Doyne Farmer’s recent conversation with EconTalk’s Russ Roberts has given listeners reason to think about the state of the economy and the way mainstream economists model market behavior and use their models and tools to predict behavior and identify trends. After listening to the EconTalk episode “Chaos and Complexity Economics (with J. Doyne Farmer)”, do you agree?
In this podcast, Roberts and Farmer delved into the realm of complexity economics, with Farmer making a strong case for its potential to significantly improve the way economists model and predict market behavior and trends. Farmer argues that it only makes sense to move away from the overly simple model of rational expectations. He advocates turning to the messy, interconnected reality of the economic world. Yes, it sounds like a heavy lift. But Farmer makes a compelling case for complexity economics and the use of agent-based modeling.
Roberts and Farmer make complexity economics palatable to outsiders to Farmer’s field, especially those outside the economics discipline and those who consider themselves lazy economists.
Around 10:26 into the podcast, Farmer explains how complexity economics can integrate more realistic and nuanced aspects of human behavior into agent-based modeling. He gives an example to illustrate how house prices are determined through adjustment at aspiration level. Complexity economists recognize the heterogeneity of individuals and the multiplicity of their decision-making strategies. This is very different from the assumption of rational expectations of homogeneous actors seeking utility maximization in neoclassical models with identical income constraints.
This shift means that the work of complexity economists seems capable of bringing the economic discipline closer to the nuances of real life and of systematically introducing rules of thumb and social institutions into decision-making, something that has been difficult in most economic models. Around 24:00, some differences between the work of complexity economists and econometricians are discussed by Farmer and shared with Roberts. It is here that Farmer describes the benefits of using complexity economics to analyze complexity Financial crisis of 2008highlighting the potential benefits of using complexity economics to inform policy responses to thwart the aftermath. Roberts pushes back and encourages Farmer to consider other options. Farmer seems determined to implement centralized policies rather than trusting decentralized markets and the people who make them up.
Complemented by the use of big data and powerful advanced computers, Farmer goes on to make compelling arguments for taking the heterogeneous approach to complexity economics and its dynamics in the real world to boost the economy and perhaps mainstream economics to recalibrate the way they model consumption. saving and investment behavior. To this point, explain why Farmer argues that this heterogeneous approach is a huge advantage, especially when it comes to demographics, income differences, random behavioral adjustments, and other factors.
From Farmer’s perspective, complexity economics could serve as a path to a future where economic models become clearer, more widely applicable, and adept at examining both the direct and indirect impacts of different policies, allowing the economy to better deal with the complexity of social and global developments. events. Yes, this creates a compelling vision, especially if it is accompanied by improved predictive power and provides a framework that significantly improves the way we understand economic dynamics. As an example, Farmer discusses how he and his team approached the introduction of an unexpected global crisis, such as the recent pandemic, to predict how consumers, businesses and industries would respond. He cites his team’s experiences with COVID in the United Kingdom.
Indeed, the integration of complexity economics creates a fertile ground for interdisciplinary collaboration and potentially provides a playground for new institutional economics, strengthening the models with empirical evidence and potentially leading to a paradigm shift in economic thinking. The push for a more inclusive and understandable science of economics is to be welcomed and is in line with a broader desire across the discipline to make economics more accessible and useful to a broader audience across all disciplines. This is indeed all terribly attractive. But there is always a but, especially in our circles committed to the ideal of a society of free and responsible individuals.
There is certainly potential for a serious clash as free market economists delve into the way Farmer advocates using the fruits of complexity economics to inform policymakers. Yes, there is always potential for this clash. But Farmer seems unfamiliar with FA Hayek’s work. From cover to cover, Hayek is not mentioned in his book, nor is he discussed in this or other popular podcasts. Moreover, he does not seem to fully understand Milton Friedman’s position on Milton Friedman’s impressive records self-interest individuals navigating the markets versus the disastrous accounts of “benevolent” government officials and policymakers. In fact, he seems somewhat hostile to Friedman and his cadre at the Chicago School of Economists.
~ Page 106, Sense of Chaos, a better economy for a better world.
Yes, Milton Friedman – or FA Hayek who is not mentioned by Farmer – are known for their advocacy of free market principles. How might they respond to Farmer’s claims? You could only assume they would react, but they would react differently. Both would likely be intrigued by its scientific approach and its ability to use “decentralized” rules of thumb as a key part of decision-making behavior. However, do you agree that Friedman would advocate including minimal government intervention and the self-regulating forces of the free market in the modeling scenarios Farmer uses to provide a balanced perspective? Or do you think he would insist on something else? Now consider Hayek with his emphasis on the fragmented nature of knowledge and the potential dangers of central planning. How might you imagine him criticizing Farmer’s approach? What suggestions would he make to Farmer?
If Farmer uses this agent-based model primarily to design policies to address important social issues, Friedman and Hayek might question its effectiveness. However, if it is possible to use his model to examine the net effects of securing property rights, improving legal systems, promoting stable money, improving capital markets, and more, we can then see Friedman and Hayek lean on Farmer’s model? Might proponents of minimal intervention encourage complexity economists like Farmer to explore the natural equilibrium toward which a dynamic economy tends through free interactions, and compare the findings with those of the more policy-oriented Keynesians?
This leads me to ask one final question. Can complexity models provide valuable insights to settle the debate about what serves society better: free markets with limited government or a government that tries to achieve policy? Making progress in settling this debate would make great strides in helping to reconcile different economic paradigms and emphasize the need to understand how society is harmed or hurt by both market forces supported by decentralized systems and by government policies supported in centralized systems is produced.
Let’s hear what You think. Consider the following questions and share your answers with us today.
- After listening to the episode, would you agree that Farmer’s conversation with Russ Roberts gives us reason to think seriously about the current state of the economy, especially how mainstream economists model and predict market behavior and trends? identify? Explain your answer.
- Around 10:26 into the podcast, Farmer illustrates how complexity economics integrates more realistic and nuanced aspects of human behavior into agent-based modeling (ABM), as seen in the setting of house prices through aspiration-level adjustment. Compare this ABM approach to representative agent decision making used in immediately clarifying market adjustments in response to disruptions or imbalances.
- Around 24:00, Farmer discusses with Roberts the differences between the work of complexity economists and econometricians; How do the pros and cons of each approach compare and contrast, especially in the context of the 2008 financial crisis?
- Why does Farmer argue that the heterogeneous approach to complexity economics, supplemented with big data and advanced computing to capture real-world dynamics, represents a significant advantage for mainstream economics in recalibrating the way consumption, savings and investment behavior is modeled, especially when demographics, income differences, random behavioral adjustments, and other factors are taken into account?
- Looking at the claimed benefits of complexity economics in making economic models clearer and more widely applicable, and able to assess the direct and indirect effects of policies, how has this approach proven useful during COVID in the UK? Consider the skepticism expressed in the posted comments on this topic. In light of this model’s experience with the US, what would be your response to further the discussion?
- Complexity economists like Farmer place significant faith in the government’s ability to strategize and implement policies without falling prey to special interests, short-sightedness, or low-information voting. Can this framework be used to consider and examine policies that increase economic freedom?
- To what extent can the complexity economics approach to modeling the world be used to help settle the debate about what is better for human flourishing: economic freedom or central planning through policy?
[Editor’s note: Don’t miss Ferrarini discussing Farmer’s book with David Henderson and Arnold Kling in this episode of our From the Shelf series.]
Tawni Hunt Ferrarini is an economist, international economics educator, and author currently at Florida State University’s Stavros Center for Free Enterprise and in residence this semester as a Liberty Fund scholar.