Reddit reviews Complexity and the Economy

There are some positive signs that thinking in economics is changing, and some good resources (linked to below) for anyone who wants to learn more.

> Romer’s huge mea culpa on behalf of mainstream economics is a sign that, after a decade-long hunt for trolls and gremlins as the cause of crisis, academia now has to begin the search for the cause of instablity inside the system, not outside it.

It's been a tenet of systems thinking for decades that systems cause their own behaviour, but government economists have shown very linear thinking over the same period of time. That's how central banks convince themselves that if low interest rates didn't work, lower and lower (or more and more negative) interest rates will at some point finally fix the economy, oblivious to the common sense reality that if you confiscate 5% of everyone's savings annually, there will probably be a qualitative change in how people (and hence the economy) behave. Unfortunately, mathematical models are incapable of capturing the diversity of goals and interests in a real economy, they assume everyone is identical and predictable.

I've been pleased to find some really good books published recently about applying agent-based thinking to economics. ABM allows each individual to be represented by an agent program with its own simulated goals and thought processes, and all are able to react to each other.

The first I've read recently is Complexity and the Economics, which makes the point that it is not enough just to change the modelling technology used to understand the economy, but the way we think about it. Complexity is the study of how simple things create structure, and then respond to the structures we create. The author talks about the economy as being not a container for technology, but being created out of it. So the hardware and software, but also the government systems, copyright laws, contract structures (and so on) make up the economy, and then people respond to it and try to exploit it to create something new with the pieces already constructed. Some bits of this book are very mathematical and I had to skim over them, but most of it is explained in prose.

There's another much more accessible book that I'm part way through, called Agent Based Modelling in Economics. This takes a very pragmatic, step-by-step approach looking at how an agent-based approach simulating diverse individuals can recreate economic problems more realistically. Early chapters look at phone adoption (in an economy with different incomes and social classes) and barter (of rations), later there's a chapter on fractional reserve banking, which I haven't yet got to. All the models from the book are written in a very accessible programming language NetLogo, and are available online. Anyone with basic programming and maths (simple algebra) skills can follow this book and the examples. (If anyone has read or is reading this book, please let me know!)