Complex Economics: Individual and Collective Rationality

258 Pages·2010·28.719 MB·English

by  Alan Kirman

Complex Economics
Individual and collective rationality
Alan Kirman
THE GRAZ SCHUMPETER LECTURES
Complex Economics
The economic crisis is also a crisis for economic theory. Most analyses of the
evolution of the crisis invoke three themes - contagion, networks and trust -
yet none of these play a major role in standard macroeconomic models. What
is needed is a theory in which these aspects are central. The direct interaction
between individuals, firms and banks does not simply produce imperfections
in the functioning of the economy but is the very basis of the functioning of a
modern economy. This book suggests a way of analysing the economy which
takes this point of view.
The economy should be considered as a complex adaptive system in which the
agents constantly react to, influence and are influenced by, the other individuals
in the economy. In such systems, which are familiar from statistical physics
and biology for example, the behaviour of the aggregate cannot be deduced
from the behaviour of the average or ‘representative’ individual. Just as the
organised activity of an ants’ nest cannot be understood from the behaviour of
a ‘representative ant’, so macroeconomic phenomena should not be assimilated
to those associated with the ‘representative agent’. This book provides examples
where this can clearly be seen. The examples range from Schelling’s model
of segregation to contributions to public goods, the evolution of buyer-seller
relations in fish markets to financial models based on the foraging behaviour of
ants.
The message of the book is that coordination rather than efficiency is the
central problem in economics. How do the myriad individual choices and
decisions come to be coordinated? How does the economy or a market ‘self
organise’ and how does this sometimes result in major upheavals, or to use the
phrase from physics ‘phase transitions’? The sort of system described in this book
is not in equilibrium in the standard sense, it is constantly changing and moving
from state to state and its very structure is always being modified. The economy
is not a ship sailing on a well-defined trajectory which occasionally gets knocked
off course. It is more like the slime described in the book Emergence (Johnson,
2001),c onstantly reorganising itself so as to slide collectively in directions which
are neither understood nor necessarily desired by its components.
Alan Kirman is Professor Emeritus at I’Universite d’Aix-Marseille 111 and I’Ecole
des Hautes Etudes en Sciences Sociales, France.
The Graz Schumpeter Lectures
Previous titles in the series:
Evolutionary Economics and Creative Destruction
/. Stanley Metcalfe
Knowledge, Institutions and Evolution in Economics
Brian J. Loasby
Schumpeter and the Endogeneity of Technology
Some American perspectives
Nathan Rosenberg
Consumption Takes Time
Implications for economic theory
Ian Steedman
Exchange Rates and International Finance Markets
An asset-theoretic approach with Schumpeterian perspective
Erich W. Streissler
An Unholy Trinity
Labor, capital and land in the new economy
Duncan K. Foley
Politics and Economics in the History of the European Union
Alan S. Milward
The Dynamics of Industrial Capitalism
Schumpeter, Chandler, and the new economy
Richard N. Langlois
Growth, Distribution and Innovations
Understanding their interrelations
Amit Bhaduri
Complex Economics
Individual and collective rationality
Alan Kirman
For more information, please visit the Graz Schumpeter Society’s website;
html
http://homepage.univie.ac.at/Bernd.Brandl/schumpeter/schumpeter.
Complex Economics
Individual and collective rationality
Alan Kirman
O Routledge
Taylor & Francis Group
LONDON AND NEW YORK
For Sylvie
First published 2011
Paperback edition first published 2011
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon, 0X14 4RN
Simultaneously published in the USA and Canada
by Routledge
270 Madison Avenue, New York, NY 10016
Routledge is an imprint of the Taylor & Francis Group, an informa business
©2011 Alan Kirman
The right of Alan Kirman to be identified as author of this work has been
asserted by him in accordance with the Copyright, Design and Patent Act 1988.
Typeset in Sabon and Helvetica by
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All rights reserved. No part of this book may be reprinted or
reproduced or utilised in any fotm or by any electronic, mechanical,
or other means, now known or hereafter invented, including
photocopying and recording, or in any information storage or
retrieval system, without permission in writing from the publishers.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Kirman, A. P.
Complex economics: individual and collective rationality / by Alan Kirman.
P- cm.
Includes bibliographical references and index.
1. Economics. I. Title.
HB171.K514 2010
330-dc22 2010001994
ISBN 13:
978-0-415-59424-0 (pbk)
978-0-203-84749-7 (ebk)
Contents
List of tables
VI
List off igures
Vll
Preface
X
1 Introduction 1
2 The structure of interaction 35
3 Fish markets: an example of the emergence
of aggregate coordination 67
4 Financial markets: bubbles, herds and crashes 125
5 Public goods: a coordination problem 155
6 Segregation: Schelling’s model 186
7 Conclusion 214
Bibliography 220
Index 236
List of tables
3.1 Number of transactions and weight for main TCs, buyers
and sellers 111
5.1 The NE and the CO values for the four treatments for one group 164
5.2 The symmetric NE and the CO values for the four treatments
for one subject 164
5.3 Average total contribution in treatments H, IN, IP and 2N 173
List of figures
1.1 The common knowledge problem 9
2.1 The information structure in the Walrasian model 42
2.2 A neighbourhood in the standard interaction model with
agents located on a grid 43
2.3 The links between n players in a standard non-cooperative game 43
3.1 The price distribution for two types of fish over aweek 77
3.2 Price distribution for whiting for each of three successive months 79
3.3 Who is learning.^ 84
3.4 Price-quantity relationship for sole,( a) for buyer 1 and
(b) for buyer 2 85
3.5 Example of non-parametric smoothing fit for the aggregate
price-quantity relation for sardines 88
3.6 The aggregate price-quantity relation across all fish 88
3.7 The transition from random buying to loyalty as a function of /S 95
3.8 The probabilities of buyers visiting the three sellers when is
low (a) and high (b) 96
3.9 The probabilities of buyers visiting the three sellers when
buyers have high or low values of /I 98
3.10 The histogram of loyalties for buyers on the Marseille fish market 99
3.11 A classifier system 102
3.12 Prices asked and accepted in the morning session 104
3.13 Prices asked and accepted in the afternoon session 105
3.14 The distribution of prices 106
3.15 The evolution of loyalty 107
3.16 The payoff advantage for buyers of loyalty 108
3.17 The payoff advantage for sellers of loyalty 108
3.18 The distribution of the total amounts bought on the Ancona
Market 112
3.19 The distribution of the total amounts sold on the Ancona Market 112
viii List of figures
3.20 Price-quantity relationship for two Transaction Classes 114
3.21 Price-quantity relationship for all Transaction Classes 114
3.22 Price-quantity relationship for buyer 78 115
3.23 Ols and Nadaraya-Watson (with h = 30) fit of the aggregate
price-quantity relationship 116
3.24 Average price for each rank of transaction of two
Transaction Classes 117
3.25 Price dynamics within a day 118
3.26 Lorenz curve for two buyers 119
3.27 Loyalty 120
4.1 The German Dax index from 1994 to 2000 130
4.2 The German Dax index from 1994 to 2004 131
4.3 Staring up at the sky quickly gets others to follow 135
4.4 An information cascade 136
4.5 The evolution of the simulated asset prices and the fundamentals 149
4.6 Simulated stationary distribution of asset prices with and
without chartists: the presence of chartists generates ‘fat tails’ 152
4.7 A bubble and the corresponding fraction of chartists 153
5.1 Information about neighbours’ contributions with an H
treatment design 165
5.2 Average total contribution in treatments VH, H, M and L
without promises 170
5.3 Average total contribution in treatments HP with promises 172
5.4 Average total contribution in treatments H, IN, IP and 2N 172
5.5 The average probability of playing each of the ten sets of
strategies when applying the Reinforcement Learning model
to the aggregate level of the six treatments 176
5.6 The probability of the 25 strategies actually chosen using the
EWA learning model 178
5.7 The average of the probabilities of 1000 repeated simulation
of the 25-periods public goods game using the EWA
learning model 179
5.8 Contributions of the six groups in H treatment
(without promises) 180
5.9 Individual contributions in six groups in VH treatment 181
5.10 Number of individual contributions for each interval for the
five treatments (3000 decisions) 181
5.11 Percentage of increasing, decreasing and unchanged
individual contributions in t compared to t — 1 for the five
treatments (3000 observations) 182
List off igures IX
5.12 The average of the probabilities of 1000 repeated simulations
of the 25-periods public goods game for one player using the
EWA learning model 183
6.1 The original Schelling utility function 187
6.2 The evolution of segregation 188
6.3 The discrete utility model and its continuous energy
approximation 192
6.4 The forces which tend to flatten the frontier 193
6.5 The influence of empty spaces and racial tolerance 194
6.6 Different possibilities for utility functions 195
6.7 Segregation in the Schelling Model with flat and peaked utilities 196
6.8 The Schelling model when swapping of agents is allowed 197
6.9 Clustering when both race and income play a role 201
6.10 Extremes avoid each other, i.e., a rich-white cluster will
avoid sharing part of its surface with poor-black, and vice versa 202
6.11 The price pressure force acts in all directions 203
6.12 The results for the baseline model 206
6.13 Reducing the number of empty cells increases spatial segregation 208
6.14 The southwards and eastwards expansion of Harlem 210
6.15 The evolution of the black areas in Chicago 211