|
||||
|
Artificial Intelligence
Markets as complex emergent phenomena | Permalink Markets are intrinsic to modern society and arguably the dominant context of economic analysis. Supply and demand functions and the four main models of market structure—namely perfect competition, monopolistic competition, oligopoly and monopoly—are among the first things that come to mind about markets, at least for those trained in economics. These are highly abstract constructs which help to make sense of a broad range of exchanges, from labour markets to financial markets, and from markets for intermediate goods to markets for consumer goods and services.1–13 Figure 1.
However, the succinctness and generalizability of these constructs do not come without a cost. The high level of abstraction involved in economic representations of markets has long been criticized in economic sociology. It has been argued that economic understanding of markets treats them as universal price-making mechanisms independent of social influences and reduces individuals to uniform, autonomous and replaceable agents whose social relations are irrelevant.5, 6,8,9Another criticism of the simplistic representation of markets comes from economic geography, which argues that economics regards markets as space-free entities (neglecting how their distribution over space and location, say, affects transactions).7 There have been criticisms within economics as well. Institutional approaches point out the role of state-defined mechanisms on the workings of markets, showing how different institutional settings affect outcomes of market-based interactions. In defense of mainstream economic analysis, neither abstractions such as demand and supply schedules, nor assumptions about profit-maximizing behaviour rule out the existence of a much more complex reality. Furthermore, even though economists use strong assumptions to simplify market contexts, they produce rather complicated analyses, particularly when the interdependency of agents' decisions is included. Progress in developing economic representations of markets from very abstract to acceptably realistic is closely interlinked with progress in state-of-the-art research methods. The market system is thought to deliver efficient allocation of scarce resources by providing liberties, albeit limited, to society members. Everyone can bid for certain goods and services as long as they have sufficient money to pay for them.10 Prices of goods and services then operate as “guideposts to where resources are wanted most” and provide incentives for supplying them there.4 This differs from a central authority making the decisions for allocation. Consequently, markets are regarded as ‘bottom-up’ systems of organizing societies. Once again, this general conceptualization of market-based allocation has important limitations in reflecting the diversity of real markets. It is well known that commonly observed conditions impede the efficiency of markets and cause market failure.1–3, 11 In some cases, the set of institutions that are supposed to facilitate exchanges of a good or a service fail to develop altogether. These cases are known as ‘missing markets’. In addition, there are important ethical concerns about the role of income distribution and power and questions about the appropriateness of the expansion of markets to areas where political participation is needed. Despite these very important limitations, markets are likely to remain central to societies, and they are given importance for delivering sustainability objectives. The United Nations Environment Programme12, 13 calls for “making the market work for sustainable development”. The general idea is to integrate relatively small changes in the system that internalize previously neglected costs of eco-system services (e.g., supply of drinking water, crop pollination). It is therefore imperative that we go beyond reductionist models of markets to better understand both their strengths and limitations with the aid of new approaches and methods. The Evolution and Resilience of Industrial Eco-Systems (ERIE) project aims to contribute to existing knowledge in this area. Through this project, a six-year research venture which began in 2010, we are investigating the interaction between physical, economic and social networks to develop insights into real-world systems. Bridging the gap between mathematical modelling and simulation of complex systems to practical applications will allow us to produce usable knowledge and strategic tools for stakeholders and policy makers.14 Specifically, we are studying two industrial systems: the South Humber Bank in the United Kingdom and global food supply chains. We use the findings of the case studies to inform simulation models, which we then analyse with the help of complexity science tools. An issue central to the project is industrial symbiosis, the activities and interactions between industrial organizations that increase the circulation of resources within an industrial system and decrease the throughput (thereby decreasing pollution and the use of virgin resources). One of the perspectives developed in the project is relating existing knowledge on industrial symbiosis to theories of missing markets. The project questions why some by-product markets that can facilitate industrial symbiosis fail to emerge and investigates the ways this problem can be addressed. This approach underscores that markets are not necessarily ready-made, uniform entities that appear in front of us when we say ‘laissez-faire’ three times. They are complex sets of institutions that evolve over time as a result of numerous interactions among agents. As mentioned above, the limitations of the standard economic representation of markets in terms of reflecting their social, spatial and institutional complexity have long been acknowledged in different disciplines. The ERIE project investigates the elements of complexity related to the temporal dimension of markets. In particular, it examines the path-dependent, evolutionary process of market development and exemplifies conditions that discourage the emergence of by-product markets. As a next step in the project, we will address policy interventions that may enhance development of these markets. References
Stay Informed
|
||||
|
||||