The Complex Adaptive System Behind the Extended Order, Part 2
Written by Robin Gu, a researcher at X-Order, an innovative research institute that attempts to combine cross-disciplinary fields such as distributed computing, computational game theory, artificial intelligence and cryptography to discover future extended orders. It was founded by Tony Tao, who is also a partner at NGC Ventures.
In Part 1, we introduced the theory of Reductionism to better understand the concepts of the complex system. We also discussed how many phenomena, in reality, have some characteristics of complex systems — the ant colony, and the well-known butterfly effect. We concluded with a transition from Complex System to the Complex Adaptive System.
In Part 2, we discuss the link between this set of Complex Adaptive System theory and the actual economy, and what we can learn from it.
The discussion should start from the “Extended Order” proposed by Hayek.
According to Hayek, the extended order is an endogenous and spontaneous complex structure developed by human groups, which lies between instinct and rationality.
In this structure, human beings, through constant learning and absorption, continuously adapt to the ever-changing environment containing complex orders. This adaptive behaviour can also change the structure, which makes it even more complex.
To a certain extent, this reveals the subjects behind operations of the economy and fundamental law that governs such an operation. The extended order has played a vital role in continuous economic development and its cyclical patterns.
Traditional classical economics, neoclassical economics and Chicago School of Economics, represented by Friedman, place more emphasis on equilibrium theory. Although the theory has changed from “general equilibrium theory” to “partial equilibrium theory” after continuous development, equilibrium is still at its core.
These theories hold that the non-equilibrium states are only temporary, and the instabilities are transient. Hence, it will quickly return to the original state or reach another equilibrium state.
However, with reference to Hayek’s extended order and the complex economic viewpoint put forward by Brian Arthur, the real world tends to be in a state of perpetual imbalance. This imbalance is endogenous, not caused by any external factor. The reason is that there exists fundamental uncertainty or Knightian uncertainty, as well as a continuous iteration of technological innovation.
Uncertainty is due to the fact that each individual does not know what the optimal decision is, so his/her decision-making process is usually not absolutely rational. This results in the whole economy deviating away from the equilibrium state; technological innovations lead to greater deviation.
We will take the birth of blockchain technology as an example. Strictly speaking, the blockchain technology behind Bitcoin is not a new technology, but a combination of relatively mature technologies in cryptography, P2P network communication, consensus algorithm, game theory, and other fields.
Combining existing technologies enables the creation of new technologies, which drive further demands. The emergence of Ethereum can well illustrate this concept. Without Bitcoin’s blockchain technology framework, Ethereum’s smart contract would no longer exist.
Technological innovation in itself is the constant creation of new needs and meeting them. This technological change has a destructive effect on the equilibrium of the economy in all directions.
With an understanding of the above theory: Complex Adaptive System (CAS) as a more macroscopic model behind the extended order, this makes its relationship with economics self-evident. If we have a good understanding of CAS, we believe that we will have a deeper understanding of the operation of the economy and of society as a whole.
A Caveat — Analysing Palindrome
To deepen our understanding of CAS, we attempt to show you how such systems are formed and developed:
Here is a palindrome sentence that the author of “An Eternal Golden Braid”, Douglas Hofstadter, likes:
A man, a plan, a canal: Panama.
Interestingly, this is an alphabetical palindrome, where the order of the letters is exactly the same as that of the reverse.
The author tries to deduce from a simple Complex Adaptive model, hoping to inspire the reader to think:
1. Set a goal to write a palindrome related to Panama: Panama
2. Write the reverse of Panama: Amanap | panama
3. Decompose the word according to grammatical rules: A man a p | panama
4. Complete a word using the left-over letter “p”. This may take a while to think. We will guess “plan”: A man a plan | panama
5. Palindrome: complete the reverse word accordingly: A man a plan | nal panama
6. “nal” needs to be completed to an actual word. Obviously, canal is suitable: A man a plan | canal panama
7. Palindrome will continue to match: A man a plan a c | canal panama
8. It is almost complete by now, with the removal of repetitive letters: A man, a plan, a canal: Panama
This is just a caveat. We hope that you will have a rough understanding of CAS by presenting deductive thinking.
In fact, this process follows two basic rules: one is a palindrome, and the other is that it should follow linguistic logic. The word “Panama” can be seen as a random starting point. Through evolutions revolving around these two rules, a stable state is finally obtained.
Each of the individuals interacts with the environment on the basis of a simple rule, while the eventual change in environment will then cause the individual themselves to change along with the rule.
The causalities between individuals and the environment are entangled and they develop together.
1. Complex System — Wikipedia
2. Complexity and the Economy — Brian Arthur
3. Complexity: The Emerging Science at the Edge of Order and Chaos — Mitchell Waldrop
4. The Engine of Complexity — John E. Mayfield
5. The Fatal Conceit — Hayek