W. Arthur

Paper #: 05-09-037

Standard neoclassical economics asks what agents’ actions, strategies, or expectations are in equilibrium with (consistent with) the outcome or pattern these behaviors aggregatively create. Agent-based computational economics enables us to ask a wider question: how agents’ actions, strategies, or expectations might react to—might endogenously change with—the patterns they create. In other words, it enables us to examine how the economy behaves out of equilibrium, when it is not at a steady state. This out-of-equilibrium approach is not a minor adjunct to standard economic theory; it is economics done in a more general way. When examined out of equilibrium, economic patterns sometimes simplify into a simple, homogeneous equilibrium of standard economics; but just as often they show perpetually novel and complex behavior. The static equilibrium approach suffers two characteristic indeterminacies: it cannot easily resolve among multiple equilibria; nor can it easily model individuals’ choices of expectations. Both problems are ones of formation (of an equilibrium and of an “ecology” of expectations, respectively), and when analyzed in formation—that is, out of equilibrium—these anomalies disappear.