Monday, September 21, 2009

Notes on Complex Systems and Evolutionary Trade Models (Part II. Complex Systems and Economics)

Link to this blog post:

Note: Recently, the Ateneo de Manila University (AdMU) Innovation Center headed by Dr. Gregory Tangonan started a complex systems study group. This semester (1st semester, school year 2009-2010) the Electonics, Communications and Computer Engineering (ECCE) Department under the School of Science and Engineering offered a graduate course on "Complex Systems" with me as one of the facilitators (together with Dr. Greg Tangonan and Dr. Nathaniel Libatique, Chair of the ECCE).

My particular interest in the topic of complex systems is on modeling and simulation. As of this writing, I am involved in a research project dealing with complex systems dynamics of evolutionary trade models and international development.

To aid my students and my research group on complex systems (and other interested readers) I am putting online some of my notes on this topic.


(Note: This is a work in progress. References will be supplied later.)

Part I. Introduction to Complex Systems
Part II. Complex Systems and Economics
Part III. An Evolutionary Theory of Trade
Part IV. Incorporating Technological Productivity in the Evolutionary Trade Model
Part V. A Cellular Automaton Model of Evolutionary Trade
Part VI. Non-Equilibrium, Spatial Evolutionary Trade Models
Part VII. Case Study: Modeling the Impact of Changes in Transportation Cost in India
Part VIII. Case Study: A 'Policy Impact Model' for Nepal
Part IX. Agent-Based Computational Economics


Matutinovic (2005) states:

"An economy is a complex system consisting of myriad of agents that may be placed in three broad categories: (1) firms, (2) households, and (3) government.

Agents' interactions come under the broad umbrella of cooperation and competition while under their production and consumption activities constitute the functional fabric of the economic system.

Economic activities often span hierarchical levels of functional interdependence."

In her book, "Complexity: A Guided Tour", Melanie Mitchell (2009) describes why economies are complex systems:

Economies are complex systems in which "simple, microscopic" components consist of people (or companies) buying and selling goods, and the collective behavior is the complex, hard-to-predict behavior of markets as a whole, such as changes in the price of housing in different areas of the country or fluctuations in stock prices.
Some economists believe that economies are adaptive on both the microscopic and the macroscopic level.
At the microscopic level, individuals, companies, and markets try to increase their profitability by learning about the behavior of other individuals and companies.

This microscopic self-interest has historically been thought to push markets as a whole – on the macroscopic level – toward an equilibrium state in which the prices of goods are set so there is no way to change production or consumption patterns to make everyone better off.

In terms of profitability or consumer satisfaction, if someone is made better off, someone else will be made worse off.

The process by which markets obtains this equilibrium is called market efficiency.

The 18th century economist Adam Smith called this self-organizing behavior of markets the "invisible hand": it arises from the myriad microscopic actions of individual buyers and sellers.

Economists are interested in how markets become efficient, and conversely, what makes efficiency fail, as it does in real-world markets.

More recently, economists involved in the field of complex systems have tried to explain market behavior in terms similar to those used previously in the descriptions of other complex systems: dynamic hard-to-predict patterns in global behavior, such as patterns of market bubbles and crashes; processing of signals and information, such as the decision-making process of individual buyers and sellers, and the resulting "information processing" ability of the market as a whole to "calculate" efficient prices; and adaptation and learning, such as individual sellers adjusting their production to adapt to changes in buyers' needs, and the market as a whole adjusting to global prices.

Next Topic: An Evolutionary Theory of Trade

Raffy Saldaña

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