The Microeconomics of Complex Economies

The Microeconomics of Complex Economies

Evolutionary, Institutional, Neoclassical, and Complexity Perspectives

1st Edition - April 15, 2014

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  • Authors: Wolfram Elsner, Torsten Heinrich, Henning Schwardt
  • Hardcover ISBN: 9780124115859
  • eBook ISBN: 9780124115996

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The Microeconomics of Complex Economies uses game theory, modeling approaches, formal techniques, and computer simulations to teach useful, accessible approaches to real modern economies. It covers topics of information and innovation, including national and regional systems of innovation; clustered and networked firms; and open-source/open-innovation production and use. Its final chapter on policy perspectives and decisions confirms the value of the toolset. Written so chapters can be used independently, the book includes an introduction to computer simulation and pedagogical supplements. Its formal, accessible treatment of complexity goes beyond the scopes of neoclassical and mainstream economics. The highly interdependent economy of the 21st century demands a reconsideration of economic theories.

Key Features

  • Describes the usefulness of complex heterodox economics
  • Emphasizes divergences and convergences with neoclassical economic theories and perspectives
  • Fits easily into courses on intermediate microeconomics, industrial organization, and games through self-contained chapters


Advanced undergraduates and graduate students who have taken a first course in microeconomics.

Table of Contents

  • Didactics: How to Work with This Textbook at Introductory, Intermediate, and Advanced Levels, and in Different Kinds of Courses

    • Beyond the “Economics of the x”: A Different Task, a Different Style
    • Sample Syllabi: Roadmaps for Teaching in Different Formats
    • Prerequisites for Particular Parts
    • Reference

    List of Abbreviations

    Part I: Basics of the Interdependent Economy and Its Processes

    Chapter 1. Introduction to the Microeconomics of Complex Economies

    • 1.1 Introduction: A Microeconomics of Direct Interdependence
    • 1.2 Different Problem Structures in Directly Interdependent Decision Situations
    • 1.3 Competing Paradigms in Economics: Invisible Hand Versus Fallacy of Aggregation
    • 1.4 Uncertainty, Strategic Uncertainty, and Bounded Rationality
    • 1.5 Path Dependence, Nonergodicity, and Cumulativity in Processes of Change
    • 1.6 Social Rules as Informational and “Expectational” Devices
    • 1.7 Social Rules and Social Institutions as Solutions to Coordination and Dilemma Problems
    • 1.8 The Public Good Character and Positive External Effects of Social Rules and Social Institutions
    • 1.9 “Instrumental” and “Ceremonial” Dimensions of Social Institutions
    • 1.10 Real-World Microeconomics
    • Further Reading
    • Further Reading—Online

    Chapter 2. Tools I: An Introduction to Game Theory

    • 2.1 Introduction
    • 2.2 Understanding a Strategic Game
    • 2.3 The Invisible Hand and the Fallacy of Aggregation Again
    • 2.4 How Not to Play a Game
    • 2.5 How to Play a Game
    • 2.6 How Many Games Can We Play?
    • 2.7 Summary
    • Chapter References
    • Further Reading
    • Further Reading—Online
    • Exercises

    Chapter 3. Problem Structures and Processes in Complex Economies

    • 3.1 A Continuum of Social Problem Structures
    • 3.2 Solutions to Social Dilemma Problems
    • Further Reading
    • Further Reading—Online
    • Exercises

    Chapter 4. Approaching Real-World Interdependence and Complexity: Empirical Phenomena in the Global Economy

    • 4.1 Introduction
    • 4.2 The Specific Inherent Complexity, Volatility, and Uncertainty of Today’s Real-World Economy
    • 4.3 Individualistic Vs. Common and Collective, Strategies to Cope with Complexity
    • 4.4 Implications of Real-World Complexity for Microeconomic Theory and Modeling
    • Chapter References
    • Further Reading—Online
    • Exercises

    Part II: Markets: General-Equilibrium Theory and Real-World Market Structures

    Chapter 5. The Ideal Neoclassical Market and General Equilibrium

    • 5.1 Introduction: The Neoclassical Paradigm and Research Program
    • 5.2 Consumer Theory
    • 5.3 Production Theory
    • 5.4 Partial Equilibrium
    • 5.5 General Equilibrium
    • 5.6 Further Developments
    • 5.7 Extensions and Transitions: The General Theory of the Second Best, Asymmetric Information, and Efficiency Under Imperfect Information
    • Chapter References
    • Further Reading—Online
    • Exercises

    Chapter 6. Critiques of the Neoclassical “Perfect Market” Economy and Alternative Price Theories

    • 6.1 Introduction
    • 6.2 The Mistaken Mechanical Analogy
    • 6.3 Internal Inconsistencies
    • 6.4 Preferences and Choice
    • 6.5 The Classical Theory of Prices and the Sraffian Critique of the Neoclassical Theory of Value and Price
    • 6.6 An Outlook on Post-Keynesian and Institutional Price Theories: Setting and Administering Prices
    • 6.7 Conclusion and Outlook
    • Chapter References
    • Further Reading
    • Further Reading—Online
    • Exercises

    Chapter 7. Real-World Markets: Hierarchy, Size, Power, and Oligopoly, Direct Interdependence and Instability

    • 7.1 Real-World Phenomena Again, the Corporate Economy, and Oligopolistic Market Structure
    • 7.2 Factors Leading to Size, Power, and a Small Number of Interdependent Suppliers
    • 7.3 Pure Monopoly
    • 7.4 Oligopoly
    • 7.5 Natural Monopoly
    • 7.6 Heterogeneous Oligopoly and Monopolistic Competition
    • 7.7 Heterogeneous Oligopolistic and Monopolistic Competition: Opportunities for Strategic Behavior of Firms and Their Potential Social Costs
    • 7.8 A Final Consideration of Firm Size and Power, Strategic Cooperation, Monopolistic Competition, and Real-World Markets
    • Chapter References
    • Further Reading—Online
    • Exercises
    • Solution Keys
    • Appendix A Neoclassical Model of Monopolistic Competition

    Part III: Further Tools and the Analysis of Complex Economies

    Chapter 8. Tools II: More Formal Concepts of Game Theory and Evolutionary Game Theory

    • 8.1 Introduction
    • 8.2 Formal Concepts
    • 8.3 Concepts from Decision Theory
    • 8.4 Solutions of Normal-Form Games
    • 8.5 Extensive Form Games
    • 8.6 Repeated Games
    • 8.7 Population Perspectives and Evolutionary Games
    • 8.8 Rationality in Game Theory
    • 8.9 Conclusion
    • Commented Game Theory Textbook References
    • Chapter References
    • Further Reading—Online
    • Exercises
    • List of Symbols

    Chapter 9. Tools III: An Introduction to Simulation and Agent-Based Modeling

    • 9.1 Introduction
    • 9.2 Method
    • 9.3 Particular Issues in Computer Simulation
    • 9.4 Advantages and Disadvantages of Simulation
    • 9.5 Microeconomics and Computer Simulation
    • 9.6 Simulation in Practice: An Example
    • 9.7 Outlook
    • Commented Textbook and Introductory Guide Reference
    • Chapter References
    • Further Reading
    • Further Reading—Online
    • Exercises

    Chapter 10. A Universe of Economies: Interdependence and Complexity, System Trajectories, Chaos, and Self-Organization

    • 10.1 Some Basics of Complexity Economics Versus Neoclassical Economics: Topology, Evolutionary Process, and Bounds and Barriers to Perfect Rationality
    • 10.2 Local and Global Information, the Neoclassical and the Complexity Economics Approaches, and Complex System Dynamics
    • 10.3 A Quasi-Neoclassical Perfect-Equilibrium Model Based on Global Information and Direct Interdependence
    • 10.4 A Policy Solution and the Emergent-Institutions Solution
    • 10.5 Conclusion
    • Chapter References
    • Further Reading—Online
    • Exercises

    Chapter 11. Dynamics, Complexity, Evolution, and Emergence—The Roles of Game Theory and Simulation Methods

    • 11.1 Introduction
    • 11.2 The Picture Becomes Complex
    • 11.3 Formal Aspects of Dynamic and Complex Systems
    • 11.4 The Origins of Order, Turbulence, and Complexity
    • 11.5 Modeling Complexity
    • 11.6 Why Does it Matter: The Agent’s Struggle with Her Complex Environment
    • 11.7 Conclusion
    • Chapter References
    • Further Reading
    • Further Reading—Online
    • Exercises

    Part IV: History of Thought and Contemporary Models in Complexity Economics

    Chapter 12. Themes of Complexity in the History of Economic Thought: Glimpses at A. Smith, T.B. Veblen, J.A. Schumpeter, and Others

    • 12.1 Introduction
    • 12.2 Adam Smith: The Classical Model of the Origins and Emergence of Institutions, and the Modern Significance of the Classical Approach
    • 12.3 Thomas R. Malthus: Introducing Basic Biological Principles—The “Principle of Natural Selection” and the Danger of “Biologism”
    • 12.4 Karl Marx: Principles of Historical System Evolution, and Collective Action Capacity
    • 12.5 Carl Menger: The Early Austrian Individualistic Evolutionary Approach—An Organic Analogy of Market Evolution
    • 12.6 Alfred Marshall: “Economic Biology” as the “Mecca” of Economics
    • 12.7 Thorstein B. Veblen: The Founding of Evolutionary-Institutional Economics
    • 12.8 John M. Keynes: Complex Microfoundations of Macro-Price Level, Interest Rate, and Employment Under Uncertainty–and the Post-Keynesian Financial Instability Hypothesis
    • 12.9 Joseph A. Schumpeter: Complex Process Through “Entrepreneurial” Innovation—Bridging Neoclassical Mainstream and Evolution
    • 12.10 Karl Polanyi: The “Market” Economy, the Disembedding of the Market and its Downside
    • 12.11 Gunnar Myrdal: Path-Dependent Development of Complex Systems—Circular Cumulative Causation
    • 12.12 Herbert A. Simon: Complexity, Bounded Rationality, and “Satisficing”
    • 12.13 Nicolas Georgescu-Roegen: The Economy as an Open System, and its Entropy
    • 12.14 Karl W. Kapp: Open-Systems Approach, Entropy, and the “Social Costs of Private Enterprise”
    • 12.15 Further Contributions to Complexity Microeconomics
    • 12.16 Clustering Economists in Diverse Economic Paradigms, and a Final Remark
    • Chapter References
    • Further Reading
    • Further Reading—Online
    • Exercises
    • Solution Keys

    Chapter 13. Recent Core Models of Complexity Microeconomics

    • 13.1 Introduction
    • 13.2 A. Sen (1967) on the Isolation Paradox and Assurance Game, and the Importance of the Future
    • 13.3 A. Schotter (1981), R. Axelrod (1984/2006), and K. Lindgren (1997) on the Emergence of Institutions
    • 13.4 T.C. Schelling (1978) and R. Axelrod (1984/2006) on Segregation
    • 13.5 T.C. Schelling (1978) and W.B. Arthur (1994) on Attendance Coordination
    • 13.6 W.B. Arthur et al. (1982), W.B. Arthur (1989), and P.A. David (1985) on Increasing Returns, Positive Feedback in Technology Choice Processes, and Lock-In
    • 13.7 R.W. Cooper and A. John (1988) on Synergies and Coordination Failures
    • 13.8 R.R. Nelson and S.G. Winter (1974, 1982) on the Evolutionary Theory of Economic Change
    • 13.9 S.A. Kauffman (1993) on Search on Fitness Landscapes
    • 13.10 D.J. Watts and S.H. Strogatz (1998) on Small-World Networks
    • 13.11 A.-L. Barabási and R. Albert (1999) on Scale-Free Networks
    • 13.12 The Veblenian Evolutionary-Institutionalist Model of Institutional Change (P.D. Bush, 1987)
    • 13.13 E. Ostrom (1990) and E. Ostrom et al. (1992) on the Governance of Common Pool Resources
    • Chapter References
    • Further Reading—Online

    Chapter 14. The Size Dimension of Complex Economies—Towards a Meso-Economics: The Size of Interaction Arenas and the Emergence of Meso-Platforms of Institutional Coordination

    • 14.1 Introduction: Why Agents Might Rationally Strive for Smaller Structures
    • 14.2 Terms and Overview
    • 14.3 Size and Meso-Size of Populations and Groups in the Literature
    • 14.4 The Ubiquity of the Dilemma Problem and Emergent Structure Again
    • 14.5 A Stochastic Element, the Population Perspective, and the Minimum Critical Mass Again
    • 14.6 Adapting Group Size: Agency Mechanisms
    • 14.7 An Empirical Application: High General Trust and High Macro-Performance in Meso-Structured Economies—an Explanation of Persisting Varieties of Capitalism
    • 14.8 Conclusion: Toward Meso-Economics
    • Chapter References
    • Further Reading—Online

    Part V: Further Applications: Information, Innovation, Policy, and Methodology

    Chapter 15. The Information Economy and the Open-Source Principle

    • 15.1 Introduction
    • 15.2 The Economics of Information, Knowledge, and Software
    • 15.3 The Economics of Open Source
    • 15.4 Policy in the Weightless Economy: Intellectual Property Rights, Open Standards, and Other Issues
    • 15.5 Conclusion
    • Chapter References
    • Further Reading
    • Further Reading—Online
    • Exercises

    Chapter 16. Networks and Innovation—The Networked Firm, Innovation Systems, and Varieties of Capitalism

    • 16.1 Overview
    • 16.2 Towards a Complexity-Based Understanding of Innovation
    • 16.3 Firms in Clusters and Networks—An Organizational Triangle
    • 16.4 National Innovation Systems
    • 16.5 Endogenous Development Theory
    • 16.6 Varieties of Capitalism
    • 16.7 Chapter Conclusion: Main Aspects of the Above Concepts
    • Chapter References
    • Further Reading—Online

    Chapter 17. Policy Implications: New Policy Perspectives for Private Agents, Networks, Network Consultants, and Public Policy Agencies

    • 17.1 Policy Implications of Complexity (Micro-) Economics
    • 17.2 Interactive and Institutional Economic Policy: A Lean Policy Approach for a Complex, Interactive, and Evolutionary Economy, Based on the Game-Theoretic Perspective
    • 17.3 Policy Implications for Information and Innovation in Firms, Networks, and Open-Source Communities
    • 17.4 Final Conclusions
    • Chapter References
    • Further Reading—Online

    Chapter 18. How to Deal with Knowledge of Complexity Microeconomics: Theories, Empirics, Applications, and Actions

    • 18.1 What Is Scientific Knowledge?
    • 18.2 Positivism and Critical Rationalism
    • 18.3 Model Platonism: The Immunizing Epistemological Practice of Mainstream Economics Under Scrutiny
    • 18.4 From “if” to “as if”: Milton Friedman and Methodological Instrumentalism
    • 18.5 Emulating Wrong Ideals: The McCloskey Critique of the Rhetoric of Economics
    • 18.6 Critical Rationalism Versus Paradigms
    • 18.7 Critical Realism
    • 18.8 Reality, “Realism,” and Constructivism
    • 18.9 Epistemological Pluralism
    • 18.10 Further “Applying” Your Knowledge on Complex Economies: Action and Experience, Enlarging Rather Than Consuming Knowledge Through Its Use
    • 18.11 A Final “Application”: Governance for the Res Publica, and Policy
    • Chapter References
    • Further Reading—Online

Product details

  • No. of pages: 600
  • Language: English
  • Copyright: © Academic Press 2014
  • Published: April 15, 2014
  • Imprint: Academic Press
  • Hardcover ISBN: 9780124115859
  • eBook ISBN: 9780124115996

About the Authors

Wolfram Elsner

Wolfram Elsner is professor of economics with the Institute for Institutional and Innovation Economics at the University Bremen in Germany. Before working in academia, he spent ten years as a local development official and state-level planner. He has published widely in various journals, has edited several books, and authored three textbooks. He is the managing editor of the Forum for Social Economics and has served as the President of the European Association for Evolutional Political Economy.

Affiliations and Expertise

Institute for Institutional and Innovation Economics, University of Bremen, Germany

Torsten Heinrich

Affiliations and Expertise

University of Bremen, Germany

Henning Schwardt

Affiliations and Expertise

University of Bremen, Germany

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