Complexity and the limits to knowledge

Economies are systems in which the macroscopically observable quantities emerge from the effects of interactions amongst the individual constituents of the system. They exhibit key features of complex systems: short-term non-predictability, emergent properties and multiple possible histories. The conventional approach to the control of the economy at the aggregate level requires the ability to both make reasonably accurate predictions of what will happen in the future in the absence of policy changes and have a reasonably accurate understanding of the impact of policy changes on the economy. Neither of these is the case. There are inherent reasons why the ability to forecast with any reasonable degree of accuracy over time is severely limited, and why the ability to extract information from aggregate time-series data about the ways in which economic variables interact is also restricted. The implication is not that governments should do nothing. The actions of governments clearly do have consequences, for better or for worse. But the conventional way of thinking, which requires a world which behaves like a dependable machine, needs to be abandoned. (c) 2004 Elsevier Ltd. All rights reserved.