Abstract
Agent-based simulation brings a host of possibilities for the future of economics. It provides a new analytical tool for both economics and mathematics. For a century and a half, mathematics has been the major tool of theoretical analysis in economics. It has provided economics with logic and precision, but economics is now suffering; economics in the twentieth century made this clear. Theorists know that the theoretical framework of economics is not sound and its foundations are fragile. Many have tried to sidestep this theoretical quagmire and failed. Limits of mathematical analysis force theorists to adopt mathematically tractable formulations, though they know these formulations contradict reality. This demonstrates how economics lacks a tool of analysis that is well suited to analyzing the economy’s complexity. Agent-based simulation has the potential to save economics from this dead end and can contribute to reconstructing economics from its very foundations. Achieving this mission requires those engaging in agent-based simulation to have an in-depth understanding of economics based on its critical examinations. This guided tour leads readers around the backside of economics, tells what is wrong with economics and what is needed for its reconstruction, and provides hints for a new direction open to incorporation of agent-based simulation.
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Notes
- 1.
- 2.
Heller [36] provided a strong testimony. Although he was against it, he recognized the existence of “our current fashion of telling the world what’s wrong with economics.” He cited names such as J.K. Galbraith, W. Leontief, F. Hahn, G.D.N. Worswick, E.H. Phelps Brown, J.H. Blackman, S. Maizel, B. Bergman, G. Myrdal, R. Heilbroner, and P. Sweezy among those who had publicly deplored the dismal state of our science. See the Introduction to Sect. 1.2 for a rough summary.
- 3.
Cited in an article in The Economist (June 11 2009). The original statement was expressed a bit differently [46, 14th minute in the video].
- 4.
See Footnote 2 for many other names.
- 5.
This assumption is not often mentioned but, in my opinion, it is the most critical one.
- 6.
In the original text, the italic “capital” is in quotation marks.
- 7.
The Symposium included five papers and featured contributions from L. Pasinetti, D. Levhari, P.A. Samuelson, M. Morishima, M. Bruno, E. Burmeister, E. Sheshinski, and P. Garegnani. P.A. Samuelson summed it up.
- 8.
A topic not addressed here is the aggregation problem. See [23].
- 9.
Two originators of RBC theory, Prescott and Kydland, were awarded the Nobel Memorial Prize in Economic Sciences for 2004.
- 10.
Soros started the Institute for New Economic Thinking just after the Lehman collapse. Many eminent economists are collaborating on the institute.
- 11.
The “marginal cost controversy” was different. It was an issue mainly in the United Kingdom. The concern was the pricing of the products of a public firm whose average cost is decreasing. The study started before World War II and took the form of a controversy after the war. One of the main proponents was R.H. Coase. See [28, 57] for a German Controversy.
- 12.
A basic observation of evolutionary economics is that important categories of the economy, such as commodities, economic behavior, production techniques, and institutions, evolve. Economics itself evolves as part of our knowledge. See [78].
- 13.
There is a widespread misunderstanding that Sraffa recommended building a new theory of incomplete or monopolistic competition; Sraffa recommended a new conception of competition. As he explicitly stated, the concept of imperfections constituted by frictions was “fundamentally inadmissible” [88, p.542].
- 14.
It would be convenient to call this principle Sraffa’s principle . This is the firm-level expression of Keynes’ principle of effective demand .
- 15.
- 16.
A set-valued function or a correspondence f from X to Y is defined as upper hemicontinuous when the set {(x, y)∣y ∈ f(x)} is closed in X × Y.
- 17.
We now know that a majority of instances have a rapidly solvable algorithm that gives the maximal solution. Unfortunately, these algorithms are not usable except for a specific class of instances. Any known general algorithm has an estimated exponential time.
- 18.
Debreu’s formulation is slightly different from that of Sonnenschein. The definition of the ε-trimmed price set is revised to adapt to the new formulation.
- 19.
Study and discussion on the testability of GET seem futile, for it is too influenced by positivist science philosophy à la Milton Friedman. Tests and refutation of a theory are not confined to the aggregate results. We can question micro-behavioral assumptions and logical consistency. See [64] for a history of these discussions.
- 20.
Increasing returns sometimes indicate the phenomenon in which production techniques improve and the cost of production decreases. This is the dynamic notion of increasing returns. Increasing returns here concern the phenomenon in which cost decreases without any change in production techniques. This is the static notion of increasing returns. The theoretical difficulty with regard to increasing returns to scale belongs to the static notion.
- 21.
When y and Y are, respectively, the production vector and the production possibility set of a firm and p the market price, voluntary trading for the firm is defined as a condition wherein the price vector p and production vector y satisfy the condition p ∈ VT(y), where \(V T(\mathbf{y}) =\{ \mathbf{p} \in R^{N}\mid \mathbf{p} \cdot \mathbf{y} \geq \mathbf{p} \cdot \mathbf{y}'\ \mbox{ for all}\ \mathbf{y}' \in Y \ \mbox{ such that}\ \mathbf{y}' \leq \mathbf{y}_{+}\}\) and y + denotes the vector in R N with coordinates \(\max \{0,y^{j_{h}}\}(h = 1,\ldots,N)\).
- 22.
- 23.
- 24.
In view of the Sonnenschein-Mantel-Debreu theorem, it will not be easy to generalize this assumption.
- 25.
See Sect. 2.3 for a short overview of this movement.
- 26.
Curiously, this claim was typically advanced by economists in the Austrian tradition. See von Mises [59]. Machlup in the marginalist controversy belongs to this tradition.
- 27.
Evidently, the new mathematics was helped by the arrival of computers.
- 28.
Explanations of the first two paradigms are different from mine. Gray explains that empirical study started a thousand years ago, whereas the “theoretical branch” started a few centuries ago.
- 29.
We are preparing a new book on process analysis based on this principle: Microfoundations of Evolutionary Economics (to appear in the same series as this book).
- 30.
- 31.
In [78], I pointed out five categories: commodities, technology, institutions, economic behaviors, and knowledge. Later, I added two categories: organizations and systems.
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Shiozawa, Y. (2016). A Guided Tour of the Backside of Agent-Based Simulation. In: Kita, H., Taniguchi, K., Nakajima, Y. (eds) Realistic Simulation of Financial Markets. Evolutionary Economics and Social Complexity Science, vol 4. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55057-0_1
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