Simulated Economy Tutorial

Just as we have weather forecasting, climate models .. we do need and should have good fine-grain computational models of complex systems such as the cell .. and the global economy.

We should be able to have whole economy simulations give reasonable predictions in response to natural events and lever-pulling such as :

- higher progressive tax rates - central bank interest rate moves - local tariffs and sanctions - shipping blackades / blockages - regional war - extreme weather events - earthquake - regional epidemic - giving poor people cash grants - free higher education - science research grants - skilled immigration / emigration

But .. of course this would require something like a rich country providing grants to applied cross disciplinary research over many years.

It might even lead to insights that prevent semi-regular economic boom and bust cycles we experienced the past 100 years.

There’s a whole discipline which does nearly that, though they do not use this style of agent based model.

Generally agent based models have numerous parameters which can take many values (endowments, preferences) and the models don’t themselves give any guidance about how to set the parameters. Theory can give limited guidance (eg., that function is concave, this parameter is negative). Sometimes we have experimental data though its generalizability beyond the lab is uncertain.

What you want to do to create a scientific macroeconomics is to work backwards from the data you see in the economy (aggregate consumption, investment, etc.) and how you know the aggregates were generated (via the behavior of a lot of individual agents), and an equilibrium assumption to recover the parameters.

If you know the parameters of the model you assume, you can then simulate interesting counterfactuals. (And yes you assume the model - a “full” model including “all” of the individual endowments and parameters you can think of is completely intractable. You have to simplify.)

You’ll never get that out of the author’s computer game.

If you want references to the macro literature it’s enormous and I can provide them.

> and an equilibrium assumption to recover the parameters

That parts makes no sense though, there isn't an equilibrium and can never be, economies are a chaotic system. One of the key problems of economic modeling is that they used mathematical tool that aren't suited for that.

You can't consider an economy as a steam engine. Walras was a trained engineer in the 19th century so I can excuse him for making this approximation, but I can't excuse anyone still following his course more than a century later.

I don’t agree that it doesn’t make sense. It’s a good approximation a lot of the time.

Also: from your comment I’m pretty sure you don’t have the background (correct me if that’s wrong) and so don’t know what it really means in practice to make an equilibrium assumption in a macro model: Markets clear, on average people have reasonable beliefs about the evolution of aggregate variables, firms maximize expected profits. That’s all pretty harmless.

I definitely don’t agree that we are “using mathematical tools which aren’t suited for that.” We aren’t treating the economy “like a steam engine.” The entire revolution in macro from the 1970’s on involves optimizing agents. There is no useful analogy to a steam engine.

I suspect you have been reading criticism by people who are misinformed about what macro actually is and how it is practiced.