Real-Life Economics: Common Sense or Complicated?

A recent interview by Doyne Farmer and Russ Roberts of EconTalk gave listeners reason to think about the state of economics and how 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),” would you agree?

In this podcast, Roberts and Farmer delve into the complexities of economics, where Farmer makes a strong case for his ability to dramatically improve the way economists model and predict market behavior. Farmer says it makes sense to move away from the rational expectations model and it’s too simple. He advocates turning to the dirty, interconnected realities of the economic world. Yes, it sounds like a heavy lift. But Farmer makes a compelling case for complex economics and the use of agent-based modeling.

Roberts and Farmer make complex economics digestible for outsiders in Farmer’s specialty, especially those outside the field of economics and those who call themselves armchair economists.

At about 22:26 in the podcast, Farmer explains how the complexity of economics can integrate the concrete and abstract aspects of human behavior into agent-based modeling. He provides an illustrative example using how housing prices are set in response to the level of demand. Complexity economists acknowledge the diversity of individuals, and the multiplicity of their decision-making strategies. Quite different from the rational expectations of uniform players seeking resource maximization in neoclassical models with uniform income barriers.

This change makes the work of a complex economist seem to be able to bring the discipline of economics closer to the real organisms and able to systematically present the rules of thumb and society in decision-making, something that was difficult in many economic models. Around 24:00, some of the differences between the work of a sophisticated economist and an economist are discussed by Farmer and shared with Roberts. It is here that Farmer explains the benefits of using hard economics to analyze the 2008 Financial Crisis, highlighting the potential benefits of using hard economics to inform policy responses to prevent consequences. Roberts backs off, encouraging Farmer to consider other possibilities. The farmer seems to be strongly committed to using a central policy rather than trusting the distributed markets and the people who make them.

Aided by the use of big data and advanced computing power, Farmer goes on to make a compelling case for taking a multidisciplinary approach to complex economics and its real-world potential to improve the economy and, perhaps, help mainstream economics reshape the way it models consumption, savings, and investment behavior. At this point, explain why Farmer says this multivariate approach is of great benefit, especially given demographics, income differences, adjustment for random behavior, and other factors.

In Farmer’s opinion, complex economics can serve as a way towards a future where economic models are clear, widely applicable, and capable of evaluating both the direct and indirect effects of various policies, equipping economics to better manage social and global problems. events. Yes, this creates a compelling perspective, especially when combined with improved forecasting capabilities and provides a framework that greatly improves our understanding of economic dynamics. As an example, Farmer discusses how he and his team approach unexpected global problems like the recent pandemic by predicting how consumers, businesses and industries will respond. He cites his team’s experience with COVID in the United Kingdom.

The integration of truly complex economies creates fertile ground for interdisciplinary collaboration and provides the opportunity to play new institutional economics, strengthening models with concrete evidence and potentially leading to a paradigm shift in economic thought. The desire for inclusive and comprehensible economics is admirable and is consistent with a broader desire across the field to make economics more accessible and actionable to a wider audience in all fields. Really, all of this a lot attractive. But, there is always something, especially in our circles committed to the ideal of a society of free and responsible people.

There can be a lot of conflict when free market economists dive deep into how Farmer advocates using the hard fruits of economics to inform policy makers. Of course, there is always the possibility of conflict. But Mlimi seems to be unaware of FA Hayek’s work. From beginning to end, Hayek is not mentioned in his book and is not discussed in this or other popular podcasts. Moreover, he seems not to fully understand Milton Friedman’s position on the impressive record of who like you people roaming the markets protesting the disastrous record of “benevolent” government officials and policy makers. In fact, he seems somewhat hostile to Friedman and his Chicago School of Economists team.

Yes, Milton Friedman – or FA Hayek who is not mentioned by Farmer – are notable for their advocacy of free market principles. How can they respond to the Farmer’s requests? One would think that they would react but they responded in a different way. Both may be impressed by his scientific approach and his ability to apply “rules of thumb” as an integral part of decision-making behavior. However, would you agree that Friedman would advocate for the inclusion of minimal government intervention and free market self-regulation in the modeling scenarios used by Farmer to provide a balanced view? Or do you think he can push for something else? Now, turn to Hayek for his emphasis on the dispersed nature of knowledge and the potential dangers of centralized planning. Can you imagine how the Farmer will criticize the way? What suggestions would he make to the Farmer?

If Farmer’s primary use of this agent-based model is to design policies only to address important social problems, Friedman and Hayek may question its effectiveness. However, if it is possible to use his model to explore the possible outcomes of securing property rights, developing legal systems, promoting stable currency, developing financial markets, and more, can we see Friedman and Hayek relying on Farmer’s model? Is it possible that the proponents of minimal intervention have contacted sophisticated economists like Farmer to examine the ecological balance of the dynamic economy towards free cooperation to compare the findings with those produced by the more policy-oriented Keynesians?

This brings me to a final question. Can complex models provide important insights to resolve the debate about which is better for society – free markets with limited government or government that tries to establish policies? Making progress in resolving this debate would make a big step in helping to reconcile different economic perspectives and highlight the need to understand how society is harmed or harmed by both market forces supported by decentralized systems and government policies produced in centralized systems.

Let’s hear what it is you think. Consider the following questions, and share your answers with us today.

1. After listening to the episode, do you agree that Farmer’s conversation with Russ Roberts gives us reason to think more about the current state of economics, especially how mainstream economists reflect and predict market behavior and identify trends? Explain your answer.
2. At about 22:26 in the podcast, Farmer shows how complex economics integrates the real and abstract aspects of human behavior into an agent-based model (ABM), as seen in the setting of housing prices by adapting them to the level of demand. Contrast this ABM approach with representative agent decision-making that is used to quickly clear market corrections in response to disruptions or disagreements.
3. At about 24:00, Farmer discusses with Roberts the difference between the work of a sophisticated economist and an economist; How do they compare and contrast the pros and cons of each approach, especially in the context of the 2008 Financial Crisis?
4. Why does Farmer argue that a complex multivariate economic approach, coupled with big data and advanced computing to capture real-world dynamics, represents a major advantage for mainstream economics in re-evaluating how consumption, saving, and investment behavior is modeled, especially when accounting calculations, income differentials are taken into account , correction of unplanned behavior, and other factors?
5. Considering the claimed benefits of complex economics in making economic models clearer, more applicable, and able to assess the direct and indirect effects of policies, how has this approach been useful during the time of COVID in the United Kingdom? Look at the doubts expressed in the comments posted on this topic. Given the experience of this model with the US, what would be your response to further the discussion?
6. Sophisticated economists like Farmer put a lot of faith in the government’s ability to strategize and implement policies without falling victim to special ingredients, disagreements, or voting on limited information. Can this framework be used to explore and investigate policies that increase economic freedom?
7. To what extent can a sophisticated economic approach to world modeling be used to help resolve the debate about which is better for human prosperity – economic freedom or centralization in policies?

[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 teacher, and writer currently based at Florida State University’s Stavros Center for Free Enterprise and in residence this semester as a Liberty Fund scholar.