Our understanding of so-called “complex systems” has made giant leaps forward in the last 40 years, due in particular to a flurry of activity in statistical physics, theoretical ecology, computer science and mathematics. Some of the concepts that have emerged should no doubt play an important role in economics as well, where the main issue is the aggregate properties of a large number of partially informed, heterogeneous and interacting agents. These ingredients are essentially the same as those present in the “complex systems” studied by physicists.

Of particular interest is notion of marginal stability (also known as “self-organized criticality”, or SOC). As a rule, complex optimization leads to fragilities and instabilities. Radical uncertainty may derive from radical complexity.

An enticing illustration concerns the stability of network economies. Why is the output of large economies so volatile, when fluctuations should average out quickly as the size of the economy grows? In the 90's physicists Bak and Chen and economists Scheinkman and Woodford surmised that large economies spontaneously evolve towards an anomalously fragile marginally stable state of the type described above. In absence of a convincing model however, this SOC scenario failed to gain acceptance in the economics community.

Together with José Moran, Jean-Philippe Bouchaud introduced [1] a general economic model where SOC occurs naturally, with idiosyncratic shocks being propagated and amplified along a network of interconnected firms. Using results from Random Matrix Theory, we find that increased interlinkages, profit seeking and/or reduced substitutability between firms' inputs drive the system to the edge of stability, as does adding firms to the system. This scenario is strongly reminiscent of similar ideas in an ecological context, where the disappearance of a single species can lead to mass extinctions mediated by network effects.

[1] Moran, José, and Jean-Philippe Bouchaud. "May's instability in large economies." Physical Review E 100.3 (2019): 032307.

About the speaker

Jean-Philippe Bouchaud is the Chairman and Chief Scientist of CFM. He supervises the research team with Marc Potters.

He founded ‘Science and Finance’ in 1994, which merged with CFM in 2000. Prior to CFM he was a researcher at the Centre National de la Recherche Scientifique until 1992. After a year at the Cavendish Laboratory in Cambridge, he joined the Service de Physique de l’État Condensé at the Commissariat à l’Energie Atomique in Saclay, France, until 2004. He holds a PhD in theoretical physics from the École Normale Supérieure (ENS) in Paris.Jean-Philippe teaches regularly at the ENS and was elected at Collège de France on the Bettencourt Innovation Chair for 2020. He has been a Member of the French Académie des Sciences since December 2017.

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