Could we have predicted the economic crisis that is as significant as the Wall Street Crash of 1929 and the subsequent crisis of the 1930’s?
In time we will analyse in greater detail the causes of the current economic crisis and economists will labour over data studying economic cycles and trends to discover whether this crisis could have been avoided – no doubt it will be the subject of numerous research papers.
What is clear to me from this self inflicted crisis is that our models to understand and predict the behaviour of the economy are extremely limited. After all how do you model something so complex? How do you capture the dynamism of an economy that is constantly changing and adapting?
Our models need to reflect and capture systems as they behave. Indeed had the decision makers in the banking industry been made aware of the far reaching consequences of some of their high risk decisions, would we have reached such a crisis where millions of people are suffering because of poor decision making in government and industry?
The situation is compounded by the inflationary rise of energy and food prices, all of which indicate that our models to understand and therefore design effective systems require new thinking.
Agent-based modelling (ABM) offers us a method to capture the dynamics of complex systems. In an agent-based model we can build artificial societies, create the social diversity and networks that bond people together. We can determine the behaviour of groups and individuals and make society look as realistic as we like. In our economic model, agents could comprise of economists, investment analysts, politicians, business leaders, anti-globalisation protestors and civil servants whose interaction creates macroscopic phenomena.
In an agent-based model each agent is a software program comprising of data and behavioural rules that evolve over a period of time, in a process known as emergence, so we build a world from the bottom up that will help us understand the big picture.
Economics is a field that is undergoing profound changes and I wonder whether we will arrive at an economic theory of everything. We have seen new ideas and disciplines emerge such as neuroeconomics that is challenging our understanding of economic behaviour and there can be no doubt that complexity science is in the early stages of transforming the economic and social sciences.
As one economist put it “economics was in the same position as quantum mechanics was in the 20’s.” That is about to change.
Interesting notion, but can the human element ever be fully quantified? News reports seem to blame “fear” and “speculation” for stock market declines as much as anything concrete. At least the laws of physics aren’t quite as much of a moving target.
No I don’t think we can ever really fully quantify the human element, at best we can determine levels of probability, which gives us a useful insight into socio-economic systems, and perhaps better ways to structure human systems. We’re in the eye of the storm!