Economic Crises: Natural or Unnatural Catastrophes?

Abstract

Whilst models of the environment and particularly of the climate have come to be ones of evolving complex systems with non-linear dynamics and complicated feedbacks, macroeconomic models have remained essentially in an equilibrium framework in which the only major changes that can occur are the result of exogenous shocks. I explain why this has been the route taken by macroeconomists However, the purpose of this paper is to suggest that, in fact, the economy shares many of the features of the environment and that it should also be viewed as a complex system which experiences major, sudden and sometimes catastrophic, changes. These changes are largely due to the evolution of the system and not to some outside influence. However, in the anthropocene era we have to take account of the co-evolution of two complex systems, the environment and the economy, and the economic models that have been proposed in “integrated” models do not capture the complexity of the economy nor of its interactions with the environment. To successfully do this will provide a better explanation of the evolution of the economy but will mean that economists have to be much more modest their claims.

I would like to thank an anonymous referee for a very helpful report and the participants in the AFOSR/CCRM Workshop on Catastrophic Risks at Stanford for their suggestions and comments and the LABEX OTMed, for funding this research.