Complexity Economics and the Accounting Framework
Southern Institute of Technology, New Zealand
Please cite the paper as:
Frederico Botafogo, (2017), Complexity Economics and the Accounting Framework, World Economics Association (WEA) Conferences, No. 2 2017, Economic Philosophy: Complexities in Economics, 2nd October to 7th December 2017
This working paper introduces a formal language to frame the concept of complexity within economic theory. The purpose is to provide a consistent analytical framework within which the varied aspects of complexity may be given expression.
The intuition underlying the framework is provided by double-entry bookkeeping and the accounting equation whereby assets equal liabilities for all possible agents in the economic system. The discussion is focused on foundational issues; markets, preferences, convexity in production, general equilibrium are not deemed to be required in describing an economic system. The basis for developing the framework is given solely by accounting theory. Linear algebra, in particular vector and tensor analyses, provide the mathematical elements required to construct said framework.
Complexity in economics is understood to imply subjective beliefs by interacting agents, who chose strategies given their particular goals, and further who update said strategies as time goes by. The resulting framework is, accordingly, dynamic and inherently uncertain. Therein, the accounting equation is seen as the expression of a solution concept, as this is defined in Game Theory. And economic value is a measurement scale which informs how distinct resource subsets relate to each other as input to output given a strategic economic process consisting of production, trade, or both.
The epistemological background which supports the framework relies on the representational theories of measurement.
The paper is organised as a list of talking points. Three appendices cover the methodological approach being used, the mathematics knowledge being required, and a short review of what the representational approach to measurement entails.