| By: |
J. Doyne Farmer (Sante Fe Institute);
John Geanakoplos (Cowles Foundation, Yale University) |
| Abstract: |
The use of equilibrium models in economics springs from the desire for
parsimonious models of economic phenomena that take human reasoning into
account. This approach has been the cornerstone of modern economic theory. We
explain why this is so, extolling the virtues of equilibrium theory; then we
present a critique and describe why this approach is inherently limited, and
why economics needs to move in new directions if it is to continue to make
progress. We stress that this shouldn’t be a question of dogma, but should be
resolved empirically. There are situations where equilibrium models provide
useful predictions and there are situations where they can never provide
useful predictions. There are also many situations where the jury is still
out, i.e., where so far they fail to provide a good description of the world,
but where proper extensions might change this. Our goal is to convince the
skeptics that equilibrium models can be useful, but also to make traditional
economists more aware of the limitations of equilibrium models. We sketch some
alternative approaches and discuss why they should play an important role in
future research in economics. |
| Keywords: |
Equilibrium, Rational expectations, Efficiency, Arbitrage, Bounded rationality, Power laws, Disequilibrium, Zero intelligence, Market ecology, Agent based modeling |
| JEL: |
A10 A12 B0 B40 B50 C69 C9 D5 D1 G1 G10 G11 G12 G13 G14 |
| Date: |
2008–03 |
| URL: |
http://d.repec.org/n?u=RePEc:cwl:cwldpp:1647&r=cmp |