Reconstructing economics

Abstract

In this paper we argue that a view of the economy as a complex interactive and adaptive system allows one to explain phenomena such as “phase transitions” which are not consistent with the equilibrium models of standard models. A growing strand of economists is now following a different methodology based upon the analysis of systems with many heterogeneous interacting agents. We explain how Agent Based Models (ABM), and, in particular Agent based Computational Economics (ACE), and Analytically Solvable Heterogeneous Interacting Agent (ASHIA) models based on statistical physics or Markov chains can be used to deal with economies in which direct interaction between agents is important. This interaction leads to empirical regularities, which emerge from the system as a whole and cannot be identified by looking at any single agent in isolation: these emerging properties are, according to us, the main distinguishing feature of a complex system. In this way economics can free itself from the limitations of the static equilibrium approach, the use of the implausible Representative Agent approach and analyze the, possibly out of equilibrium, dynamics which seem more consistent with observed empirical data. The complexity approach is a very challenging line of research whose empirical results are very promising. Modeling an agent-based economy, however, remains a complex and complicated adventure.