Mainstream economics has always had its dissidents. But the discipline’s failure to predict the financial crisis has made the ground especially fertile for a rethink.
Critics tend to agree on what is wrong with current macroeconomic forecasting. A hearing of the House of Representatives Committee of Science and Technology on July 20th targeted the “dynamic stochastic general equilibrium” (DSGE) models used by the Federal Reserve and other central banks. The hearing aimed to “question the wisdom of relying for national economic policy on a single, specific model when alternatives are available.”
The Institute for New Economic Thinking in New York, which had its inaugural conference in April, has attacked many of the assumptions, including efficient financial markets and rational expectations, on which these models are predicated. These assumptions were clearly too simplistic. But there is less agreement on what should replace the old ways.
One of the most promising options was the topic of a workshop in Virginia at the end of June. The workshop was funded by America’s National Science Foundation and attended by a diverse bunch that included economists from the Fed and the Bank of England, policy advisers and computer scientists. They were there to explore the potential of “agent-based models” (ABMs) of the economy to help learn the lessons of this crisis and, perhaps, to develop an early-warning system for the next one.
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The organisers of the Virginia workshop—Doyne Farmer [SFI professor] and Rob Axtell of George Mason University [SFI external professor]—wanted to explore the feasibility of constructing an immense ABM of the entire global economy by “wiring” many such modules together.
See also: Are we flying the economy by the seat of our pants?, Santa Fe Institute Update
See also: Blame the economists, Newsweek