The Cournot Centre series
Edited by Robert M. Solow and Jean-Philippe Touffut
Chapter 5: Economic policies with endogenous innovation and Keynesian demand management
The global crisis has strikingly brought to the fore the importance of banking and financial markets for the dynamics of real economies. It has also revealed itself to be a ‘natural experiment’ for economic analysis, exposing the inadequacy of the predominant theoretical frameworks. The basic assumptions of mainstream models – such as rational expectations, optimizing, representative agents, and so on – are to a large extent responsible for the failure to forecast the crisis. They also seem to be unable to propose a remedy for putting economies back on a steady growth path (Colander et al., 2008; Kirman, 2010). In fact, the crisis sets a tall challenge for alternative, evolutionary theories, linking micro behaviour and aggregate dynamics. In this chapter, we develop an evolutionary, agent-based model to try to fill the theoretical vacuum present nowadays in macroeconomics. The model addresses three major, interrelated, questions. First, it explores the processes by which technological change affects macro variables, such as unemployment, output fluctuations and average growth rates. In addition to this ‘Schumpeterian’ question, we also ask how such endogenous, firm specific changes in the supply side of the economy interact with demand conditions. This is a basic ‘Keynesian’ issue. Finally, we explore the possible existence of long-term effects of demand variations. Is long-term growth only driven by changes in technology, or does aggregate demand affect future dynamics? Are there multiple growth paths whose selection depends on demand and institutional conditions?
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