Prior Commitment and Uncertainty in Complex Economic Systems: Reinstating History in the Core of Economic Analysis

Date01 September 2017
DOIhttp://doi.org/10.1111/sjpe.12138
Published date01 September 2017
PRIOR COMMITMENT AND
UNCERTAINTY IN COMPLEX
ECONOMIC SYSTEMS: REINSTATING
HISTORY IN THE CORE OF ECONOMIC
ANALYSIS
John Foster*
ABSTRACT
Conventional ‘neoclassical’ economics is very useful in understanding how prices
are determined but less so as a general basis for understanding the economic
behaviour we observe. What is not taken into account is that economic systems
are dissipative structures that are complex, but incompletely connected, networks
of rules. It is explained why a degree of prior commitment in decision-making is
inevitable in complex economic systems and the implications of this are exam-
ined. It is argued that economic analysis must begin with the reality that choices
are made in relation to pre-existing commitments, both with regard to economic
structures built in the past and to prevailing systems of belief, when deciding
what to do in a future characterised by uncertainty. It is explained how conven-
tional economic incentives can be dealt with in such a complex historical context
building upon the neoclassical perspective of Alfred Marshall over a century
ago. It is argued that econometric modelling remains viable and useful in under-
standing behaviour in complex economic systems. It is shown how we can design
and interpret time series econometric modelling from a complex systems
perspective.
II
NTRODUCTION
....if your theory is found to be against the second law of ther-
modynamics I can give you no hope; there is nothing for it but
to collapse in deepest humiliation.
Sir Arthur S. Eddington (1928)
Conventional economics offers us a very tidy core conception of economic
decision-making it is centred upon choosing equilibrium solutions of con-
strained optimisation problems, in either strategic or non-strategic contexts,
purportedly using the best available information. Over the years, many
*The University of Queensland
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12138, Vol. 64, No. 4, September 2017
©2017 Scottish Economic Society.
392
economists have offered critiques in which they conclude that this can be an
inadequate and misleading representation of economic behaviour. However,
this has remained a remarkably durable way of motivating economic analysis
and it is clear why. Seeing people as trying to do the best they can, in the cir-
cumstances that they face, is a very attractive starting point in trying to
understand how responding to incentives leads to mutual gains from economic
cooperation. It is a particular formalisation of Adam Smith’s two centuries
old hypothesis concerning the behaviour of people when given the freedom to
buy and sell in markets and to freely strike contracts protected by law. It was
Alfred Marshall, among others, who went on to lay down the foundations of
the modern ‘neoclassical’ representation of economic behaviour. But his pur-
pose was not to provide a general theoretical representation of all economic
behaviour but to provide one that could help us understand how prices are
determined. His was a ‘price theory.’ ‘Microeconomics’, built upon con-
strained optimisation theory, only became a term widely used after the emer-
gence of the concept of ‘macroeconomics’ in the 1940s. But price theory was
kept in the title of George Stigler’s influential microeconomics textbook in
1946 and was still in use in the title of Milton Friedman’s famous lecture
notes in 1962.
Today, the use of the neoclassical conception is much more general than
merely price theory it constitutes a theoretical core for understanding how a
whole economic system functions, operationalised in the general equilibrium
conception of L
eon Walras, fully formalised by Kenneth Arrow and G
erard
Debreu in 1954.
1
Meanwhile, microeconomics has, to a large degree, become
a branch of strategic game theory, still seeking out equilibrium solutions but
far-removed from old-style neoclassical price theory. More recently, the fun-
damental tenets of neoclassical economic theory have come to be scrutinised
by experimental economists, and although the evidence seems to suggest that
such theory remains useful in understanding price determination in appropri-
ate contexts, it does not seem to be adequately supported to be chosen as the
axiomatic core of a general theory of economic behaviour. Such doubts
opened the door to modern ‘behavioral’ economics in which the findings of
both economic psychologists and experimental economists have been docu-
mented in a rapidly increasing volume of literature.
In a nutshell, this literature tells us that, although there is no doubt that
people try to optimise when they are able to do so, definably economic
choices are also determined by other important motivations. Of course, this
has not gone unnoticed by conventional economists and concessions have
been made: rationality can be viewed as ‘bounded’; the provision of informa-
tion can be ‘asymmetric’; market coverage can be ‘incomplete’, etc. But,
despite all of these qualifications, constrained optimisation in equilibrium has
remained firmly at the core of conventional economic theory and has even
been defended by prominent critics of modern economics, such as Paul
1
The beginning of this transition can be traced back to the seminal contributions of Allen
and Hicks (1934).
PRIOR COMMITMENT AND ECONOMICS 393
Scottish Journal of Political Economy
©2017 Scottish Economic Society

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT