"System change is now inevitable. Either because we do something about it, or because we will be hit by climate change. '...

"We need to develop economic models that are fit for purpose. The current economic frameworks, the ones that dominate our governments, these frameworks... the current economic frameworks, the neoclassical, the market frameworks, can deal with small changes. It can tell you the difference, if a sock company puts up the price of socks, what the demand for socks will be. It cannot tell you about the sorts of system level changes we are talking about here. We would not use an understanding of laminar flow in fluid dynamics to understand turbulent flow. So why is it we are using marginal economics, small incremental change economics, to understand system level changes?"

Wednesday, October 1, 2008

Post-Equilibrium Economics

Agent-based modeling, a new approach favored by computer science types, is much more likely to prove useful than the general equilibrium modeling of traditional economics precisely because markets are nothing like the models economists traditionally use.

Though computationally intensive at a minimal level, agent models scale much better than the conventional equilibrium models. Conventional models yield publishable results with three or four variables, but become totally intractable at about thirty degrees of freedom. Agent models scale linearly with the number of modeled agents and linearly with the comutational load of each agent's decisions. Thus, they present a vastly more promising application of computation to economics.

So perhaps a reasonably useful theory of economics may emerge just in time to do us some good! Or perhaps, just barely too late...

A story to this effect appears in today's New York Times.
It seems clear that no one really knows what is coming next. Why?

Well, part of the reason is that economists still try to understand markets by using ideas from traditional economics, especially so-called equilibrium theory. This theory views markets as reflecting a balance of forces, and says that market values change only in response to new information — the sudden revelation of problems about a company, for example, or a real change in the housing supply. Markets are otherwise supposed to have no real internal dynamics of their own. Too bad for the theory, things don’t seem to work that way.

As an aside it's nice to see Doyne Farmer's name for the first time in a while in that article. Anyone besides me remember reading The Eudaemonic Pie? A very interesting read to say the least; Farmer is perhaps the most memorable character in the memorable story.



David B. Benson said...

Good article in TNYT.

Chile has foriegn currency transaction controls after having been burned rather badly by a flood of sudden speculation by foreigners in the Chilean economy.

ac said...

Do you know of anyone who is actively working along these lines?

Years and years ago when I read Capital, I thought it would be neat to write a simulation of a simple commodity producing society (in which more or less homogeneous agents produce and trade their own commodities), and then to extend this to archetypal capitalist production.

Never did follow through with this, but I'd be surprised if someone wasn't doing something similar/better.

David B. Benson said...

mt --- You might caree to vist with James Galbraith, economist, professor at University of Texas, Austin.

Michael Tobis said...

Thanks, David!

An interesting suggestion. I didn't know he was here. I had a brief flirtation with the LBJ School last year.

Perhaps I ought to look them up again.