The Complex Roots of Economic Liberalism

Liberalism, when applied to economic activity, has, in its various forms, emphasised the desirability of leaving as much freedom of choice as possible to the individual. Yet, implicit in such arguments is the idea that, by so doing, the economy will self organise into a state which has a number of desirable properties. In particular, economic theory, has, over the past century moved to the position that markets, in which individuals are left to their own devices will self organise into an equilibrium and we have shown that such equilibria have desirable social welfare properties.

However the Achilles heel of modern economic theory is the problem of stability. By insisting on studying the properties of equilibrium states without being able to show that an economy would ever arrive in such a state, we have put to one side what is possibly the most important problem in economics. One escape route, used by macroeconomists, has been to simply assume that the economy is always in equilibrium. But, by avoiding the analysis of its out of equilibrium characteristics, we are doomed to fail to account for endogenous crises, such as that from which we are currently still suffering.

An inspection of historical writings on this subject shows that our predecessors were well aware of this problem. Some wrote it off, Others like Hayek argued that there were mechanisms that would achieve an adjustment to equilibrium but his analysis was far from complete, and Debreu thought that the task was impossible.

Yet, treating the economy as a complex adaptive system, an idea which also has long historical roots, may help to resolve the question. In such systems aggregate behaviour emerges from the interaction between individuals. It cannot be understood by looking at the typical or «representative» agent, any more than the collective development of an ant colony can be deduced from the behaviour of the typical ant. However the sort of evolution of an economic system that would be consistent with such a view, is far from the simple convergence to equilibrium usually assumed. One simply cannot assume as we have done, that economies left to their own devices will settle to a satisfactory state and indeed, all the empirical evidence suggests that they will lurch from one crisis to another. Unfortunately, taking such a view, while it will give us a more reasonable basis for analysing economic phenomena, may finally destroy the hope, made explicit by Walras, that one day economics would be a science in the same category as astrophysics.