what are they, what are the issues, what insight can we get from Complex System Dynamics?

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Institutions structure our life and our societies. They can be seen as given by God, as a result of some social contract or as attractors of complex system dynamics...

In the neo-classical vision of economics, they are no institutions:

This is obviously not the case in real life! At this point, I have not yet defined institutions. I will not pretend to do this later, but rather give you examples of institutions. The above two examples, routines and beliefs, are institutions which deal with issues of uncertainty and bounded rationality. Other such institutions are for instance: norms, signs, languages, and some aspects of cultures.

Another issue facing human societies is cooperation. Game theory is a formalisation of the issue, but let me recall for you the idea if you are not familiar with it. In the case of a tax raised to build a road, the best situation for me is to avoid paying the tax and use the road that you have paid with your taxes. But if all take the same decision, no road will ever be built and that situation is worse than the situation of a road built with everyone's contribution. But how does one establishes cooperation among a society of egoists? The answer is once more institutions, such as state, police, hospitals, schools, banks, firms and so on.

On the other hand, institutions is a major theme in social sciences, where individuals are in situations, i.e. their behaviour is suppposedly strongly correlated with their social group. In some sense, institutions are a common issue to all social sciences including economics. Those economists who study real specific systems do recognize the importance of institutions, which are most often taken as fixed and given. Others pay attention to some specific institutions such as property rights and taxes for instance. Douglass North e.g. has written a fundamental book on the Theory of Institutions (1990), in which the "role" of institutions is to cope with uncertainty.

What about a Complex System approach?

Let us first note that institutions in social sciences are the equivalent of patterns in physical systems and functional organisation in biology. Whatever the language we use, emergence, self-organisation, spatio-temporal instabilities... cooperative dynamics is basically a description of how the microscopic properties of simple elements give rise to macroscopic properties of ensembles. We can then expect that ideas from statistical physics will be useful in that context. In fact, the methodology is also based on non-linear dynamics and the combination of these two approaches is often called Complex Systems Dynamics (Weisbuch 1990).

Let us see the basic scheme for the institutions that may arise on a market. The loop on figure 1 is typical of a situation of bounded rationality.An economic agent will sample data about the market situation and build a world representation by coding these data into information. The coding process is equivalent to learning or to interpolation of the data. Decisions will be taken by the agents according to their representation of the market and the actions taken by the agents contribute to shaping of the market. Market dynamics then implies the coupling of cognitive and economic dynamics.

Our description of a market fits into the complex system framework: the structure of the market is a network of entangled loops, each loop corresponds to one agent, and agents differ becuase their models of the world are  based on different experience. Complex systems evolve in time towards attractors. We here interprete attractor configurations as institutions.

Apart from these two simple paradigmatic examples, a number of other institutions relate to information processing in markets: brokers or terms of contracts for instance. Viewing institutions as attractors explains a number of interesting general features. References

Arthur, Brian W. and Lane, David .A, (1993), "Information contagion", Structural Changes and Economic Dynamics, 4, 81-104.

Follmer H. (1974) "Random economies with many interacting agents", Journal of Mathematical Economics, vol. 1, 1, March, pp. 51-62.

Kirman Alan P., (1993), " Ants , rationality and recruitment ", Quarterly Journal of Economics. vol. 108, pp. 137-156

North, Douglass C. (1990)" Institutions, Institutional Change and Economic Performance (Political Economy of Institutions and Decision)"

Orlean A. (1995), ``Bayesian interactions and collective dynamics of opinions: herd behavior and mimetic contagion'', JEBO, 28, pp. 257-274.

Weisbuch G. (1990), "Complex Systems Dynamics", Addison Wesley, Redwood City, California.

Weisbuch G.,  Kirman A. and Herreiner D. (1999), " Market Organisation and Trading Relationships",
Journal of Theoretical Economics, to appear.

Note: The purpose of the present essay is not the presentation of  neo-classical economics approach to institutions: these few preliminary and somewhat caricatural remarks are intended to stress a big  difference in perspective.