November 14, 2010 at 10:58 pm | Posted in Books, Economics, Financial, Research | Leave a comment










The Self-Organizing Economy

Paul R. Krugman (Author)

Editorial Reviews

The book . . . is . . . a piece of serious popular science writing; the author tries to be engaging and clear but is not afraid to use a little mathematics. Krugman’s exuberance in describing his work helps get the reader over the rough spots. As a set of lectures aimed at people with backgrounds in economics, it also includes some technical sections that would be hard going for the uninitiated. Fortunately, these can be skipped with little loss of meaning.

. . . Krugman’s general approach seems . . . plausible . . . for developing a general understanding of self-organization and complexity, for two reasons. First, he is willing to suppose that there is more than one process going on in the world, as shown by his instability and growth models. It really does seem absurd to suppose that the power law for word-use frequencies in English is generated by the same kind of process that determines earthquakes. SOC, order from instability, and Simon-style growth models appear to be independent explanations for power-law regularities. Second, Krugman starts with a more grounded understanding of the phenomena he studies, so that he knows better what features of reality are lost when he simplifies things in his models.

Product Description

In the last few years, the concept of self-organizing systems – of complex systems in which randomness and chaos seem spontaneously to evolve into unexpected order – has become an increasingly influential idea that links together researchers in many fields, from artificial intelligence to chemistry, from evolution to geology. For whatever reason, however, this movement has so far largely passed economic theory by. It is time to see how the new ideas can usefully be applied to that immensely complex, but indisputably self-organizing system called the economy. This volume shows how models of self-organization can be applied to many economic phenomena: how the principles of “order from instability”, which explains the growth of hurricanes and embryos, can also explain the formation of cities and business cycles; how the principles of “order from random growth” can explain the strangely simple rules that describe the sizes of earthquakes, meteorites and metropolitan areas. Without discarding the insights of conventional economic analysis, Krugman weaves together strands from many different disciplines, from location theory to biology, to create a new view of how the economy forms structures in space and time.

Product Details:

· Paperback: 122 pages

· Publisher: Blackwell Publishers; Unknown edition

· January 1996

· Language: English

· ISBN-10: 1557866996

· ISBN-13: 978-1557866998

Those who are only familiar with Krugman’s excellent New York Times op-ed pieces may not know that he was (and still is?) a world-renowed economist whose work centered on “economic geography” — i.e., understanding why it is that economic activity on so many scales is localized rather than dispersed. Why do cities exist? Why do they exist where they do? Why is economic activity so concentrated in the West? Why does Africa have such a hard time becoming part of the “developed world”? Clearly there are connections between economic geography and international development. A complete theory of economic geography would explain not only why activity concentrates where it does, but what policymakers can do to bring activity to inactive areas.

The Self-Organizing Economy
starts with some simple models of geographic concentration. Suppose that there’s a certain benefit to moving your business near an economic center like a city; the benefit may be something as clear-cut as reduced transportation costs. But being further away from a city has its benefits as well, in decreased rent. Tune your parameters accordingly, to qualitatively match observed behavior. Start with a hypothetical land area where businesses are located at random, then use a computer to simulate how the distribution of businesses will change over time. You’ll find — Krugman did — that concentration is inevitable over a wide range of parameters.

He starts with the segregation model from Thomas Schelling’s Micromotives and Macrobehavior. You don’t even need to assume that people are explicitly racist, in the sense that they’d prefer a neighborhood where everyone looks like them. You just need to make the weaker assumption that people would prefer not to be the lone white person in a black neighborhood. Under that assumption, a perfectly integrated neighborhood is not a stable equilibrium as the process evolves in time: a slight perturbation (which in this case would mean something like “a few more black people move in”) throws the system quickly away from that equilibrium and on to another one.

He moves on to macroeconomics, namely trying to understand why business cycles happen at all. Why doesn’t the economy grow consistently with population? Why does it instead go through periods of boom and bust? There’s an interesting hypothesis in here that inventories always lie near an unstable equilibrium, and that an external (in the jargon: exogenous) shock is sufficient to knock us away from that equilibrium.

Connected with which, there’s an even more interesting story (Krugman doesn’t bother calling it a “model”) to make explicit exactly what “globalization” means. In terms of actual economic value, Krugman has persuasively argued in “Pop Internationalism” that we are not a “global economy,” and in any case that the economy was more global before World War I. He hits the same theme in The Self-Organizing Economy, just long enough to tie globalization in with ideas from complex systems. Other nations’ economies are also stuck near an unstable equilibrium, for the same reason that ours is. A shock that knocks us into a recession knocks them into one, too; our business cycle is “phase-locked” with theirs.

Self-Organising is a well-developed concept in physics and Krugman tries to apply that concept to economics. Despite its interesting title, knowledgable readers will find that there is no real insight offered, other than some common sense discussions. Krugman in the book claimed that before “the visionaries of Santa Fe” economists have tried long ago using “nonlinearity” in modeling economics. Of course nonlinear functions have been used since day one in economics, the question is how to use it correctly. Krugman’s book is just one more example how nonlinearity can be misused.

Best read together with the two volumes of Santa Fe proceedings (Anderson and Arrow 1987; and B. Arthur et al 1996).

A recent article is revealing on why economics is becoming more and more dismal despite the attempts of putting a new face (like this book): John Cassidy “The decline of economics”, The New Yorker Dec. 2 1996.

The Self-Organizing Economy

Paul R. Krugman (Author)


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