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More is different ... and complex! the case for agent-based macroeconomics

Abstract

This work nests the Agent-Based macroeconomic perspective into the earlier history of macroeconomics. We discuss how the discipline in the 70’s took a perverse path relying on models grounded on fictitious rational representative agent in order to try to pathetically circumvent aggregation and coordination problems. The Great Recession was a natural experiment for macroeconomics, showing the inadequacy of the predominant theoretical framework grounded on DSGE models. After discussing the pathological fallacies of the DSGE-based approach, we claim that macroeconomics should consider the economy as a complex evolving system, i.e. as an ecology populated by heterogenous agents, whose far-from-equilibrium interactions continuously change the structure of the system. This in turn implies that more is different: macroeconomics cannot be shrink to representative-agent micro, but agents’ complex interactions lead to emergence of new phenomena and hierarchical structure at the macro level. This is what is taken into account by agent-based models, which provide a novel way to model complex economies from the bottom-up, with sound empirically-based microfoundations. We present the foundations of Agent-Based macroeconomics and we discuss how the contributions of this special issue push its frontier forward. Finally, we conclude by discussing the ways ahead for the fully acknowledgement of agent-based models as the standard way of theorizing in macroeconomics.

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Notes

  1. 1.

    The introduction partly draws upon Dosi (2012a), Fagiolo and Roventini (2017), and Dosi and Virgillito (2017) to which the reader is referred for further details.

  2. 2.

    A through discussion of emergence in economics is in Lane (1993).

  3. 3.

    A sharp Economics-101 synthesis is Harcourt et al. (1967). A discussion of the “Italian Keynesianism” and its links with the later Italian agent-based models is in Dosi and Roventini (2017).

  4. 4.

    An early formalization is via some Lotka-Volterra dynamics: see Goodwin (1950, 1951), and some refinements one of us proposes in Dosi et al. (2015b).

  5. 5.

    Nonetheless, Friedman was the pusher who first spreaded crack in the economic profession. The monetarist Weltanschauung is so pervasive in modern macroeconomics that (Bernanke 2002) celebrated Friedman’s 90 birthdays saying: “Regarding the Great Depression. You’re right, we did it. We are very sorry. But thanks to you, we won’t do it again.”. And monetarism is the backbone of New Keynesian economics (Mankiw and Romer 1991). In that sense, monetarism has triumphed (De Long 2000).

  6. 6.

    For a much more detailed reconstruction of what happened to the theory, intertwined with the reconstruction of the actual policy dynamics which led to the 2008 crisis, see Cassidy (2009), Turner (2010) and Bookstaber (2017).

  7. 7.

    And the warnings of Kaldor (1982) against the Scourge of Monetarism.

  8. 8.

    See also the seminal contribution of Leijonhufvud (1968) for an interpretation of Keynesian theory grounded on market disequilibrium processes and coordination failures.

  9. 9.

    In this respect there has always been a great sense of complementary by Solow with Schumpeter and, later on, Nelson and Winter (1982). And conversely a somewhat reductionist interpretation of Nelson and Winter’s contribution is a long-term microfoundation of Solow’s dynamics.

  10. 10.

    Exogenous TFP shocks in the production function are modeled in order to deliver a unit root in the productivity and output time series.

  11. 11.

    An exception was Howitt (2012) who claimed that “macroeconomic theory has fallen behind the practice of central banking” (p. 2).

  12. 12.

    Chari et al. (2009) put it in the clearest way: “an aphorism among macroeconomists today is that if you have a coherent story to propose, you can do it in a suitably elaborate DSGE model”.

  13. 13.

    Recently Fukuyama updated his opinion: ‘If you mean [by socialism] redistributive programs that try to redress this big imbalance in both incomes and wealth that has emerged then, yes, I think not only can it come back, it ought to come back. This extended period, which started with Reagan and Thatcher, in which a certain set of ideas about the benefits of unregulated markets took hold, in many ways it’s had a disastrous effect. In social equality, it’s led to a weakening of labour unions, of the bargaining power of ordinary workers, the rise of an oligarchic class almost everywhere that then exerts undue political power. In terms of the role of finance, if there’s anything we learned from the financial crisis it’s that you’ve got to regulate the sector like hell because they’ll make everyone else pay. That whole ideology became very deeply embedded within the Eurozone, the austerity that Germany imposed on southern Europe has been disastrous.” Interview on the New Statesman, 17 Oct 2018, https://www.newstatesman.com/culture/observations/2018/10/francis-fukuyama-interview-socialism-ought-come-back.

  14. 14.

    A non exhaustive list includes the Bank of England (Braun-Munzinger et al. 2016; Baptista et al. 2016); the European Central Bank (Montagna and Kok 2016; Halaj 2018); Central Bank of Brazil (Da Silva and Tadeu Lima 2015; Dos Santos and Nakane 2017); Central Bank of Hungary (Hosszu and Mero 2017); Bank of Russia (Ponomarenko and Sinyakov 2018); the IMF (Chan-Lau 2017); U.S. Office of Financial Research (Bookstaber and Paddrik 2015); U.S. Internal Revenue Services (Bloomquist and Koehler 2015).

  15. 15.

    This Section and the next two are partially grounded on Fagiolo and Roventini (2017).

  16. 16.

    A discussion of the limits of the representative assumption in light of the current crisis is contained in Kirman (2010b).

  17. 17.

    On this and related points addressing the statistical vs. substantive adequacy of DSGE models, see Poudyal and Spanos (2013).

  18. 18.

    A taxonomy of the most relevant identification problems can be found in Canova and Sala (2009). See also Beyer and Farmer (2004) and the discussion in Romer (2016).

  19. 19.

    This is what mainstream macroeconomics consider “sound microfoundations”. However, as Kirman (2016) put it: “the rationality attributed to individuals is based on the introspection of economists rather than on careful empirical observation of how individuals actually behave”.

  20. 20.

    Fagiolo et al. (2008) find that GDP growth rates distributions are well proxied by double exponential densities, which dominate both Student’s t and Levy-stable distributions. In light of such results, the choice of Curdia et al. (2014) to drawn shocks from a Student’s t distribution is not only ad-hoc, but not supported by any empirical evidence.

  21. 21.

    Lindé and Wouters (2016) also conclude that more non-linearities and heterogeneity are required to satisfactory account of default risk, liquidity dynamics, bank runs, as well as to study the interactions between monetary and macroprudential policies.

  22. 22.

    For a similar discussion about general equilibrium model, see the classic (Kirman 1989).

  23. 23.

    Recall that in presence of flat likelihood functions as those typically associated to DSGE model, Bayesian estimation simply reduce to a sophisticated calibration exercise. More on that in Section 2.

  24. 24.

    On a not very long time scale, one should also consider the new physical and social landscapes emerging from the impact of climate change. In an agent-based framework, see Lamperti et al.(2018a, 2018b).

  25. 25.

    The increasing supply of big data is likely to considerably improve the input validation of agent-based models. Incidentally, this is not going to apply to representative-agent DSGE models.

  26. 26.

    According to Moss (2008) one of the advantage of ABMs is that they also allow policy makers to be involved in the development of the model to be employed for policy evaluations.

  27. 27.

    Some of the agent-based models presented below have been already extensive employed to study policy interdependence: for an overview cf. Fagiolo and Roventini (2017) and Dawid and Delli Gatti (2018).

  28. 28.

    The roots are in Dosi et al. (2010). See also Dosi et al. (2013, 2015a, 2016b) for extensions studying the the possible interactions between credit markets and real dynamics and the impact of different combinations of fiscal and monetary policies. Dosi et al. (2017a) study the role of heterogeneous and adaptive expectations on the performance of the economy. A series of works Dosi et al. (2017b, 2017c, 2018c) extends the K+S model to study the decentralized interactions of firms and workers in the labor markets and the impact of structural reforms. Finally, Lamperti et al. (2018a, 2018b) develop the first agent-based integrated assessment model to jointly account for the coupled climate and economics dynamics.

  29. 29.

    As we discussed at more length in Dosi and Roventini (2016), this way of theorizing has reached ridiculous levels when economists develop models of rational lovemaking, but even worse, criminal ones, when dynamic models of torture are shamelessly derived to compute the optimal level of punishment!

  30. 30.

    Romer (2016) also contains a deep discussion on why “post-real” macroeconomics has emerged and why the current norms in the economic profession makes it difficult to jettison it.

  31. 31.

    We know that even Nobel laureates in economics do not have access to top macroeconomic journals if they submit theoretical papers which are not aligned with orthodoxy.

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Acknowledgments

Thanks to Giorgio Fagiolo, Mattia Guerini, Francesco Lamperti, Alessio Moneta, Maria Enrica Virgillito. All usual disclaimers apply. This study was funded by European Union’s Horizon 2020 grants: No. 649186 - Project ISIGrowth. The authors declare that they have no conflict of interest.

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Dosi, G., Roventini, A. More is different ... and complex! the case for agent-based macroeconomics. J Evol Econ 29, 1–37 (2019). https://doi.org/10.1007/s00191-019-00609-y

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Keywords

  • Macroeconomics
  • Economic policy
  • Keynesian theory
  • New neoclassical synthesis
  • New Keynesian models
  • DSGE models
  • Agent-based evolutionary models
  • Complexity theory
  • Great recession
  • Crisis

JEL Classification

  • B41
  • B50
  • E32
  • E52