W. Brian Arthur

The Economy as an Evolving Complex System II.

* Introduction W.B. Arthur, S.N., Durlauf, and D. Lane * Asset Pricing Under Endogenous Expectations in an Artificial Stock Market W.B. Arthur, J.H. Holland, B. LeBaron, R. Palmer, and P. Tayler * Natural Rationality V.M. Darley and S.A. Kauffman * Statistical Mechanics Approaches to Socioeconomic Behavior S.N. Durlauf * Is What Is Good for Each Best for All? Learning From Others in the Information Contagion Model D. Lane * Evolution of Trading Structures Y.M. Ioannides * Foresight, Complexity, and Strategy D. Lane and R. Maxfield * The Emergence of Simple Ecologies of Skill J.F. Padgett * Some Fundamental Puzzles in Economic History/Development D.C. North * How the Economy Organizes Itself in Space: A Survey of the New Economic Geography P. Krugman * Time and Money P. Shubik * Promises Promises J. Geanakoplos * Macroeconomics and Complexity: Inflation Theory A. Leijonhufvud * Evolutionary Dynamics in Game-Theoretic Models K. Lindgren * Identification of Anonymous Endogenous Interactions C.F. Manski * Asset Price Behavior in Complex Environments W.A. Brock * Population Games L.E. Blume * Computational Political Economy K. Kollman, J. H. Miller, and S. Page * The Economy as an Interactive System A.P. Kirman * How Economists Can Get A Life L. Tesfatsion * Some Thoughts About Distribution in Economics P.W. Anderson

Time Series Properties of an Artificial Stock Market

This paper presents results from an experiemtal computer simulated stock market. In this market artificial intelligence algorithms take on the role of traders. They make predictions about the future, and buy and sell stock an indicated by their expectations of future risk and return.

Path-dependent processes and the emergence of macro-structure

Abstract Path-dependent systems of the ‘autocatalytic’ or self-reinforcing type typically possess a multiplicity of possible asymptotic outcomes or structures, with early random fluctuations determining which structure is ‘selected’. We explore a wide class of such systems, which we call non-linear Polya systems, where increments to proportions or concentrations occur with probabilities that are non-linear functions of present proportions or concentrations. We show that such systems converge to outcomes (proportions or concentrations) that are represented by the stable fixed points of these functions. These limit theorems are strong laws of large numbers for path-dependent increments, and as such they generalize the standard Borel strong law for independent increments. They are powerful and easy to use. We show applications in chemical kinetics, industrial location theory and in the emergence of technological structure in the economy.

'Silicon Valley' locational clusters: when do increasing returns imply monopoly?

Abstract It is often argued that the presence of increasing returns implies that one product, or one technology, out of several possible must come to dominate a market. This paper examines this argument in the context of regional economics. It constructs a model of industry location where firms choosing among regions are attracted by agglomeration economies due to the presence of other firms in these regions, and where ‘historical accident’ enters because firms are heterogeneous and enter the industry in random order. It asks: When do economies of agglomeration lead to a ‘Silicon Valley’ - a single dominant location or region monopolizing the industry? The paper shows that: (i) Where there is no upper bound to locational increasing returns due to agglomeration, there will indeed be a monopoly outcome: industry will cluster in one dominant region, with probability one. ( Which region depends both on geographical attractiveness and accidental historical order of firm entry.) (ii) Where there is an upper bound to increasing returns due to agglomeration, certain sequences of firm entry can produce dominance by one region; others can produce regional sharing of the industry exactly as if the agglomeration effects were absent. Construed more generally in economics, the results show that increasing returns, if bounded, do not guarantee monopoly outcomes.

On designing economic agents that behave like human agents

This paper explores the idea of constructing theoretical economic agents that behave like actual human agents and using them in neoclassical economic models. It does this in a repeated-choice setting by postulating “artificial agents” who use a learning algorithm calibrated against human learning data from psychological experiments. The resulting calibrated algorithm appears to replicate human learning behavior to a high degree and reproduces several “stylized facts” of learning. It can therefore be used to replace the idealized, perfectly rational agents in appropriate neoclassical models with “calibrated agents” that represent actual human behavior. The paper discusses the possibilities of using the algorithm to represent human learning in normal-form stage games and in more general neoclassical models in economics. It explores the likelihood of convergence to long-run optimality and to Nash behavior, and the “characteristic learning time” implicit in human adaptation in the economy.

The evolution of technology within a simple computer model

Technology—the collection of devices and methods available to human society—evolves by constructing new devices and methods from ones that previously exist, and in turn offering these as possible components—building blocks—for the construction of further new devices and elements. The collective of technology in this way forms a network of elements where novel elements are created from existing ones and where more complicated elements evolve from simpler ones. We model this evolution within a simple artificial system on the computer. The elements in our system are logic circuits. New elements are formed by combination from simpler existing elements (circuits), and if a novel combination satisfies one of a set of needs, it is retained as a building block for further combination. We study the properties of the resulting build out. We find that our artificial system can create complicated technologies (circuits), but only by first creating simpler ones as building blocks. Our results mirror Lenski et al.s: that complex features can be created in biological evolution only if simpler functions are first favored and act as stepping stones. We also find evidence that the resulting collection of technologies exists at self-organized criticality.

Economics of changing age distributions in developed countries

The demographic situation in the developed countries of the world has changed dramatically over the past century: fertility has declined by two-thirds; life expectancy has more than doubled; the proportion of the population over 65 has doubled or tripled, while the proportion of children has declined drastically. At the same time, birth rates have varied widely, creating dents and bulges in the population age distribution. This rapidly changing demographic situation in the developed world contributes to many social and economic problems: population ageing strains pension systems; unusually large generations experience educational disadvantages, reduced wages, and increased unemployment; changing marriage and household behaviour affect the demand for housing. This book examines the implications of such changes for the United Kingdom, Israel, Japan, and the United States. It presents the latest research on these issues by an international group of outstanding scholars. The book is aimed at economic demographers, sociologists, labour economists and policy-makers.

Optimal Time Paths with Age-Dependence: A Theory of Population Policy

A mathematical model is established whereby optimal accumulation paths of population and the economy can be figured when the basic feature of population dynamics, age dependence, is taken into account. This model series links 2 previously separate disciplines and literatures - i.e., formal policy dealing with the dynamics of age and time. An integral-equation control theory is utilized. Recognition of age structure in analyzing fertility trends is important at both macro- and microeconomic levels. The present model was constructed by embedding an age-disaggregated population in a simple economic growth model where the fertility level and rate of savings can both be influenced by government policy. Such policy should balance the lifetime value of births and capital against the social costs necessary to create them. One the problem has been defined and a dynamic theory developed, optimum static theories can be establihsed where the variables are held constant over time.

An artificial stock market

The Santa Fe Artificial Stock Market consists of a central computational market and a number of artificially intelligent agents. The agents choose between investing in a stock and leaving their money in the bank, which pays a fixed interest rate. The stock pays a stochastic dividend and has a price which fluctuates according to agent demand. The agents make their investment decisions by attempting to forecast the future return on the stock, using genetic algorithms to generate, test, and evolve predictive rules. The artificial market shows two distinct regimes of behavior, depending on parameter settings and initial conditions. One regime corresponds to the theoretically predicted rational expectations behavior, with low overall trading volume, uncorrelated price series, and no possibility of technical trading. The other regime is more complex, and corresponds to realistic market behavior, with high trading volume, high intermittent volatility (including GARCH behavior), bubbles and crashes, and the presence of technical trading. One parameter that can be used to control the regime is the exploration rate, which governs how rapidly the agents explore new hypotheses with their genetic algorithms. At a low exploration rate the market settles into the rational expectations equilibrium. At a high exploration rate it falls into the more realistic complex regime. The transition is fairly sharp, but close to the boundary the outcome depends on the agents’ initial “beliefs”—if they believe in rational expectations they occur and are a local attractor; otherwise the market evolves into the complex regime.

The End of Certainty in Economics

The story of the sciences in the 20th Century is one of a steady loss of certainty. Much of what was real and machine-like and objective and determinate at the start of the century, by mid-century was a phantom, unpredictable, subjective and indeterminate. What had defined science at the start of the century—its power to predict, its clear subject/object distinction—no longer defines it at the end. Science after science has lost its innocence. Science after science has grown up.