Economic Complexity and Econometric Simplicity

1
Economic Complexity and Econometric Simplicity

• Prof. Ping Chen
• Spring 2004
• 2/27/2004

2
Questioning Supply-Demand Curve

• Puzzling cases
• Why health cost rises so rapidly?
• Why stock prices so volatile?
• How to price a product in practice?
• Question if supply-demand model is universal,
  what kind of phenomena would not appear?

3
Hidden Hypothesis of SS-DD Model

• Stability of equilibrium?
• Why single cross-section?
• Interdependence of SS and DD (supply induced
  demand doctors and patients)
• Linear regime of SS or DD curve
• Non-observable variable

4
Modify SS-DD Curve

• From linear to non-linear curve
• Implications of non-linear SS-DD curve
• Biological and ecological constraints in addition
  to budget constraints
• Social interaction vs. individual rationality
• Macro environment of individual choice
• Fashion and social trend
• Multiple time scales

5
From Statics to DynamicsBusiness Cycle Effect

• Missing business cycle effect in micro and
  finance theory
• IS-LM curve and business cycle effect
• Conflicting interests for demand and supply side
  in financial market

6
What is the source of persistent business cycles?

• Conflicting beliefs in market stability
• Marx (explosive oscillation)
• Schumpeter (persistent oscillationbiological
  clock)
• Frisch (demped oscillation maintained by external
  shocks)
• Nelson and Granger (marginal unit root and
  persistent shocks)
• Who is right?
• Mathematical modeling
• Natural experiments
• Universal (physics) theory

7
What is the rational foundation of efficient
market?

• Friedmans argument for efficient market
• Perfect competition would eliminate speculator?
• Hidden assumptions
• Infinite arbitrage resource
• Winners strategy can be replicate
  (zero-information cost, predictable pattern of
  trajectory)

8
Where is the microfoundations of macro
fluctuations

• Lucas model of inter-temporal substitution
• Degree of freedom and arbitrage opportunity
• Relative price movements in time and space
• The principle of large numbers
• Relative deviation

9
China Puzzle, Economic Chaos, and Evolutionary
Dynamics

• Needhams question, scale economy, and
  diversified evolution under open and close
  systems gt evolutionary culture dynamics and the
  origin of division of labor (1968 1979 1987)
• Discovery of economic chaos gt endogenous nature
  of persistent business cycles (1984 1987
  1996)
• Law of large numbers in statistical economic
  mechanics gt social animal and meso economics
  (1999 2002)
• Toward a Unified Evolutionary Theory of
  Bioeconomic Dynamics (Economic Complexity and
  Bioeconomic Physics) (2002 2004)
• Economy scale and culture diversity historical
  interactions among resource, technology, and war
  in shaping division of labor and social evolution

10
New Ideas in Economic Thinking and Modeling

• Ecological constraints and physiological basis of
  economic behavior Nonlinear boundaries against
  convex utility production gt population dynamics
  is a better alternative of optimization approach
• Emerging technologies are the driving force of
  creative destruction and PERSISTENT business
  cycles gt open evolution against close
  Arrow-Debreu model
• Social psychology conflicting interests gt
  collective behavior out-weights individual
  rationality (Friedman-Lucas model of
  methodological individualism)
• Path-dependence (history culture matters)
  economic metabolism gt raise serious doubt to
  transaction cost (property right) school