Is Economic Complexity Fragile?

In response to Dane's fine post on the rising complexity and fragility of an advanced economy, I have to wonder if the original essay by historian Bryan Ward-Perkins (see Financial Times op-ed) is confusing complexity with scale.

Complexity is a fascinating field, and I think the robust comments the post received are testimony to that (superb discussion!). Also, I adore the folks and research at the Sante Fe Institute, the capital of complexity studies, But the word "complexity" has become woefully trendy, and calls to mind the overuse and abuse of otherwise interesting topics like dolphins or innovation or Eastern religions. And in this case, I think it has been misapplied.

Let me quote both Ward-Perkins followed by Dane here:

"The more complex an economy is, the more fragile it is, and the more cataclysmic its disintegration can be."

Ward-Perkins' main point that complexity increases fragility, is wrong.

Keep in mind that Ward-Perkins is analogizing the current U.S. economy and recession to the British fringe of the Roman empire after the sack of Rome in 410. Rome v America is an interesting comparison, but Ward-Perkins' analysis is shockingly off target in linking 410 to 2010.  I say shockingly because his book on the collapse of Rome is perhaps the single best accounting of hard evidence on Rome's demise that I've come across.

If you are interested in the fate of large nations, you study Rome. And if you study Rome, you need the facts, which is what Ward-Perkins does better than anyone.  Fact number one is that the collapse of Roman civilization was real and terrible. His book destroys the trendy revisionism that suggests the post-Roman world was a gentle evolution and that no "civilization" was lost. This cautionary tale can not be overemphasized because it must be understood that systemic collapse could indeed happen again. Unfortunately, my admiration for Ward-Perkins' masterful documentation of the effects of Roman collapse do not extend to his attempt at causes.

Fact number two is that the collapse of Rome was not sudden. Ward-Perkins knows this, so why make the complexity argument?  It sounds good sure, but it doesn't fit. The demise of scale economies is better understood as a consequence, not a casue, of collapse. Besides, the basic causes of Rome's weakend economy are not so mysterious. Bruce Bartlett wrote an excellent essay on this years ago (worth digging up). But the key point is that bald economic ignorance by its rulers set up Roman civilization for epic failure. It wasn't their fault, in one sense, because nobody knew economics then. Nonetheless, the city fell in 410, but that was preceded by more than a century of ... let's just list the key factors ... violent political strife, hyperinflation and currency debasement, regulated labor market rigidity in the extreme, slavery and the exhaustion of its supply, and the ultimate walling off of the outside. Any one of these is a better explanation for unsustainability and collapse than "fragile complexity."

Rome, like China, ultimately walled itself off from the world, became insular, became stagnant. talk about a non-entrepreneurial economy!

Indeed, the one idea I would like to push into the minds of modern policymakers is that economic growth relies precisely on the concept of scale. With scale comes labor specialization. This was the insight of Adam Smith (and an insight the Romans lacked).  Scale can be increased externally by openness to other economies -- through trade, immigration, investment, and ideas. But scale can also be enhanced internally. Smart pro-growth policy recognizes both. Internal scale rises with bigger, better transportation networks. Scale rises with better communications technology. Indeed, the revolution in scale spawned by the internet and other digital technologies is the key reason to have confidence in a coming long boom.

Is economic scale fragile?  I suppose it can be, but that is a much deeper question. Networks, as Dane describes, can be strong or weak. A strong network (think cellular telephony) can lose one or more nodes and still function. A weak network (think of local plumbing) needs all of its nodes to be up for the system to function. Overall, the modern economy leans much more towards the strong network. Consider, for example, what happens to all the other cities in the world economy when one is incapacitated. Not much. As tragic as Hurricane Katrina was on the lives of millions of Americans, the economic lesson was a surprise. The national economy was robust in the extreme -- economic growth barely flinched at the loss of a major port of trade, even the destruction of huge amounts of oil refining.

Comments

[Nathan Smith]

On the question "Is economic scale fragile?" here's what I would say.

First, we must distinguish between two definitions of scale. There is scale of the market as a whole, and scale of production processes within it.

For example, if Economy A has 100 million subsistence farmers, while Economy B has 10,000 workers completely specialized in a unique skill and engaging in trade with all the other 9,999 to satisfy their needs, Economy A is characterized by a larger scale of the market, while Economy B is characterized by a larger scale of production.

Now, I think what leads to fragility is not "scale" *per se* but scale of production *relative* to scale of the market. An assembly line, to oversimplify perhaps, is only as fast as its slowest worker. That may not be a problem if a slacking worker can be quickly and easily replaced. But suppose an economy with 10 workers produces a single consumption good by a roundabout production process with 10 stages. If one worker dies, or falls sick, or goes on strike, production stops. And society is vulnerable to a threat of hold-up by any of its members.

The larger the scale of the market relative to the scale of production, the easier it is for any production process to cope with shocks. In a large economy, if a worker quits a new one can be hired. If a machine breaks, a new one can be bought or commissioned. If demand slackens in one town, it might be booming in the next one.

I think this is one reason why economies don't pursue specialization as far as it might, from the point of view of pure optimization of production patterns, be efficient to do. A super-specialized economy would be too fragile. There might be some optimal ratio of scale of markets to scale of production, where the marginal benefits of productivity from greater specialization exactly offset the marginal costs of greater fragility.

[Michael F. Martin]

Excellent points. The topology of the interactions among the various elements of a complex system (i.e., the structure of the network) matters greatly to its fragility (or resilience) in the face of exogengous or endogenous perturbations.

[louis vuitton]

The battle of ideas is not won or lost in Congress, or even in elections, but in the long assessment of history. Just ask Qeng Ho.

[replica watches]

The battle of ideas is not won or lost in Congress, or even in elections, but in the long assessment of history. Just ask Qeng H

[honorary degree]

Indeed, the revolution in scale spawned by the internet and other digital technologies is the key reason to have confidence in a coming long boom.

[Electronic Scales]

"The more complex an economy is, the more fragile it is, and the more cataclysmic its disintegration can be." i am in your side.

[Supra TK Society]

It is often inferred that you just lack self-confidence within a victory through your rivals on the certainty that you happen to be irritable alongside them.