The Microeconomics of Complex Economies

Didactics: How to Work with This Textbook at Introductory, Intermediate, and Advanced Levels, and in Different Kinds of Courses

• Beyond the “Economics of the x”: A Different Task, a Different Style
• Sample Syllabi: Roadmaps for Teaching in Different Formats
• Prerequisites for Particular Parts
• Reference

List of Abbreviations

Part I: Basics of the Interdependent Economy and Its Processes

Chapter 1. Introduction to the Microeconomics of Complex Economies

• 1.1 Introduction: A Microeconomics of Direct Interdependence
• 1.2 Different Problem Structures in Directly Interdependent Decision Situations
• 1.3 Competing Paradigms in Economics: Invisible Hand Versus Fallacy of Aggregation
• 1.4 Uncertainty, Strategic Uncertainty, and Bounded Rationality
• 1.5 Path Dependence, Nonergodicity, and Cumulativity in Processes of Change
• 1.6 Social Rules as Informational and “Expectational” Devices
• 1.7 Social Rules and Social Institutions as Solutions to Coordination and Dilemma Problems
• 1.8 The Public Good Character and Positive External Effects of Social Rules and Social Institutions
• 1.9 “Instrumental” and “Ceremonial” Dimensions of Social Institutions
• 1.10 Real-World Microeconomics
• Further Reading
• Further Reading—Online

Chapter 2. Tools I: An Introduction to Game Theory

• 2.1 Introduction
• 2.2 Understanding a Strategic Game
• 2.3 The Invisible Hand and the Fallacy of Aggregation Again
• 2.4 How Not to Play a Game
• 2.5 How to Play a Game
• 2.6 How Many Games Can We Play?
• 2.7 Summary
• Chapter References
• Further Reading
• Further Reading—Online
• Exercises

Chapter 3. Problem Structures and Processes in Complex Economies

• 3.1 A Continuum of Social Problem Structures
• 3.2 Solutions to Social Dilemma Problems
• Further Reading
• Further Reading—Online
• Exercises

Chapter 4. Approaching Real-World Interdependence and Complexity: Empirical Phenomena in the Global Economy

• 4.1 Introduction
• 4.2 The Specific Inherent Complexity, Volatility, and Uncertainty of Today’s Real-World Economy
• 4.3 Individualistic Vs. Common and Collective, Strategies to Cope with Complexity
• 4.4 Implications of Real-World Complexity for Microeconomic Theory and Modeling
• Chapter References
• Further Reading—Online
• Exercises

Part II: Markets: General-Equilibrium Theory and Real-World Market Structures

Chapter 5. The Ideal Neoclassical Market and General Equilibrium

• 5.1 Introduction: The Neoclassical Paradigm and Research Program
• 5.2 Consumer Theory
• 5.3 Production Theory
• 5.4 Partial Equilibrium
• 5.5 General Equilibrium
• 5.6 Further Developments
• 5.7 Extensions and Transitions: The General Theory of the Second Best, Asymmetric Information, and Efficiency Under Imperfect Information
• Chapter References
• Further Reading—Online
• Exercises

Chapter 6. Critiques of the Neoclassical “Perfect Market” Economy and Alternative Price Theories

• 6.1 Introduction
• 6.2 The Mistaken Mechanical Analogy
• 6.3 Internal Inconsistencies
• 6.4 Preferences and Choice
• 6.5 The Classical Theory of Prices and the Sraffian Critique of the Neoclassical Theory of Value and Price
• 6.6 An Outlook on Post-Keynesian and Institutional Price Theories: Setting and Administering Prices
• 6.7 Conclusion and Outlook
• Chapter References
• Further Reading
• Further Reading—Online
• Exercises

Chapter 7. Real-World Markets: Hierarchy, Size, Power, and Oligopoly, Direct Interdependence and Instability

• 7.1 Real-World Phenomena Again, the Corporate Economy, and Oligopolistic Market Structure
• 7.2 Factors Leading to Size, Power, and a Small Number of Interdependent Suppliers
• 7.3 Pure Monopoly
• 7.4 Oligopoly
• 7.5 Natural Monopoly
• 7.6 Heterogeneous Oligopoly and Monopolistic Competition
• 7.7 Heterogeneous Oligopolistic and Monopolistic Competition: Opportunities for Strategic Behavior of Firms and Their Potential Social Costs
• 7.8 A Final Consideration of Firm Size and Power, Strategic Cooperation, Monopolistic Competition, and Real-World Markets
• Chapter References
• Further Reading—Online
• Exercises
• Solution Keys
• Appendix A Neoclassical Model of Monopolistic Competition

Part III: Further Tools and the Analysis of Complex Economies

Chapter 8. Tools II: More Formal Concepts of Game Theory and Evolutionary Game Theory

• 8.1 Introduction
• 8.2 Formal Concepts
• 8.3 Concepts from Decision Theory
• 8.4 Solutions of Normal-Form Games
• 8.5 Extensive Form Games
• 8.6 Repeated Games
• 8.7 Population Perspectives and Evolutionary Games
• 8.8 Rationality in Game Theory
• 8.9 Conclusion
• Commented Game Theory Textbook References
• Chapter References
• Further Reading—Online
• Exercises
• List of Symbols

Chapter 9. Tools III: An Introduction to Simulation and Agent-Based Modeling

• 9.1 Introduction
• 9.2 Method
• 9.3 Particular Issues in Computer Simulation
• 9.4 Advantages and Disadvantages of Simulation
• 9.5 Microeconomics and Computer Simulation
• 9.6 Simulation in Practice: An Example
• 9.7 Outlook
• Commented Textbook and Introductory Guide Reference
• Chapter References
• Further Reading
• Further Reading—Online
• Exercises

Chapter 10. A Universe of Economies: Interdependence and Complexity, System Trajectories, Chaos, and Self-Organization

• 10.1 Some Basics of Complexity Economics Versus Neoclassical Economics: Topology, Evolutionary Process, and Bounds and Barriers to Perfect Rationality
• 10.2 Local and Global Information, the Neoclassical and the Complexity Economics Approaches, and Complex System Dynamics
• 10.3 A Quasi-Neoclassical Perfect-Equilibrium Model Based on Global Information and Direct Interdependence
• 10.4 A Policy Solution and the Emergent-Institutions Solution
• 10.5 Conclusion
• Chapter References
• Further Reading—Online
• Exercises

Chapter 11. Dynamics, Complexity, Evolution, and Emergence—The Roles of Game Theory and Simulation Methods

• 11.1 Introduction
• 11.2 The Picture Becomes Complex
• 11.3 Formal Aspects of Dynamic and Complex Systems
• 11.4 The Origins of Order, Turbulence, and Complexity
• 11.5 Modeling Complexity
• 11.6 Why Does it Matter: The Agent’s Struggle with Her Complex Environment
• 11.7 Conclusion
• Chapter References
• Further Reading
• Further Reading—Online
• Exercises

Part IV: History of Thought and Contemporary Models in Complexity Economics

Chapter 12. Themes of Complexity in the History of Economic Thought: Glimpses at A. Smith, T.B. Veblen, J.A. Schumpeter, and Others

• 12.1 Introduction
• 12.2 Adam Smith: The Classical Model of the Origins and Emergence of Institutions, and the Modern Significance of the Classical Approach
• 12.3 Thomas R. Malthus: Introducing Basic Biological Principles—The “Principle of Natural Selection” and the Danger of “Biologism”
• 12.4 Karl Marx: Principles of Historical System Evolution, and Collective Action Capacity
• 12.5 Carl Menger: The Early Austrian Individualistic Evolutionary Approach—An Organic Analogy of Market Evolution
• 12.6 Alfred Marshall: “Economic Biology” as the “Mecca” of Economics
• 12.7 Thorstein B. Veblen: The Founding of Evolutionary-Institutional Economics
• 12.8 John M. Keynes: Complex Microfoundations of Macro-Price Level, Interest Rate, and Employment Under Uncertainty–and the Post-Keynesian Financial Instability Hypothesis
• 12.9 Joseph A. Schumpeter: Complex Process Through “Entrepreneurial” Innovation—Bridging Neoclassical Mainstream and Evolution
• 12.10 Karl Polanyi: The “Market” Economy, the Disembedding of the Market and its Downside
• 12.11 Gunnar Myrdal: Path-Dependent Development of Complex Systems—Circular Cumulative Causation
• 12.12 Herbert A. Simon: Complexity, Bounded Rationality, and “Satisficing”
• 12.13 Nicolas Georgescu-Roegen: The Economy as an Open System, and its Entropy
• 12.14 Karl W. Kapp: Open-Systems Approach, Entropy, and the “Social Costs of Private Enterprise”
• 12.15 Further Contributions to Complexity Microeconomics
• 12.16 Clustering Economists in Diverse Economic Paradigms, and a Final Remark
• Chapter References
• Further Reading
• Further Reading—Online
• Exercises
• Solution Keys

Chapter 13. Recent Core Models of Complexity Microeconomics

• 13.1 Introduction
• 13.2 A. Sen (1967) on the Isolation Paradox and Assurance Game, and the Importance of the Future
• 13.3 A. Schotter (1981), R. Axelrod (1984/2006), and K. Lindgren (1997) on the Emergence of Institutions
• 13.4 T.C. Schelling (1978) and R. Axelrod (1984/2006) on Segregation
• 13.5 T.C. Schelling (1978) and W.B. Arthur (1994) on Attendance Coordination
• 13.6 W.B. Arthur et al. (1982), W.B. Arthur (1989), and P.A. David (1985) on Increasing Returns, Positive Feedback in Technology Choice Processes, and Lock-In
• 13.7 R.W. Cooper and A. John (1988) on Synergies and Coordination Failures
• 13.8 R.R. Nelson and S.G. Winter (1974, 1982) on the Evolutionary Theory of Economic Change
• 13.9 S.A. Kauffman (1993) on Search on Fitness Landscapes
• 13.10 D.J. Watts and S.H. Strogatz (1998) on Small-World Networks
• 13.11 A.-L. Barabási and R. Albert (1999) on Scale-Free Networks
• 13.12 The Veblenian Evolutionary-Institutionalist Model of Institutional Change (P.D. Bush, 1987)
• 13.13 E. Ostrom (1990) and E. Ostrom et al. (1992) on the Governance of Common Pool Resources
• Chapter References
• Further Reading—Online

Chapter 14. The Size Dimension of Complex Economies—Towards a Meso-Economics: The Size of Interaction Arenas and the Emergence of Meso-Platforms of Institutional Coordination

• 14.1 Introduction: Why Agents Might Rationally Strive for Smaller Structures
• 14.2 Terms and Overview
• 14.3 Size and Meso-Size of Populations and Groups in the Literature
• 14.4 The Ubiquity of the Dilemma Problem and Emergent Structure Again
• 14.5 A Stochastic Element, the Population Perspective, and the Minimum Critical Mass Again
• 14.6 Adapting Group Size: Agency Mechanisms
• 14.7 An Empirical Application: High General Trust and High Macro-Performance in Meso-Structured Economies—an Explanation of Persisting Varieties of Capitalism
• 14.8 Conclusion: Toward Meso-Economics
• Chapter References
• Further Reading—Online

Part V: Further Applications: Information, Innovation, Policy, and Methodology

Chapter 15. The Information Economy and the Open-Source Principle

• 15.1 Introduction
• 15.2 The Economics of Information, Knowledge, and Software
• 15.3 The Economics of Open Source
• 15.4 Policy in the Weightless Economy: Intellectual Property Rights, Open Standards, and Other Issues
• 15.5 Conclusion
• Chapter References
• Further Reading
• Further Reading—Online
• Exercises

Chapter 16. Networks and Innovation—The Networked Firm, Innovation Systems, and Varieties of Capitalism

• 16.1 Overview
• 16.2 Towards a Complexity-Based Understanding of Innovation
• 16.3 Firms in Clusters and Networks—An Organizational Triangle
• 16.4 National Innovation Systems
• 16.5 Endogenous Development Theory
• 16.6 Varieties of Capitalism
• 16.7 Chapter Conclusion: Main Aspects of the Above Concepts
• Chapter References
• Further Reading—Online

Chapter 17. Policy Implications: New Policy Perspectives for Private Agents, Networks, Network Consultants, and Public Policy Agencies

• 17.1 Policy Implications of Complexity (Micro-) Economics
• 17.2 Interactive and Institutional Economic Policy: A Lean Policy Approach for a Complex, Interactive, and Evolutionary Economy, Based on the Game-Theoretic Perspective
• 17.3 Policy Implications for Information and Innovation in Firms, Networks, and Open-Source Communities
• 17.4 Final Conclusions
• Chapter References
• Further Reading—Online

Chapter 18. How to Deal with Knowledge of Complexity Microeconomics: Theories, Empirics, Applications, and Actions

• 18.1 What Is Scientific Knowledge?
• 18.2 Positivism and Critical Rationalism
• 18.3 Model Platonism: The Immunizing Epistemological Practice of Mainstream Economics Under Scrutiny
• 18.4 From “if” to “as if”: Milton Friedman and Methodological Instrumentalism
• 18.5 Emulating Wrong Ideals: The McCloskey Critique of the Rhetoric of Economics
• 18.6 Critical Rationalism Versus Paradigms
• 18.7 Critical Realism
• 18.8 Reality, “Realism,” and Constructivism
• 18.9 Epistemological Pluralism
• 18.10 Further “Applying” Your Knowledge on Complex Economies: Action and Experience, Enlarging Rather Than Consuming Knowledge Through Its Use
• 18.11 A Final “Application”: Governance for the Res Publica, and Policy
• Chapter References
• Further Reading—Online