Economic decision making: application of the theory of complex systems

TL;DR

This paper explores how complex systems theory applies to economic decision making, emphasizing social systems' chaotic nature and offering principles and applications for managing economic and business policies amid complexity.

Contribution

It introduces a framework linking complex systems theory to economic policy and decision making, with practical applications in small economies, corporate management, and risk management.

Findings

Small economies benefit from flexibility and ethics in global processes

Decision making under complexity involves balancing short-term noise and long-term chaos

Economic non-equilibrium complicates debt and risk management

Abstract

In this chapter the complex systems are discussed in the context of economic and business policy and decision making. It will be showed and motivated that social systems are typically chaotic, non-linear and/or non-equilibrium and therefore complex systems. It is discussed that the rapid change in global consumer behaviour is underway, that further increases the complexity in business and management. For policy making under complexity, following principles are offered: openness and international competition, tolerance and variety of ideas, self-reliability and low dependence on external help. The chapter contains four applications that build on the theoretical motivation of complexity in social systems. The first application demonstrates that small economies have good prospects to gain from the global processes underway, if they can demonstrate production flexibility, reliable business ethics and good risk management. The second application elaborates on and discusses the opportunities and challenges in decision making under complexity from macro and micro economic perspective. In this environment, the challenges for corporate management are being also permanently changed: the balance between short term noise and long term chaos whose attractor includes customers, shareholders and employees must be found. The emergence of chaos in economic relationships is demonstrated by a simple system of differential equations that relate the stakeholders described above. The chapter concludes with two financial applications: about debt and risk management. The non-equilibrium economic establishment leads to additional problems by using excessive borrowing; unexpected downturns in economy can more easily kill companies. Finally, the demand for quantitative improvements in risk management is postulated.