AITIC Session 06

Complexity Science as Order-Creation Science

Neo-

Second Law of Thermodynamics

Computational Austrian
First law of Thermodynamics

classical

Heisenberg’s Uncertainty Pr.

Economics
Newton’s Laws of motion

Economics Simulation
Mathematical (agent models)
Game Theory
Modelling
DEDUCTION
Complexity
Statistical Science
Inferences INDUCTION

Artificial Heuristics
ABDUCTION Intelligence
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McKelvey B (2004) Complexity science as
order creation science: New theory, new
method. E: CO (December) pp 2–17.

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 Outline
• Objective
• Address entrepreneurship and organizational change dynamics
• Key concern
• Economists’ theories concern explaining equilibrium, taking help of maths,
Newtonian mechanics and first law of thermodynamics
• These theories are inadequate for addressing rapid change characterizing the contemporary
world. Even evolutionary theories are inadequate owing to above, and for inattention to agent
heterogeneity, interdependence and irreversibility that characterize disequilibrium dynamics
• Theories are needed to explain order creation under rapid change, where there is
no equilibrium. Mathematical models cannot handle/ order creation.
• Main Advocacy
• Agent-based computational models (ABM) are preferable over mathematical
models, given ABM’s ability of modelling emergence of order
• Mathematical models are inadequate since they can deal only with equilibrium dynamics
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Coping in the Modern Age

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 4 Revolutions
• Agricultural
• Industrial
• Service
• Digital (21st Century)

The only thing that gives an organization a competitive edge - the

only thing that is sustainable - is what it knows, how it uses what
it knows, and how fast it can know something new!
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 The prognosis
• Economies of the 21st century are dominated by globalization and
integrated by sophisticated information networks
• Creative destruction from the transition is creating social disorder
worldwide
• New technology, dynamic markets, accelerating change, shorter product
life cycles, digital information revolution, decentralization, globalization,
environmental decay
• Entirely new industries are being born, and the world is unifying
into a global market governed by the imperatives of knowledge
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But there is rising Uncertainty …
• Uncertainty in organizational environments is a function of
(1) degrees of freedom (one signature of complexity)
(2) the possible nonlinearity of each variable comprising each degree of
freedom
(3) the possibility that each may change.
• Above three environmental ingredients give rise to seemingly
countless strategic options.
• A system has to have internal variety, also defined as degrees of
freedom that matches its external variety so that it can self-organize
to deal with and thereby “destroy” or overcome the negative effects
on adaptation of imposing environmental constraints and complexity

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To cope …
• Lower level units of an organization, must absorb variety, leaving
upper managers with less frequent, less noisy, less complex, but
weightier decisions.
• ‘New Age’ economies and organizations in the digital information era
call for organizational designs in which the collective intelligences of
many employees may be brought to bear, quickly, on New Age
organization problems and strategies
• Firms must develop strategies for acquiring, interpreting, distributing,
and storing the information that individuals possess
• Learning is a nonlinear, interactive, and coevolving process

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 Coping mechanisms, continued …
• Strategic advantage lies in developing new useful knowledge from the
continuous stream of “unstructured, diverse, random, and contradictory
data” swirling around firms (ogilvie p. 3)
• Corporate restructuring is focusing on responding to hyper-growth, building
cellular networks, product-cycle management, use of internal markets
• Nearly autonomous (de-centralized) entrepreneurial cellular networks and
fundamentally different ways of corporate governance are likely to replace
top-down hierarchical control

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Coping …
• Disequilibria rather than optimization, with enhanced competitiveness
stemming from employee empowerment, is the order of the day
• Employees are now responsible for adaptive capability rather than just
being bodies to carry out orders.
• It is not just the one brain at the top that counts - it is lots of connected
brains.
• This points to the critical importance of bottom-up emergent dynamics
underlying the creation of learning and new knowledge, and
distributed intelligence in organizations

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Complexity and Emergence

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Stable, orderly structures can persist even under
conditions of dynamism, where equilibrium concepts are
inapplicable (since L.H. Derivative ≠ R.H. Derivative):

We are setting out to study what leads to emergence of

orderly structures.

Ignoring dynamism is not an option any longer. We are

studying order creation for the same reasons that
scientists earlier studied equilibrium: obtaining control,
engineer and manage new stuff, etc.
Why is evolutionary theory inadequate? 12
Iconic example of order-creation
• Convection currents
• There is a temperature differential in the layers of air from the hot
surface of the earth to the cooler regions above
• When the temperature gradient is at sub-critical levels, heat transfer
occurs by conduction
• At a certain critical level of gradient, certain orderly patterns of air
movement* are seen to form (self-organization) [*carrying heat energy]
• these cannot be explained by Newtonian mechanics
• Kites and other large birds often float up riding on convection
currents.

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Formally …
• In a Bénard process ‘critical values’ in the energy
differential—measured as temperature, (ΔT) between
warmer and cooler surfaces—affect the velocity, R, of the
air-flow, which correlates with ΔT
• Suppose the surfaces of the container represent the hot
surface of the earth and the cold upper atmosphere

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 Bénard cells can also be observed when water begins
to boil: it comprises the pentagonal, hexagonal cells
Emergence: Bénard cell on the surface of the liquid (bubbles) that trap air.

• Below the 1st critical value (the Rayleigh number), heat transfer
occurs via conduction: gas molecules transfer energy by vibrating
more vigorously against each other while remaining essentially in the
same place
• Between the 1st and 2nd critical values, heat transfer occurs via a bulk
movement of air in which the gas molecules move between the
surfaces in a circulatory pattern - the emergent Bénard cell
• Above the 2nd critical value a transition to chaotically moving gas
molecules is observed.

Newtonian → |Rc1 |→ Emergent →|Rc2 |→ Chaotic 15

Newtonian → |Rc1 |→ Emergent →|Rc2 |→ Chaotic

Fluid dynamicists have focused on the 1st critical value, Rc1— the Rayleigh
number—that separates laminar from turbulent flows.
• Below the 1st critical value, viscous damping dominates; so self-organized
emergent (new) order does not occur
• Above the Rayleigh number inertial fluid motion dynamics occur
• Control parameters, Ri , externally influenced, create R > Rc1 with the
result that a phase transition (instability) approaches, degrees of
freedom are enslaved, and order parameters appear, resulting in similar
patterns of order emerging …
• A second critical value, Rc2, separates the region of emergent complexity
from deterministic chaos - the so-called “edge of chaos.”
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The European and American schools of
Complexity studies

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European School vs. American School of complexity
sciences
• The European School focuses on the effects of externally imposed
energy differentials (adaptive tension) on the production of phase
transitions
• Energy levels above Bénard’s 1st critical value are important for overcoming
the threshold-gate, agent-activation problem
• The American school focuses on internal positive feedback induced
nonlinearities stemming from the coevolution of interacting,
heterogeneous agents that are set in motion by small instigation
effects – the butterfly effects of chaos theory.

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American School
• The American complexity literature focuses on positive
feedback, power laws, and small instigating effects
• New order resulting from nonlinear positive feedback effects [*e.g.
the high-pitched squeal that results when the microphone is placed (too) near a
speaker; emergence of strong group norms that feed back to sanction agent
behaviour]
• Fractals, scalability, power laws, and scale-free theory
• Self-organized criticality - a power law event - in which small initial
events can lead to complexity cascades of avalanche proportions

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Modeling complexity phenomena:
Agent-based modelling instead of
Mathematical modeling

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Theory and Models
A theory
“does not attempt to describe all aspects of the phenomena in its
intended scope; rather it abstracts certain parameters from the
phenomena and attempts to describe the phenomena in terms of just
these abstracted parameters” (Suppe p. 11)
 Assumes that the phenomena behave according to the selected
parameters included in the theory
Is indirectly linked to phenomena via the mediation of models
Example: How well does an idealized wind-tunnel model of an airplane
wing represent the behaviour of a full sized wing in a storm?

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Theory, Model, Phenomenon

Analytical Adequacy Ontological Adequacy

THEORY MODEL PHENOMENON

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Why Agent-based-modeling instead of
mathematics?
• The most significant dynamics in bio- and econospheres are not
variances around equilibria but are due to the interactions of
autonomous, heterogeneous agents energized by contextually
imposed tensions (p. 27)
• A system comprising of heterogeneous agents has the capacity for self-
modification according to internally constructed and defined goals (p. 14)
• In mathematical modelling, the needs of tractability give rise to
assumptions that are demonstrably antithetical to a correct
understanding, modelling, and theorizing of human social behaviour:
Math moulding

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 Math molding
• Economists make the ‘instrumentally convenient’ assumption that all agents
are homogeneous. This makes the math more tractable
• All people do not act in the same way and on an identical set of premises; agents display
heterogeneity in behaviour. Searching for universal laws of behaviour is pointless (p. 14)
• Economists assume that agents act independent of other agents (ref. IID)
• Agents are interdependent. What an agent can or cannot do is a often function of
surrounding agents [as well as environmental constraints that act differently on different
agents—given heterogeneity in agent capabilities].
• A math model accounts for the translation of order from one form to another
under equilibrium assumptions. Phenomena are studied under the
governance of the 1st Law of Thermodynamics.
• Irreversibility arising from entropy* change requires study of order-creation under
disequilibrium. *Recall that a perfect reflector cannot send escaping vapour back into a bottle.

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What do agent based models accomplish?
• Introduces virtual experiments so researchers can
• manipulate variables with a surety not possible with real-world human experiments
• run experiments with large numbers of virtual subjects
• do so over many time periods
• replicate the foregoing as many times as deemed appropriate
• Fostering the study of interdependence rather than avoiding it by assuming
independence
• Positive feedback processes are emphasized in addition to negative
feedback, equilibrium-preserving processes
• Permitting the exploration and study of genuine order-creation processes
and emergent behaviours among interconnected agents

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Agent-based models can …
• … model complexity, diversity, heterarchy (multiple orders and
constraints), vast networks of connections, indeterminate social
behaviors, mutual causality, and so forth - all the key elements of
knowledge era dynamics …
• … enabling study of how agent rules lead to order creation and the
formation of norms, hierarchy, institutional structure, supervenience
• … because they (a) more adequately represent the state-space of
real-world companies/organizations and (b) have been tested against
real-world phenomena
Hence the suggestion is to use models to develop simplified theories
that can be tried out by managers and entrepreneurs
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Complexity Catastrophe (Kauffmann)
• According to Kauffman, as
complexity increases, the
number of peaks vastly increases
in the landscape, while the
difference between peaks and
valleys diminishes, such that
even though the pressure of
Darwinian selection persists,
emergent order cannot be
explained by selection effects.
He terms it complexity
catastrophe.
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References

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Darwinian selection & Evolutionary theory
(from Nelson and Winter)
• Darwinian theory
• Genes replicate with error
• Variants are differentially selected, altering gene frequencies in populations
• Populations have differential survival rates, given existing niches
• Coevolution of niche emergence and genetic variance
• Struggle for existence
• Nelson and Winter introduce Darwinian selection as a dynamic
process over time, substituting organizational routines for genes,
search for mutation, and selection via economic competition

NEXT
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 Why evolutionary theory is inapplicable?
• Dispersed interaction: dispersed, possibly heterogeneous, agents active in parallel
• No global controller or cause: coevolution of agent interactions
• Many levels of organization: agents at lower levels create contexts at higher levels
• Continual adaptation: agents revise their adaptive behavior continually
• Perpetual novelty: by changing in ways that allow them to depend on new
resources, agents coevolve with resource changes to occupy new habitats
• Out-of-equilibrium dynamics: economies operate ‘far from equilibrium’, meaning
that economies are induced by the pressure of trade imbalances individual-to-
individual, firm-to-firm, country-to-country, etc.
BACK
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Summary: Why is evolutionary theory inadequate?
• Evolutionary theory is not the best approach (is an awkward choice)
for explaining entrepreneurship and organizational change dynamics
• We need both new theory and new methods aimed at explaining order
creation instead of focusing on problems explaining equilibrium.
• The dynamics of order creation are the result of geological events and
Darwinian selection is largely a fine-tuning process toward
equilibrium within a context of existing species and stable niches
• most of the true order-creation action is over before Darwinian theory
approaches become relevant
BACK

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