On the Emergence and Evolution of Economic Complexity

Abstract

This paper examines the emergence and evolution of economic complexity, defined as large-scale specialization and exchange (LSSE), within the context of a simple coordination game in which communication and coordination costs (institutions) are modeled explicitly. The commonly held view that complexity in the form of LSSE (pre- and post-industrial society) emerged and evolved spontaneously (i.e. as a Nash outcome) is examined critically. Specifically, it is shown that spontaneous-occurring LSSE equilibria are less likely than coordination-based ones (i.e. with a third party). Various communication and coordination strategies (CCSs) are examined, the results of which are then used to examine three complexity-increasing periods, namely ancient Mesopotamia and the first and second industrial revolutions. It is argued that in addition to technological innovations, all three were characterized by important institutional innovations (CCS) including the birth of laisser-faire and the rise of the modern-day, vertically- and horizontally-integrated industrial conglomerate.