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Agent-Based Computational Economics - An Introduction Charlotte Bruun Department of Economics, Politics and Public Administration Aalborg University 9000 Aalborg Denmark [email protected] 1 Introduction Terming a specific approach to economics agent-based may appear paradoxical. Isn’t human behavior the foundation of economics - and shouldn’t all economic theory be based on agents behavior in some sense? This, at least, is what conventional economic theory has been claiming since the 1970’s. In this intro- duction we shall argue that agent-based computational economics (ACE) allows agents and especially their interaction, a more pivotal role than does conven- tional microeconomics or microfounded theory. There is a difference between microeconomics and agent-based economics - in the latter you are not satisfied with understanding exactly how a single agent acts in economic markets - you are primarily interested in the system view that arises when you observe the interaction between a number of agents. From observing an isolated agent, it is impossible to foresee what happens when a multitude of agents interact - it cannot be deduced. This adds importance to the computational part. In agent-based economics the computer is not merely used as a giant calculator finding analytical or numerical solutions, but is used as a central part in a new methodological approach to economics. 2 The Economy as a Complex Adaptive System The economy may be described as a complex adaptive system, i.e. a system where complexity arises because of the way a large number of agents interact. Complexity thus stems from the fact that the economy is a large composite system. What we observe as the economy, is the result of millions of agents interacting. We know the output of this system as growth rates, inflation rates, unemployment rates etc., but how do we get from the description of our agents to these aggregate magnitudes, and can we say anything about the aggregate 1
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magnitudes in their own right? As other sciences dealing with large composite systems, economics has devel- oped a tradition of dealing with two levels: the microlevel and the macrolevel. Microeconomics takes as its starting point the behavior of individual agents whereas macroeconomics theorizes about relations between aggregate magni- tudes. The problem is that unless one is willing to make very restrictive as- sumptions, it has proven to be impossible to unite the two levels. This has resulted in assumptions of homogeneity and constructions as the representative agent - a construction that among others, has been heavily criticized by Kirman (1992). The apparent impossibility of uniting micro and macro is particularly crucial in economics since we have developed a tradition of demanding microfounda- tion of macroeconomics. In reality this means a dismissal of macroeconomics altogether, and an ignorance of the fact that important characteristics of the system may arise in the interaction part. If Keynes’ conception of effective
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