Economics III

I’m sorry it’s been so long between my last couple posts. I’ve been pretty busy. Brian just moved to Eindhoven from Austin, so I’ve been hanging out with him, moving to our new place, and then I just read a dance with dragons. In addition to that, I’ve also started working on my research project for the summer. Hopefully things will settle down now and I’ll be able to post blogs more frequently.

So, last week, I was beating up on the neoclassical growth model and my friend came running to it’s defense. He had a good point. The best way to predict the weather is based on what today’s weather is. This might work passably well, but will fail pretty quickly here in the Netherlands and in Pittsburgh. It works really well in Austin. Hot today, going to be hot tomorrow. A better way to predict is to create a range of likely outcomes through simulation. This is what the weather man does on the news. They run simulations based upon the current conditions as well as conditions in the surrounding areas to make a better prediction than just walking outside.

Evolutionary economics is based upon these same ideas. Many of the models are more like climate models rather than mathematical equations. These models have predicted crashes similarly to what happened in 2007, based upon the rules of our economy and behaviors of people within the system. There have been some models that have attempted to create models very similarly to the neoclassical models, which are able to account for more of the differences between growth rates within countries.

I prefer the simulation approach over the mathematical models, because you are able to easily change things. As we have more control over our economy than the weather, these changes can reflect policy choices, changes in regulation as well as increases or decreases in government spending. As these changes build on each other the system can simulate how a series of changes within a short time period may impact the system.

The other benefit of evolutionary economics over neoclassical is the clear tie to how science, technology and education impact the economy. These factors are typically left in the residual or the measure of our ignorance in neoclassical economics. Changes in the rate of adoption or creation of new technologies and scientific breakthroughs can impact the long term health of an economy which everyone knows, but the economists haven’t done the best job showing it under neoclassicalism. If they had, then we would never be cutting education and science funding first. We would be pouring money into these systems to try to spur more discoveries!

Neoclassical economics was useful, however, I think the time for it has passed as it is unable to deal with the complexity of the world. Evolutionary economics looks at the economy as a complex system and is designed to handle it.

Further reading:
Origin of Wealth:

One thought on “Economics III

  1. I am somewhat knowledgeable about basic economics but not the areas you cover in this post. It sounds like people use a linear time-invariant (LTI) model for systems that are not LTI. That problem crops up in engineering and probably economics.

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