“Complexity, Economics, and Public Policy” by Durlauf

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Introduction

It seems reasonable to state that the complexity that exists within the scope of systems models related to the assessment of economies and politics serves as a significant foundation for appropriate evaluations and projections pertaining to public policies. The utilization of complex and advanced formulas does not imply a great degree of ambiguity but offers consistent and concrete data sets for analysis in this vein – apparently if they are applied properly. Durlauf (2012) provides a coherent rationale that supports the statements above in his notable article Complexity, economics, and public policy. The latter contains a thorough discussion that gives convincing arguments that the mentioned complexity is able to advance the methodology of formal economic analysis.

It should also be noticed that the author further argues that even if complexity can impact how public policies analysis is done, it does not delimit the utilization of consequentialists’ approaches to comparison of these policies. Such an argument is directly related to Durlauf’s critique of the suggestion of Hayek and Gaus in this regard, to which a considerable part of the article is dedicated. This paper aims to provide the analysis of Complexity, economics, and public policy from the perspective of political science and will be organized as follows. First, the view of the article from the angle of politics will be given. Second, the crucial ideas of Durlauf (2012) will be presented and analyzed. Third, the publication by Hayek (1964) – through the lens of Complexity, economics, and public policy’s essentials – will be discussed, and the analysis will be mostly dedicated to Hayek’s doctrine. Fourth, the article by Gaus (2007) will be explored in a similar way as the one by Hayek. Fifth, final assumptions and conclusions – that will integrate all the critical findings from the paper – will be provided.

Political Science Perspective

Political science is the science of politics, about the laws governing the emergence of political phenomena (institutions, relations, processes), as well as the methods and forms of their functioning and development, the approaches to managing political operations, consciousness, and culture. There are two opposing points of view regarding the existence of regularities in politics. The first one, while not denying the possibility of relatively stable dependencies in political processes, nevertheless does not consider them sufficient to recognize the existence of general patterns in politics. Supporters of a different point of view believe that there are general laws in the political process, such as, for example, the law of the class struggle of Marx, the law of conformity to the development of the level of production with production relations, the iron law of Michels’ oligarchy, the rules of bureaucratization by Parkinson, etc.

It would be reasonable to state that Durlauf (2012) shares the second perspective as he believes that there are particular patterns, systems, and models that – with the application of mathematics – can be used to evaluate public policies. Such an approach allows achieving the necessary degree of integration of the three pillars of public relations nowadays – politics, economics, and law. According to Durlauf (2012), his “article considers some of the implications of complex systems ideas for the study of economics and the evaluation of public policies” (p. 45), which fully supports the arguments above.

Political science-primarily studies the political sphere of people’s life: political structure, institutions, and relations, as well as political personality traits, command, and culture. Therefore, the object of political science research is the political sphere of society, as an objective reality independent of the researcher. As the subject of specific political research, one can choose any aspect of the political sphere of society, for example, the political culture of citizens or political institutions. Hence, the subject of the article in focus seems to be “complex systems models for the study of economics and the evaluation of public policies” (Durlauf, 2012, p. 45). This allows relating the publication to the dimension of political science.

At this point, it should be emphasized that systems analysis – applied by Durlauf (2012) – in fact, is an alternative to behaviorism since, unlike the latter, it considers the political sphere as an integral, self-regulating system that is in direct interaction with the external environment. It allows one to use the general theory of systems in the study of political phenomena, including political conflicts, to streamline ideas about the political sphere, systematize the entire variety of political events, build a certain model of political action, and present the object under study as a single organism, the properties of which are not the sum of properties. Therefore, any changes occurring in a separate element of the system can lead to its imbalance. In addition, the systematic approach allows each element of the system to be considered as a subsystem endowed with certain properties. This, in turn, may be formulated as the opportunity to utilize particular mathematical models in order to attain the significant evaluation of a public policy, which is visible from the article.

The social environment in which political events develop can also be considered as a system or several interacting systems of one class or several classes. Moreover, each element of a system of any level can simultaneously perform different functions in relation to various systems or subsystems. However, Durlauf (2012) claims, “My analysis largely ignores other social sciences, although much of the argumentation applies to applications of complexity to them” (p. 45). This statement narrows the scope of the article’s discussion and allows it to focus on the most important aspects of the research – complexity and agent-based models.

Complex Models

The undoubted advantage of complex modeling is the ability to choose the level of materiality, which allows one to get a reflection of reality as a model, simplified to the degree required by the researcher. As a rule, a high degree of abstraction makes it possible to identify the main patterns of development of complex macroeconomic processes, such as economic growth, inflation and other consequences of the choice of the monetary policy regime, unemployment, and a number of implications of the conducted macroeconomic policy, cyclical fluctuations in politics. A lower degree of abstraction is more often used in modeling microeconomic processes, allowing one to solve problems related to the issues of optimization, rational choice, and risk analysis.

The use of complex methods significantly expands the possibilities of modeling, allows one to formulate new tasks, as well as improves the quality of management decisions. Thus, complex modeling within the scope of public policies evaluation, using various mathematical tools to simulate the basic properties of real processes and phenomena, is one of the most effective tools for studying crucial political problems. In order to construct them, it is necessary to highlight the essential characteristics of the real object under study and abstract from the insignificant. Here, the following statement will stress the importance of systems analysis as an alternative to behaviorism – that was mentioned above – for the article. “Together, the assumptions of bounded rationality, direct interdependences, and incomplete markets constitute a clear alternative to the behavioral and institutional assumptions that underlie neoclassical general equilibrium models” (Durlauf, 2012, p. 48). This approach to understanding complex systems serves as a foundation for justifying mathematical modeling in the framework of both economics and politics.

It should be noted that with the development of economic and mathematical modeling, the classification of the applied models becomes more complicated. Both new types of models and new ways of constructing mixed models of already existing types appear, which leads to the emergence of new classification features. In modern economic and mathematical modeling, mathematics acts as a necessary set of tools, providing a suitable mathematical method for solving almost any financial problem. But with the development of the modeling apparatus, the issue of classification also becomes more complicated (Durlauf, 2012). Along with the emergence of new types of models and the combination of models of different types into more complex structures, new signs of classification appear.

Complex systems are based on an indirect description of the modeled object using mathematical formulas. It involves the use of methods of algebraic, differential, and other equations connecting the output and input variables of the model, supplemented by a system of constraints and an objective function, and, as a rule, there is a way to obtain an analytical solution to the equations (Durlauf, 2012). Examples of analytical models are linear and nonlinear programming models, regression analysis, dynamic programming. According to Durlauf (2012, p. 51), complexity science has two primary aims, “First, it attempts to understand how microscopic interactions lead to macroscopic outcomes.” Second, it is focused on emergent properties that are probably would be better determined as properties that emerge at various levels of aggregation than the description of the elements of systems.

The apparent disadvantages of this approach are the computational complexity of solving the equations (especially with a large dimension of the objects under study), as well as the need to simplify real things to ensure the availability of an exact solution. However, these are compensated by the fact that complex systems approaches distinguish “from neoclassical economics, namely, that complex economic models introduce dynamical considerations that are absent from standard methods” (Durlauf, 2012, p. 54). Such a trait remains relevant and significant under the current conditions of ambiguity and uncertainty within the scope of politics.

One of the characteristic features of the modern world is the presence of a considerable amount of numerical information characterizing a wide range of political processes, which is accumulated in various state and non-state, national and international organizations. Each country has a corresponding statistical service, which has numerical data on all areas of the state’s activities (budget, demographic data, various economic, social indicators, etc.). Political science research centers accumulate different databases of content analysis, event analysis, etc.

These data have been collected over many previous years and are constantly updated, which allows one to consider them from the standpoint of studying the dynamics of political processes. The analysis of a large volume of such quantitative data is impossible without the use of mathematical methods. This requires the development of a methodology for the application of mathematical methods in the analysis of social processes, the formulation of appropriate mathematical problems in order to identify patterns and forecast the development of political and state-legal processes. The modern state of computer technology and its constant improvement make it possible to solve highly complex mathematical problems due to the constantly growing computing capabilities.

For example, the development of macroeconomic science in recent decades has been marked by significant progress in areas of theory such as monetary policy and long-term public policies’ improvements. Nevertheless, gaps remain at their junction that require filling and appropriate research efforts. The impact of the choice of a monetary policy regime on economic growth is one such example. The problem is of practical importance for many economies with emerging markets that are faced with the need to overcome the increased inflationary background and volatility of the national currency exchange rate.

Another example is as follows; currently, the most popular tools for assessing the effectiveness of the state are nonparametric methods for analyzing the operating environment – data envelopment analysis (Data envelopment analysis, 2019). The essence of the process is as follows: the state is presented as a system that consumes the resources of society and produces socially significant benefits (security, health, infrastructure, etc.). In this case, the production function that determines the process of converting resources into a result remains unknown; however, based on empirical data on costs and benefits, an approximation of the production possibility frontier is constructed. Distance to the production frontier, i.e., cost-benefit ratio, is a measure of the effectiveness of the system under consideration.

It should be noted that the specificity of the method lies in the fact that the estimates obtained are relative: the border is drawn strictly for a given set of states or regions. Differences in external conditions have become a key problem in applied research on the effectiveness of the state: the same amount of public goods in different countries and regions requires additional costs (Data envelopment analysis, 2019). At the moment, there are a number of methods for taking into account the influence of external conditions on the efficiency of the state.

Here, it should be noted that the article has a section that critiques Hayek-Gaus’s approach to complex systems. In this vein, Gaus defenses Hayek’s position that evolved moral rules – as well as independent individual actors in politics and economics – do not allow the consistent application of complex systems in public policy evaluation due to the subsequent uncertainty (Durlauf, 2012). Each individual has his or her own rationale that – in most cases – cannot be properly assessed by complex formulas. However, it is argued that “one can take a more optimistic view than Gaus with respect to consequentialist justifications for economic policies as determined by government authorities” (Durlauf, 2012, p. 63). This is supported by the following coherent and concise reasoning.

According to Durlauf (2012, p. 64), “More precise predictions typically involve careful empirical work in order to assess policy-relevant parameters.” Indeed, the more complex and advanced an evaluation is, the more extent of pre-assessment measures and research is to be taken. Then, “Part of the art of policy-making is the fine tuning of policies as their effects are revealed” (Durlauf, 2012, p. 64). This can be a kind of expedient policy; however, this expedience implies the recognition of the limitations to policy-makers knowledge, as well as adjusting policies to attain a particular goal.

Thus, there are specific prerequisites that demonstrate the presence of an exact extent of certainty within the political scope, which provides the opportunity for complex systems’ application. The rationale provided above is supported by the following concise statement. “If one has a well-defined set of mathematical equations that describe an economic phenomenon of interest, then unpredictability can be equated to the specification of probabilities associated with the different outcomes” (Durlauf, 2012, p. 66). At this point, it seems reasonable to turn to the provision of the doctrines of Hayek and Gaus, which will be founded on their related specific publications.

Hayek’s Doctrine

Economics is not an exception to this rule. Moreover, it is this science that can perfectly demonstrate such a pattern. Taking into account all the crisis situations and uncertainties of the economic systems of our time and the past days, it is possible to think over and over again about the most effective models and elements of the system for the final birth of the best solution for the surrounding world. A re-examination of the studies of economics by Hayek provides a field for the establishment and processing of new and old ideas, which at a certain point in time can help to establish order in a crisis situation and normalize the economic situation as a whole.

The main thesis of Hayek’s reflections is the thesis of the fundamental limitation of human knowledge. This means that knowledge as a final product cannot exist in any concentrated form in the form of complete truth. It cannot be fully conveyed in numbers and formulas. Knowledge is divided and dispersed to varying degrees between people and is subconscious in nature. Hence, it follows that not everything can be empirically confirmed. Hayek (1964) says that there is no single, final, and full-fledged truth that could describe the picture of the world and the economy, in particular. Knowledge is subjective. It passes from one generation to another, sometimes undergoes transformations, but from this, it does not become less significant.

Hayek said that the institutionalization that a person leads does not depend entirely on his or her conscious decision. It is strongly dependent on the very process of historical development, which unconsciously pushes one towards systematization in various spheres. Hence it follows that, for example, the market and the market system arose naturally rather than as a result of purposeful mental activity (Hayek, 1964). The market system was born and developed as a necessity for the further development of the human race. The market is a serious and large-scale stage in the history of mankind, allowing people at all levels of cooperation to increase our capabilities and knowledge to achieve greater goals.

Hayek investigated the mechanisms by which economic actors work and coordinate their actions. The scientist identified the main theoretical pillars of economics. He views prices as an information and communication system (Hayek, 1964). The theory of prices is highlighted, which should demonstrate the mechanism of price adjustment to destructive outside influence. The next important pillar is capital. This is a complex structure that consists of individual means of various sizes. The theory of capital is assigned the role of regulator of the mechanism of adaptation of respective capitals in the general structure. Money is an important point. This is the relationship between changes in the design of prices and their effects on the form of capital, the mass of money in circulation, production, and consumption, as well as the influence of the political environment, is considered as a separate item (Hayek, 1964). It should also be said about the interest of Hayek in the theory of the cycle, which examines the three pillars listed above together and clarifies the causes and types of failures in the functioning of the price-capital-money system.

Hayek recognizes the existence of objectivism and hard facts in the natural sciences. But if we are talking about social sciences, then the alignment is changing. Such sciences do not study the peculiarities of the functioning of the nature of things, but relations between people, which are very difficult to describe in the form of numbers and sign formulas (Hayek, 1964). It is not the facts of objective reality that are investigated, but human ideas about it and the intangible world of human thinking.

However, Hayek did not completely deny the empirical principle. He recognized the importance of such knowledge in his works. Empirical data can play an important role in predicting future economic events. According to Hayek (1964), forecasting is not an assessment of specific numbers. This is an assumption about the possible ways of development of events in the coming time. This postulate speaks of the difficulties in presenting specific numbers in forecasting. Further, it is necessary to say about an important component of the Austrian school of economics. This is the principle of methodological individualism, which states that social and economic phenomena are born from the actions of individuals based on subjective ideas. Hence, there is the idea according to which the national economy can only be regarded as a set of individual farms.

In his studies, Hayek anticipated and led the neo-Austrians in criticizing Keynesianism and monetarism. These currents viewed the system at levels different from the views of the neo-Austrians. Hayek had a negative attitude to the politicization of the economy, which to some extent was characteristic of Keynesianism. Initially, Hayek completely criticized any intervention of politics in the economy; political institutions could use the national economy for purposes detrimental to the national economy itself. However, it became apparent to him that economic institutions, without policy intervention, could abuse their powers (Hayek, 1964). Ultimately, he came to the conclusion that the influence of the political apparatus of the state on the economy should exist, but in a limited form of regulating the rule of law and excluding the abuse of power by economic actors. The state must create conditions for the people on their way to the implementation of their own financial plans. It is not the scale of the intervention that is important, but the scope of its application.

Gaus’s Doctrine

Normative individualism is the autonomous significance of the life of each individual, his well-being or satisfaction of preferences – is the basis, as is commonly believed, of the unconditional moral claims of each individual to non-interference in his life, well-being, or satisfaction of preferences. This is the critical thesis on which the overall Gaus’s doctrine is founded (Gaus, 2007). The moral claim to non-interference from others is fundamental to the liberal tradition. Of particular importance is the fact that each individual’s life, well-being, or satisfaction of preferences prevents the individual from justifying moral obligations that require him to abandon his own interests in order to work for the good and satisfy the choices of others. At the very least, the onus is on the individual to prove that some degree of non-interference or non-harm must be sacrificed to help meet violent demands. The liberal tradition accepts individual freedom as a political or legal norm.

Individual freedom is what each individual can legitimately demand from another. There may be many things in life that are just as worthy as an end as such or a means to achieve it, but – at least in the absence of special aggravating circumstances – none of them are suitable as a legal requirement for others. In part, the reason that freedom is the only that can be demanded of others as a political right is that the demand for liberty is unusually modest; to demand freedom is just to insist on being left alone in your independent actions or joint voluntary actions with other individuals (Gaus, 2007). Freedom as non-interference from others, therefore, is good that anyone with goals, objectives, or plans would like to demand from others, it can only be given by others and can be provided relatively cheaply, in contrast to other requirements, which can be satisfied or realized only at the expense of others.

In accordance with liberal tradition, respect for the rights of an individual and his freedom requires respect for the individual’s right to dispose of external objects – tangible and intangible property – acquired by him in a way that does not violate the equal freedom of others. Proponents of the liberal tradition are likely to agree with several concomitant provisions (Gaus, 2007). First, the seizure of the acquired property of an individual by peaceful means is already an encroachment on his freedom. Secondly, the outbreak of the products of an individual’s labor or property received by him as a result of the voluntary exchange of his labor or the products of his work violates his right to accept or refuse something. Third, a system that allows such violent takeovers jeopardizes all other freedoms; the inviolability of private property is the main condition for the general regime of freedom. Fourth, personal property guarantees are fundamental to economic prosperity (Gaus, 2007). In general, the liberal tradition maintains that freedom is possible only under conditions of private property and a free market.

Liberalists, whose main philosophical views are contractarian or consequential, will demand more direct justifications for compulsory funding for the production of a public good – justifications that do not focus specifically on the scope or severity of rights. Contractarians will simply point to the overall benefit that the public interest is hypothesized to bring. In the absence of particular complications, promoting the public good, even coercively if necessary, would be considered a Pareto improvement.

Coercive financing of a public good can be defended from positions within the liberal tradition since it implies only the mildest form of paternalism. Consequently, it requires only a little or no weakening of the vital parts of the rule against paternalism. The problem that arises when individuals are faced with the choice of donating or not donating money to finance the production of a public good is that these individuals usually manage to outsmart themselves.

Rational agents will wisely refuse to contribute their share; regardless of what the rest decide – whether it will be possible to collect a sufficient number of payers or not – a rational agent decides not to participate in the payment (Gaus, 2007). However, instead of ultimately getting the best possible result for oneself, namely, obtaining the good without paying for it, everyone will end up without this public good. The actual outcome will be even worse in terms of the fundamental values and preferences of the stakeholders than the outcome for each of the persons who are required to contribute their share. Forcing individuals to pay simply helps them overcome their desire to follow a strategy of being “too smart” that might harm them.

This appeal to a supposedly favorable paternalism points to a common feature in all of these excuses for collection of contributions — a feature that most opponents of statism within the liberal tradition would argue against. From the point of view of these tougher opponents of statism, none of these excuses is capable of taking choice or self-determination seriously enough. Opponents of statism within the tradition believe that its basic norm should be the protection of the order (or jurisdiction, or sovereignty) of the agent by himself and all of his personal property. The main evil of coercive interference lies in the violation by the interferer of the agent’s right to choose and not in the harm to the interests of the agent, which is usually characteristic of such breaches of the agent’s right to self-control. Thus, coercive interference remains unlawful even if it is in the interests of its victims.

The assumption that comes from the presentation of the two doctrines may be as follows. Indeed, Gaus seems to continue Hayek’s ideas regarding the essence of human rationality and its place in politics and economics. The related issue that is relevant for complex systems – as it comes from the doctrine’s crucial ideas – is that this rationality imposes a great extent of uncertainty on the evaluation process. A plethora of aspects cannot be expressed in numbers and formulas with the required degree of accuracy. However, it should be mentioned that nor Hayek nor Gaus do not reject the significance of empirical methods that can be used in politics and economics. This is the point from which Gurlauf (2012) starts his critique of Gaus-Hayek skepticism regarding complex systems.

Conclusion

To conclude, the article by Steven Durlauf – Complexity, economics, and public policy – was discussed through the lens of political science. The author’s fundamental idea is that complexity is to be considered as a set of mathematical means that can alleviate the modeling of significant political and economic environments. In order to apply complex systems, it is essential to obtain a great extent of data, as well as to conduct thorough research and define a formula that would fit best to a particular case. The doctrines of Gaus and Hayek were presented in order to show the rationale behind the positions that are being criticized by Durlauf (2012). It was found that Durlauf (2012) provides convincing and relevant arguments, and complex systems can be used in the framework of public policies evaluation indeed.

Reference List

Data envelopment analysis (2019). Web.

Durlauf, S. (2012) ‘Complexity, economics, and public policy’, Politics, Philosophy & Economics, 11(1), pp. 45–75.

Gaus, G. (2007) ‘Social complexity and evolved moral principles’, in: Hunt, L. and McNamara, P. (eds.) Liberalism, conservatism, and Hayek’s idea of spontaneous Order. London: Palgrave Macmillan, pp. 149–176.

Hayek, F. (1964) ‘The theory of complex phenomena’, In: Bunge, M. (ed.) The critical approach to science and philosophy: In honor of Karl R. Popper. New York: Free Press, pp. 22–42.

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DemoEssays. (2022) '"Complexity, Economics, and Public Policy" by Durlauf'. 29 December.

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DemoEssays. 2022. ""Complexity, Economics, and Public Policy" by Durlauf." December 29, 2022. https://demoessays.com/complexity-economics-and-public-policy-by-durlauf/.

1. DemoEssays. ""Complexity, Economics, and Public Policy" by Durlauf." December 29, 2022. https://demoessays.com/complexity-economics-and-public-policy-by-durlauf/.


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DemoEssays. ""Complexity, Economics, and Public Policy" by Durlauf." December 29, 2022. https://demoessays.com/complexity-economics-and-public-policy-by-durlauf/.