Complexity economics as an early-warning system: a proposal
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Economics has largely failed to predict global financial crises. In an increasingly globalized world, the consequences of that failure are likely to become more severe. The present article attributes much of economics’ malaise to the traditional and continuing use of equilibrium models. The unifying assumption of the equilibrium viewpoint has been that the components of an economy will persist in a state of balance unless perturbed by external factors. This article challenges that assumption, proposing instead that economies are typically out of balance, and that equilibrium is transitory. That single changed assumption, central to complexity economics, entails additional changed assumptions regarding policymaking. Global economic growth will be most effectively managed, and crises most effectively avoided, when economists deploy dynamic models which address the immediate future. As a programmatic example, Boolean Network (BN) modeling of global economic criticality utilizing the Lempel-Ziv (LZ) complexity metric is proposed as an Early Warning System (EWS) useful in decision-making and forecasting economic crises. The new viewpoint, if adopted, would likely present political challenges, which are evaluated at some length.