COMPLEX SYSTEMS APPROACH TO ECONOMICS
Capital Fund Management, École Polytechnique and Académie des sciences, Paris, France
Lecture 1. Collective effects, crises, discontinuities
Lecture 2. Will large economies be stable? The need for out-of-equilibrium economics
Financial and economic history is strewn with bubbles and crashes, booms and busts, crises and upheavals of all sorts. Understanding the origin of these events is arguably one of the most important problems in economic theory. We will review recent efforts to include heterogeneities and interactions in socio-economic models. The so-called Random Field Ising model (RFIM) provides a unifying framework to account for many collective socio-economic phenomena that lead to sudden ruptures and crises. We discuss some empirically testable predictions of these models, for example robust signatures of RFIM-like herding effects, or the logarithmic decay of spatial correlations of voting patterns. We will then turn to recent firm network models and study the conditions under which they can dynamically attain a competitive economic equilibrium. It turns out that the time needed to reach equilibrium diverges to infinity as the system approaches a critical line. Such instabilities are a source of excess volatility: Competitive equilibrium can only be reached within some restricted region of parameter space, outside of which one observes spontaneous periodic and chaotic dynamics, reminiscent of real business cycles. This suggests an alternative explanation of excess volatility in terms of purely endogenous fluctuations.
