Building Systems

A system is a set of elements which are connected in particular ways. The formal general equilibrium model is an extreme case in which every element is directly connected to every other and in which all potential external connections, including connections from the future, are incorporated in the data. The foundational assumption of this paper is that viable systems must be selectively connected, and that viable large systems are highly-decomposable assemblies of smaller systems. As Simon argued, quasi-decomposability has made evolution possible from the beginning of the universe. Economies are evolutionary systems, in which human intentionality is a novel feature which modifies but does not supersede the processes of novelty generation, selection and diffusion. The microfoundations for this study are found in the characteristics of the human brain as a system of selective connections. Human knowledge consists of domain-limited patterns imposed on events. Organization—selective connections—is thus basic; but the potential for human knowledge is greatly enhanced by specialisation between domains, combined with variation within each. Co-ordination and development, so often separated in economic theory, are interconnected; they are both ordered processes—not states, in which markets (alongside many other institutions) are prime sources of order.