In praise of complexity economics

Chris Dillow writes In praise of complexity economics.

One feature of complexity economics is that recessions can be caused not merely by shocks but rather by interactions between companies. Tens of thousands of firms fail every year. Mostly, these failures don't have macroeconomic significance. But sometimes — as with the Fukushima nuclear power plant or Lehman Brothers — they do. Why the difference? A big part of the answer lies in networks. If a firm is a hub in a tight network, its collapse will cause a fall in output elsewhere. If, however, the network is loose, this will not happen; the loss of the firm is not so critical. Daron Acemoglu has formalized this in an important paper, and there are some good surveys of network economics in the latest JEP.

Emphasis Mine

A critical node in a network is one that has survived previous prunings whether through skill or luck. The longer it survives, the more critical it becomes as success garners more connections. Thus making the inevitable failure all the more devastating.

But this still leaves the question why firms fail? The Marxist explanation is that of over-production: more goods are produced than that can be consumed.

This is what is happening with the oil production currently. There are producers who are losing money as they pump oil. Instead of shutting down, these producers have to keep pumping in order to maintain income so that the investments are paid off. Capital cannot lie idle for long.

As always, the Capitalist economists cannot look too deeply at Marxist explanations because they will have to admit the Marxist Laws of Motion for Capital. They would rather say that they do not know than admit an alternative explanation.

Over-production is a direct result of the exploitation of workers under the Capitalist system through the appropriation of surplus value. This is what no Capitalist economist will admit to.

Crises are a normal part of the operation of Capitalism. The current struggle among economists is about how to mitigate the effects of such crises.