CLEP – The interconnected challenges of the 21st-century global economy necessitate a reevaluation of competition law systems worldwide in the spirit of multidisciplinarity. It means not only reviewing in light of its intellectual roots in jurisprudence, microeconomics, and ethics, but also recognizing the rapidly increasing number of valuable insights from contemporary studies on information and complexity. The Competition Law, Economics, and Philosophy series comments on this process. It is a mix of these three disciplines, seasoned with a bit of literature, science, technology, and personal experience.
The Wealth of Nations 250th Anniversary:
Adam Smith as Precursor of Complexity Economics
File: SSRN
I’d like to thank the Polish Economic Society for inviting me here. The opportunity to speak among some of the most renowned economists is a tremendous honor for a doctoral candidate. Particularly because, after studying economics and law, I decided to pursue a PhD in legal studies. I believed that by researching the growing importance of competition law, I would follow in the footsteps of Adam Smith, who, in the Wealth of Nations, not only repeatedly warned against monopolies and cartels but also defined political economy as “a branch of the science of a statesman or legislator.” This perspective is gaining traction these days, especially amid threats posed by digital giants – Amazon, Facebook, Google, and the former Twitter. Their economic power translates into political power. Their owners openly attack the foundations of liberal democracy and the value of utmost performance to Smith – freedom of the individual from domination. Freedom from being dominated and constrained, whether by the state or market oppressors. My research examines how we can make competition law fairer and more effective through a cutting-edge perspective on the economy known as complexity economics.
Complexity economics rejects the standard model of the economy as a mechanism that balances the aggregated forces of supply and demand. The economy is a complex system composed of a vast number of components whose interactions continuously cause the emergence of new systemic properties. Contrary to common usage, “complex” means something different from “complicated.” As the famous comparison goes, “A jet engine is complicated. Mayonnaise is complex.” An engine has many mechanical parts that can be replaced without changing its characteristic properties, even if this would render it useless. Mayonnaise, in turn, is a complex system that emerges from the chemical interactions of its components. Replacing even a single component would deprive it of its characteristic properties.
Let’s return to Smith and the “invisible hand.” Not the most famous one from The Wealth of Nations, nor the more important one from The Theory of Moral Sentiments. Let’s start from the beginning. Smith used this metaphor three times in his works. The first time was around 1750, in his essay On the History of Astronomy. There, he states that the ancients accepted the properties of commonly used substances as given. However, whenever they encountered exceptional natural phenomena, they tried to explain them in terms of some “invisible hand”:
Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters. But thunder and lightning, storms and sunshine, those more irregular events, were ascribed to his favour, or his anger.
This “invisible hand” behind exceptional natural phenomena is complexity. A hurricane is a complex system powered by a stream of energy from the sun that drives the interaction between winds and rainwater carried from the oceans. Understanding complexity enables us not only to identify the causes of hurricanes but also to predict them. Complexity also explains those common properties of nature that, as Smith notes, the ancients took as given. “Water refreshes” because it is wet. Neither oxygen nor hydrogen is wet. Not even a water molecule – a H2O – is wet. It is the interaction of numerous such molecules – cohesion and adhesion – that causes the phenomenon we experience as moisture to emerge. This “emergence” of new properties is a key characteristic of complex systems. Complexity economics leverages knowledge accumulated by the exact sciences – physics, chemistry, and biology. This perspective opens up new possibilities for humanity. Understanding the complexity behind hurricanes helped save the lives and property of tens of thousands of people. Imagine the possibilities that stem from a better understanding of the “invisible hand” driving the largest complex system studied by the social sciences – the modern economy- and its disturbing patterns: climate change, financial crises, and the pandemic threat.
Adam Smith described how the interaction of resourceful individuals leads to the emergence of economic system properties such as fair markets. This makes him precursor of complexity economics. The vision of the economy as a complex system best captures the idea of the “invisible hand.” This raises the question: how is it possible that this metaphor became a banner of standard economics, which depicts the economy as a simple calculus of forces in equilibrium? Because standard economics interprets the “invisible hand” as a balancing mechanism. Thanks to it, aggregated demand and supply are in equilibrium, prices stabilize, and the market mechanism protects competition. This model necessitates the assumption of negative feedback loops. From this perspective, the effects of minor disruptions quickly fade. Even if a company outperforms its competitors, it will produce each subsequent unit less efficiently, and it will face a limit to growth. Meanwhile, in the entire Wealth of Nations, the word “equilibrium” appears only once, in the context of international trade.
Complexity economics observes that the “invisible hand” leads to positive feedback loops – called increasing returns or economies of scale. Small events can have immense consequences. Mild tropical winds can escalate to a hurricane. The first factory to advance the division of labour in pin production can take over the entire market and block further innovation. Similarly, internet users who followed their friends’ early decisions to join a specific social media ensured Facebook’s long-term dominance through network effects. Fortunately, Smith also foresaw how to control these positive feedback loops before they led to losses on the scale of a natural disaster. This is where the triad from the title of this seminar – economics, morality, and institutions – comes into action. In all economic interactions – exchange, labor, competition – moral rules shared by individuals cause the emergence of an institutionalized law that regulates market activity. Therefore, we must remember that the foundation of a complex economic system lies in our core values. It is in light of these values, not simple mathematics, that we should assess the effectiveness of the institutions that regulate it.
<Translated transcript of the presentation from the webinarium
Adam Smith: economics, morality, and institutions – 250 years of the Wealth of Nations: https://www.pte.pl/aktualnosci/wydarzenia/czwartek-u-ekonomistow-2>
Filip Lubinski 
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