Given the crisis weighing down theworld economy and financial markets, it is not surprising that a substantive reconsideration of the principles ofmodern economics is underway. The profession’s dissident voices, it seems, arefinally reaching a wider audience.

For example, the Nobel laureate Ronald H. Coase has complained thatmicroeconomics is filled with black-box modelsthat fail to study the actual contractualrelations between firms and markets. He pointed out that when transaction costsare low and property rights are well defined, innovative private contracts might solve collective-action problemssuch as pollution; but policymakers rely largely on fiscal instruments, owingto economists’ obsession with simplisticprice theory.

Another Nobel laureate, Paul Krugman, has claimed that macroeconomics overthe last three decades has been useless at best and harmful at worst. He arguesthat economists became blind to catastrophic macro failure because they mistookthe beauty or elegance of theoretical models for truth.

Both Coase and Krugman bemoan the neglect of their profession’s patrimony– a tradition dating at least to Adam Smith – that valued grand andunifying theories of political economy and moral philosophy. The contemporaryobsession with reductionist and mechanical models seems to have driven theprofession from theory toward ideology, putting itout of touch with the real economy.

The simplicity and elegance of micro and macro models make them useful in explainingthe price mechanism and the balance or imbalance of key aggregate economicvariables. But both models are unable to describe or analyze the actualbehavior of key market participants.

For example, the textbook theory of the firm does not examine thestructure of corporate contracts, and delegatesthe study of assets, liabilities, incomes, and expendituresto “accounting.” How can firms be understood without examining the corporatecontracts that bring together their stakeholders – that is, their shareholders,bankers, suppliers, customers, and employees – whose complex relationshipsare manifested in companies’ balance sheets and transaction flows? Inconcentrating on production and consumption flows, national accounts aggregateor net out such data, thus neglecting theimportance of financing and balance-sheet leverage and fragilities.

Indeed, today’s mainstream micro- and macroeconomic models areinsufficient for exploring the dynamic and complex interactions among humans,institutions, and nature in our real economy. They fail to answer what Paul Samuelson identified as the key questions foreconomics – what, how, and for whom are goods andservices produced, delivered and sold – and rarely deal with “where” and “when,” either.

The division of economics into macroeconomics (the study of economicperformance, structure, behavior, and decision-making at the national,regional, or global level) and microeconomics (the study of resource allocationby households and firms) is fundamentally incomplete and misleading. But thereare at least two other divisions in economics that have been neglected: meso-economics and meta-economics.

Meso-economics studies the institutional aspects of the economy that arenot captured by micro or macroeconomics. By presupposingperfect competition, complete information, and zero transaction costs,neoclassical economics assumes away the needfor institutions like courts, parties, and religions to deal with the economicproblems that people, firms, and countries face.

By contrast, the economists Kurt Dopfer, John Foster, and Jason Potts havedeveloped a Macro-Meso-Microtheory of evolutionary economics in which “an economic system is apopulation of rules, a structure of rules, and a process of rules.” The mostimportant feature of a meso-economic framework is to study the actual web ofcontracts, formal or informal, in family, corporate, market, civil, and socialinstitutions. Doing so provides a natural linkage between micro and macro,because the micro-level rules and institutions typically imply macro-levelconsequences.

Meta-economics goesstill further, by studying deeper functional aspects of the economy, understoodas a complex, interactive, and holistic living system. It asks questions likewhy an economy is more competitive and sustainable than others, how and whyinstitutions’ governance structures evolve, and how China developed four global-scalesupply chains in manufacturing, infrastructure, finance, and governmentservices within such a short period of time.

In order to study the deep hidden principles behind human behavior,meta-economics requires us to adopt an open-minded, systemic, and evolutionaryapproach, and to recognize the real economy as a complex living system withinother systems. This is difficult, because official statistics mismeasure – orsimply miss – many of the real economy’s hidden rules and practices.

For example, measurements of GDP currently neglect the costs ofnatural-resource replacement, pollution, and the destruction of biodiversity.Furthermore, it is common to assume in public policy that what is not easilymeasured statistically is insignificant or does not exist. Static, linear, andclosed analyses applied to open, non-linear, dynamic, and interconnectedsystems are bound to be faulty andincomplete.

The British economist Fritz Schumacher understood that human institutions,as complex structures with dynamic governance, require systemic analysis. Hedefined meta-economics as the humanizing ofeconomics by accounting for the imperative of a sustainable environment; thus,he included elements of moral philosophy, psychology, anthropology,and sociology that transcend the boundaries of profit maximization andindividual rationality.

Similarly, Eric Beinhocker, at the newly established Institute for New Economic Thinking,argues for “a new way of seeing and understanding the economic world.” Such anapproach requires incorporating psychology, anthropology, sociology, history,physics, biology, mathematics, computer science, and other disciplines thatstudy complex adaptive systems.

We believe that the framework of “micro-macro-meso-meta-economics” – whatwe call “systemnomics” – is a more complete way to analyze human economies,understood as complex living systems evolving within dynamically changingcomplex natural systems. This is a particularly useful framework for analyzingthe evolution of ancient but re-emerging economies such as China and India, which are large enough tohave a profound impact on other economies and on our natural environment.