones may die in the course of time. Those selection processes of culture are peculiarly taken into account by the naturalistic approach. Moreover, it relates culture to natural selection: since culture appears to occur later as compared to biological mechanism acting on genes, cultural evolution rests upon foundations laid before by natural selection (Cordes, 2015). Together, competition among firms is investigated with two types of evolutionary concepts: Darwinian thinking and the naturalistic approach.ReferencesCampbell, Donald T. (1965): "Variation and Selective Retention in Socio-Cultural Evolution", in: Barringer, H. R., Blanksten, G. I. and Mack, R. W. (eds.), Social Change in Developing Areas: A Reinterpretation of Evolutionary Theory, Cambridge, Mass.: Shenkman, pp. 29-49.Cordes, Christian (2015): "Evolutionary Economics", in: Wright, James D. (ed.), International Encyclopedia of the Social and Behavioral Sciences, Oxford: Elsevier, pp. 430-436.Dawkins, Richard (2006): The Selfish Gene: With a new Introduction by the Author, Oxford, England: Oxford University Press.Johnson, Dominic D., Price, Michael E. and van Vugt, Mark (2013): "Darwin's Invisible Hand: Market Competition, Evolution and the Firm", Journal of Economic Behavior and Organization, Vol. 90, Supplement, pp. S128-S140.Nelson, Richard R. and Winter, Sidney G. (1982): An Evolutionary Theory of Economic Change, Cambridge, Mass.: Belknap Press of Harvard University Press.Richerson, Peter J. and Boyd, Robert (2008): Not by Genes Alone: How Culture Transformed Human Evolution, Chicago: University of Chicago Press.Stoelhorst, Jan-Wilhelm (2008): "The Explanatory Logic and Ontological Commitments of Generalized Darwinism", Journal of Economic Methodology, Vol. 15, No. 4, pp. 343-363.Stoelhorst, Jan-Wilhelm and Richerson, Peter J. (2013): "A Naturalistic Theory of Economic Organization", Journal of Economic Behavior and Organization, Vol. 90, Supplement, pp. S45-S56.van den Bergh, Jeroen C. and Gowdy, John M. (2009): "A Group Selection Perspective on Economic Behavior, Institutions and Organizations", Journal of Economic Behavior and Organization, Vol. 72, No. 1, pp. 1-20. Close