Chapter 7: Complexity and Aggregation
Alan Kirman 7.1 Introduction Why is the complex systems approach of particular interest currently for economists and how is it related to aggregation? I will try to explain why it may offer a way out of some of the difficulties that have beset economics in general and macroeconomics in particular in recent years. Economic theory has revealed itself to be vulnerable on two fronts. The first is the problem of aggregation; how is the behaviour of the economic system related to that of the individuals that make it up? Can the aggregate be shown to have certain desirable properties? The second is that of why do individuals behave as they do? The answer to the first question is simple but undermines much of modern macroeconomics. What has been proved is that the standard model of a system composed of isolated indiviuals each satisfying the standard rationality axioms and each solving his or her own maximizing problem does not allow one to show that the system will have a unique and stable equilibrium. To avoid the difficulties that this entails, macroeconomists usually assume that the whole system can be analysed as if it were an individual satisfying the standard rationality axioms.1 But because of the results just mentioned, in fact the idea that the aggregate will satisfy the assumptions on individual behaviour is reduced to the status of an additional ad hoc hypothesis and one that cannot be derived from assumptions on individuals. This poses problems only because economists want to...
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