Is the discipline of economics built on sand? Most economists would answer with a resounding “no”. But most must also know that the economy is not characterised by perfect foresight and equilibrium, but by trial and error and evolution. That was the intuition of the Austrian economists, Joseph Schumpeter and Friedrich Hayek. But this vision has had next to no influence in the discipline itself. This gap between how economists think and what economies are is evident to any careful observer. But hitherto nobody has closed the gap between rigorous theory and broad vision. This, argues McKinsey’s Eric Beinhocker in a brilliant, thought-provoking and wide-ranging book, published last year, is about to change.* Welcome, he argues, to the world of “complexity economics”, computer-based simulations and more realistic assumptions. Mr Beinhocker has a measure of the complexity of the modern economy – the number of distinct products, or “stock keeping units”. In a stone-age culture the number was a few hundred. In today’s New York, he suggests, the number may be 10bn. Moreover, not just most of those products but the complex system that invented, designed, produced and sold them is largely the result of just the last 250 years out of 2.5m years of human evolution. The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free. Read more
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