Doyne Farmer
Appearances
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Let me just put an asterisk by this. There are special cases where that doesn't, where you get dynamics. But they're really special cases. If you look at the workhorse models used by the Federal Reserve or any of the people who are actually using models to make decisions about the economy, they're still actually using rational expectations.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And those models settle into fixed points absent external stimuli.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
They even have names like real business cycles. Okay. But when you look at them, they don't make business cycles unless they're getting kicked. So I find the name a misnomer. Got it. They're not endogenous business cycles.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Yeah. Well, that's one of the things. But unlike in physics, where the work you're talking about builds out of the classical work, the methods used are similar to those used in traditional equilibrium statistical mechanics, here we throw the whole thing out and start over.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And that's actually the source of the tension within the academic community and why this kind of, this way of doing things is so strongly opposed by the mainstream academic economists.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Yeah. Again, I'm trying to be nice to the economists. They were doing the best they could. But, you know, yeah, I think there were two key things that happened. One is, I think the 2008 crisis was substantially a non-equilibrium event. Things got out of whack. We weren't sitting at the equilibrium we've been at. Why? Because we were dealing with
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
financial instruments we didn't properly understand, and they had side effects that we really didn't understand. There were a few people like Robert Shiller who anticipated the housing bubble, that the housing bubble would pop, but almost nobody anticipated was how enormous the side effects on the real economy would be.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And that was because mortgage-backed securities, almost everybody globally was holding them. Foreign institutions were holding US mortgage-backed securities because they were the hot new thing, great investment, low risk, high return, hooray, hooray. But what they didn't realize is when the housing bubble popped, that meant that all those mortgage-backed securities got enormously
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
their valuations dropped very low, which meant that all these financial institutions holding them were stressed, which meant that they were not in shape to lend money anymore, which meant nobody was lending money to the businesses in the real economy that needed it to construct new buildings and do all the things that we do in the real economy, and the real economy got whacked really hard.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
I would argue it was all an out of equilibrium event, endogenously driven.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Oh, that totally makes sense. It's true. As a physicist, you will appreciate it because it says that The economy doesn't seem to be time reversible. If I look at time series, just from looking at the time series, I can tell which way time is flowing. Now, of course, the other significant thing that happens is the economy tends to grow.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
It's not that it can't shrink, but the US economy has been going up at 2% per year on average most of the time since the Revolutionary War. So that's another time asymmetry. But yeah, markets go down easier than they go up.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Right, right. You know, since we're talking about the endogenous-exogenous distinction, I should say disequilibrium models are also really useful when the shocks come from outside. And the good example of that would be COVID. Now, that was clearly outside, right? I mean, at least from the point of view of the economy, having a virus suddenly cause people to not go to work is an outside shock.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
That was a very sharp and sudden outside shock. And we built a model in a crash program as the pandemic was starting and actually used it to advise the British government about the economic consequences of different forms of lockdowns. And that model was very, very explicitly disequilibrium. I mean, it worked in a very simple way. We said,
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
An industry can't make its product if there's no demand for the product, if it doesn't have the inputs it needs for the product, and if it doesn't have the labor it needs.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And so just using that basic observation, the longer story for how we managed to guess how big the shocks were going to be and which industries would get shocked, that had to do with our knowledge of occupational labor and beautiful data set put together by the Bureau of Labor Statistics. But that contained information like how close together do people work in different occupations?
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Yeah.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
So from that, we can infer who would be able to go to work and who wouldn't. And but we initialized the model in the steady state it was in before the pandemic started. And then we hit it with the shocks. And using the rule I said, we could see those shocks reverberating around the economy because every day we'd update the model. We'd say, oh, does this industry have labor? Does it have inputs?
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Does it have demand? And if it didn't have some of those, we would reduce its output. So it was a very dynamic output that changed through time. For example, some of the industries were running out of inputs a month or two after the lockdown started. So it didn't, the consequences weren't necessarily felt immediately.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And then once they ran out of, once they reduced production, if they were upstream in the economy, meaning like producing natural resources or stuff that lots of other industries use, then that would propagate, as they say, downstream and hit the other industries. So there were complicated dynamic effects. And mainstream models don't work that way. They assume equilibrium from the get go.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And so I think they were just, their hands were, they were in a straitjacket because you really had, it was a very explicitly disequilibrium event. And by the way, note that the two big, events that just happened in recent history, they're both this equilibrium of events.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Well, let me actually, I would say chaos has two things. One is sensitive dependence on initial conditions, which is what you just said. Things that are, you know, maybe so close together in the state space that you can't distinguish them. and therefore could correspond to the same measurement, could eventually become very far apart. So that's the sensitive dependence part.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
But the other part is endogenous motion. Chaos is really, you can get endogenous motion two ways in dynamical systems, which is what I did before I started doing economics. And one is through oscillations, which don't need to be chaotic. But there's even a theorem that says once you have more than two frequencies oscillating, you almost always get chaos.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And so that says that if you're looking at an endogenous motion and it's not periodic or quasi-periodic with two periods, then it's got to be chaos. And that has not been absorbed by the economics community. And I think it's essential because basically if you want to have irregular business cycles that are endogenous, they must be chaotic. There's no other way to do it.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Yeah. Well, you know... Imagine we didn't have shocks somehow. We just live in a smooth world where we're not getting hit by surprises. Now, first of all, that doesn't mean we're not going to grow, right? That's another endogenous phenomenon.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
It's also worth noting that the economy is full of feedbacks. That's one of Kane's brilliant insights, is that it requires demand to produce stuff. And if we have a situation where demand falls, for example, because people become unemployed, then we automatically are going to produce less, which means more people are going to become unemployed, which means we're going to have less demand.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
So there are feedback loops like that in the economy. We do things to try and control those feedback loops. Another brilliant insight, the reason we have central banks is to do things like control interest rates and set the rules up, adjust rules as we need to keep the economy on a steady path. But if we do that imperfectly, then we might expect oscillations.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
It's back to my point about the drunk driver on the windy road. Or in live lectures, I like to illustrate pole balancing. If you take a pole, it's gotta be about longer than three feet. You put it in your hand and you try and preserve the pole vertical. Maintain the pole as vertical as possible. Well, you can keep it more or less vertical, but it oscillates around vertical.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Now think of the pole as the economy and think of my hand as the central bank or all the planners that are making economic decisions all the time, trying to anticipate what the economy is going to do. You know, I decided to start a business. I decided to borrow money, lend money. All those things are like my hand trying to steer that pole now and,
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Having the pole be perfectly vertical is keeping the economy on the nice steady path. So it deviates from vertical. I move my hand to correct. I tend to over or under correct. The pole then comes back toward the center, but I miss it as I come back. And so the pole endogenously wobbles back and forth. Now, to illustrate the difference in viewpoint,
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
If, again, that pole is the economy in a standard model, the story goes like this. I am a perfect pole balancer. So somebody knocks the pole. All right. So the pole gets knocked. I then calculate exactly how to move my hand to bring the pole smoothly to rest back at the top, maximizing consumption in the economy as I do it. And before I get to the top, somebody knocks the pole again.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Now, there can be elements of both stories. If I'm standing on a sailboat in a storm, I'm getting knocked all the time. That happens. But the point is, even if I'm standing on level ground, the pole's oscillating, and there's no breezes. There's no outside influences. It doesn't take outside influences. So that's the side of the story that's missing, whereas
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Mainstream tries to explain everything in the way I said.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
They are secretly unstable. But you have to assume, like with a rational decision maker, the rational decision maker can keep it pinned at its stable point.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And in their favor, taking their side of viewing things, they would say, well, maybe it's a good enough approximation to say it's an equilibrium. It's true. For some purposes, just saying the pole's vertical is good enough. If it's oscillating through a 10-degree angle, Well, 10 degrees, you know, it's not a big deviation.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
But on the other hand, I would argue that, yeah, the economy tends to go up, but business cycles are the swerves around it, and that's the pole deviating from equilibrium.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Yeah, exactly right.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Well, Going back to what I described before is called an agent-based model. Agent-based models are just simulations on computers that involve agents who make decisions. And the challenging part is you have to figure out how those agents are making decisions. What decisions are they making in each situation? Now, first of all, take the example of the COVID model I made.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
That model actually has no agents making decisions. Okay. Because all we have to understand is that industry can't produce if it doesn't have demand, labor, or the inputs it needs. So the production function, as it's called, the recipe for making stuff, does all the work. And the dynamics of the simulation, which tracks what everything's doing. Now, that's...
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
You often do need agents making decisions. That model, by the way, it worked. It was very simple and it didn't have prices, but that meant we couldn't address things like inflation. Now, we correctly guessed. We said, we think that's okay because for the first year or so, we don't think there's going to be inflation.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
We actually explicitly said after that, all bets are off and we're worried about it. So now you want to bring inflation and you've got to have agents making decisions because they're looking ahead going, oh, are we going to have inflation? What's happening? What are interest rates doing? They have to be thinking about all that stuff.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Now, but as I said, in an agent-based model, we kind of come at it from the other end. We usually start simple. Like I have models where the agents actually just flip coins to make decisions. So they're literally zero intelligence agents. And Those models can be quite useful. They have made useful predictions.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
For example, if you want to predict how the bid-ask spread in a financial market, that is the difference between the buying and selling price, how does that depend on the way orders are flowing into the market? You can calculate it with a zero intelligence model. The orders flowing in could be sand grains coming in at random. But you quickly realize, oh, no, we need to refine it.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
You now need to make something a little more realistic like, So value investors buy undervalued assets. So several different agent-based models where the rule is, this guy's the value investor or investors. And what do they do? They have some way of valuing the asset. When the valuation's under the price, they buy it and hold it. When it's over, they sell it. And so...
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
rules, simple rules like that. I have other models where, you know, back to business cycles and poll balancing, we assume a network of agents who are really, really dumb. All they do is look at their neighbors to see what their neighbors are doing. And the neighbor that's consuming the most in that period, so myopic consuming the most, they go, I'll adopt that savings rate.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
So they all have different savings rates. They're all adopting different savings rates. And by the way, back to the instability in the economy. If you save too much, the economy doesn't work. You've got to strike the right balance because again, to sell stuff, you've got to have consumers to buy the stuff. And those consumers then have jobs doing something that allows them to sell stuff.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
So you're going around that loop all the time. The balance is somewhere in the middle. So amazingly, as long as these agents don't update their strategies too often, the economy actually spontaneously starts oscillating because
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Agents are changing their savings rates dynamically, but also almost, to me, almost more amazingly, they get pretty darn close to the optimal savings rate, even though they're absolute dummies. And selection's doing all the work. You see, because you're selecting toward the agent that consumes the most, they're chasing that agent.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Now, that agent might be on a spending spree and about to go bust, so it's not perfect, but they get within... No, a few percent of the optimal strategy. So anyway, a bit of a tangent, but just to illustrate the kinds of things we do to have the agents make their decisions.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And then the key point is that not only do we think that can be more realistic in many settings, it can capture dynamics more naturally because you can see the deviations from the imperfections of the economy, but it's tractable. So we can run simulations with millions of agents instead of being stuck with just a few.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
That's right. But let me emphasize, we also have supply and demand and inflation. Okay, sure. Because those agents make supply and demand happen, right? And that's in the oscillations we're seeing, they may be oscillations where there's more supply than demand or more demand than supply.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And in some markets, you know, some markets saying supply equals demand, not a bad approximation over sufficiently long timescale. In other markets like housing markets, supply and demand can be wildly out of balance. And it goes back to the way prices get formed in housing markets. You know, if you bought a house, What do you do? You go find a comparable house.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
You go to a real estate agent who says, here are some comparable houses. You know, you would just tweak it up or down a little bit. You try and sell your house at that price. It doesn't sell, you mark it down, doesn't sell again. After a month or two, you mark it down again. Maybe at the end you go, I don't want to sell my house. This is too cheap. And you pull it off the market.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
So there in housing markets, you can see supply and demand imbalances that are more than an order of magnitude. And you can see, like you go through the housing crisis, we flipped from a market where there was a huge excess of demand to a market where there was a huge excess of supply and prices are responding very sluggishly to that, those much more.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And you can't capture that in a mainstream model because you can't write it down in an equation simply.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Yeah, so let's be a little more precise there. Okay. In macro, that's more or less true, though these days a hot topic in macro is having heterogeneous agent models where you have things like a Gaussian distribution of agents, just one-dimensional Gaussian, with some agents, say, having more earning power than others. Okay. Right? Right.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Okay, so they're putting that in, but in our models, what do we do? We create a synthetic population with a million agents where we try and match all the demographics, earning power, education, age, even race and gender. And so we match all those characteristics of the population. We can even do it regionally. So it may vary.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
So we have the power because we can have millions of agents to really make all this much richer and much more accurate.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Yeah, yeah. So mixing together a couple of metaphors there, but in a good way. Yeah. What does the economy do for us? So first of all, you know, when I wrote my book, I realized it made me appreciate the economy more because I really tried to reflect on what is this thing doing for us? And I would argue it's like, it's the digestive system of civilization, the metabolism.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
It takes in, just as our metabolism, what does it do? We take in food, right? from the outside world, we reform that food, we break it into pieces and we make it into something else. What does the economy do? It takes in natural resources and then combines it with labor and we reform it into goods and services that we consume or that other industries consume. So it's the engine at the bottom.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
It's like, Having the economy work is like having a square meal every day and having that energy allow you to walk around and do the tasks you need to do. Very fundamental to everything we do. And now the ecology analogy comes from the fact that ecology is really a theory about specialists. I mean, what is grass? Grass is an organism that takes sun and earth and water and makes grass with it.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
A zebra is an organism that turns grass into zebras. A lion is an organism that turns zebras into lions. They're all specialized. But the interactions can be rather long range. Get rid of the lions, grass gets hammered.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
So even though the lion might not interact with the grass except to roll around in it occasionally, because the lions are controlling the zebras and the zebras are controlling the grass, it's all connected. So economists sort of, I mean, Adam Smith already said something like that. But our models very explicitly do that in a bounded rational setting because why are we specializing?
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
We're specializing because we're only boundedly rational. We get good at doing very specific things. We can't do everything. And so we put that in from the start and our models because we can put in more institutional structure and so on, allow us to think about the ecological part of the story with more richness. Now, back to the metabolism part of the story.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
The metabolism, it's a bit different from your body in that metabolism is maintained by an ecology that the metabolism is feeding. The metabolism feeds all of us, but we're making that happen by each of our specialized roles.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
We're like the little cells inside your digestive system that are themselves being fed by the fact that we're digesting food, but those cells can be very specialized and doing very different things.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Yeah. We were inspired by ecology. One of the nice things about hanging out at SFI is you get to know a little about a lot of things. And we said, well, the same basic thing is going on in the economy because we have all these specialists. And in particular, in ecology, one of the central ideas is that of a trophic level.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
with the grass, grass has a trophic level of one, zebras have a trophic level of two, lions have a trophic level of three. And the way you compute trophic levels is you say an organism is equal to one plus the average trophic level of the things it eats, right? So, so. And you can actually just write that statement down and derive a key equation about the economy.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Because in this case, what happens is industries, trophic level in industry is one plus the trophic levels of its inputs. And labor, we put as the foundation, that's trophic level zero. So an industry that purely has labor has trophic level one. It turns out this is very closely related
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
to a concept in economics called output multiplier, which is used in a different way, but defined in a similar way. The prediction then is that the deeper your supply chain is as an industry, the faster you'll improve. I go, wait a minute, that sounds weird. Well, first of all, the depth of the supply chain is the trophic level here. Why?
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Because if let's suppose you don't take in very many labor inputs and all your inputs are things that already have high trophic levels, then you're going to have an even higher trophic level than your inputs. And you keep going back down until you get back to labor and
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
So, in fact, the trophic level is the average time it takes a dollar that an industry pays to its labor to get into somebody's pocket or get it, in other words, to get all the way back to all the labor that went into making the thing as you go down the chain.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
So this allows you to compute these trophic levels for industries, which typically, as in biology, organisms eat more than one thing, their trophic levels aren't just integers, they're more complicated. Similarly, here you can compute trophic levels for industries. Now, suppose we assume that every industry is innovating at about the same rate. Bald assumption, but good place to get started.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
We can let it be different, but let's start out by assuming they all innovate at the same rate. Well then, if you have a deep supply chain, there are many industries that innovate on the way up to your industry. So you experience the product of all those innovations coming up the supply chain. So, you know, if my laptop, if the titanium that
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Apple is using, it's cheaper, that helps make my laptop cheaper. If the chips get cheaper, etc. You're inheriting all those improvements in addition to the improvements the laptop designers themselves make. And so then we just compute it that this means things with deep trophic levels, their products should improve faster, meaning they should get better or cheaper or some combination of the two.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And Sure enough, we looked at the data, and we took advantage of the fact that trophic levels change slowly through time. So you can, roughly speaking, assume they stay constant. And you can predict 14 years ahead which products are going to be cheaper or not just based on that assumption alone. The prediction is quite good. And amazingly, it gets better as you go further forward into the future.
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
As someone who does a lot of predicting, that's a pretty unusual prediction.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Yeah. Now, interestingly, in biology, competition is a key part of evolutionary theory. But evolutionary biologists view competition as what leads us to speciation. That's one of Darwin's key insights. Whereas in economics, the mainstream people like Milton Friedman say, no, competition means you quickly come to equilibrium, the state of rest.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
So they arrive at a completely different conclusion, both using competition. Now, it's in part because economists start with rationality, they assume we're all really smart, so we figure everything out, and that gets us to this equilibrium quickly. Whereas in biology, you know, there is random variation that's being amplified as a result of the competition and actually causes species to diverge.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
I would argue that's also happening in the economy. Because, well, in some cases, we may behave rationally. I'd say the cases where we behave rationally are the ones where things are really simple so we can figure them out. But most of the time, it's pretty complicated. So that's not such a good approximation. And we, you know, overshoot, undershoot, and differentiate.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Well... I think it's fundamentally endogenous. And it's a challenge to model in economics. In biology, you can just say, well, innovation is randomness. You randomly change a gene. Or, OK, you have to deal with recombination, which is more complicated. But it's just a process you can specify in an algorithm. Because we have this universal biological code that everything follows.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Whereas we don't have anything that clean in the economy, Innovation depends on human reasoning, but sometimes just assuming it happens randomly is not a bad start. There's something called Wright's Law or learning by doing, comes under several different names. That's a very useful way to predict technological improvement.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
The theory for that actually, ironically, was originally started by John Muth John Muth is a guy who actually invented rational expectations in 1960. But he also, he could work with both hands. He said, let's assume that inventors just throw darts at a dartboard at random. And let's assume they're just smart enough to see when they've made a better throw.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And so he then showed that you got Wright's law, although only with an exponent of one, right? That's the only exponent he could drive. Fast forward, there was another simulation paper. And then we wrote a paper where, again, we enhanced that idea by looking at the fact that technologies are connected within a device.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
If you change the carburation system, you may need to change the ignition system. So you look at what's called a design structure matrix that automobile designers and other designers of complex things use to understand interactions.
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So we enhanced the theory to deal with that, derived a bunch of stuff physics style, and we were able to show that, derived the Wright's law exponent, and show that the more complicated and less modular the system is, the lower that exponent is and the slower it improves. And that's been tested. It seems to be more or less true.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
It's another example of throwing darts at a dartboard actually is good enough to get you there, as was ironically realized by John Muth, the founder of rational expectations. But somehow economics got locked into a framework where you couldn't do what Muth did anymore. That's just bad cricket. to assume that people just flip coins. Not okay.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Yes. I think the same is true in physics and many other disciplines. Because those guys had to wrestle with coming up with the concepts in the first place. So they understood the slippery ground they were standing on better than subsequent generations.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
I think actually the simulations will help us derive better theories. The theories that get derived, though, are different than that standard template I gave you. Sure. Although sometimes it could be that, if it goes to equilibrium, could work, right?
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
But the theories that we complexity economists use are often more like statistical mechanics or evolutionary biology models, which may or may not have equilibrium in them. And so it's a much more flexible theoretical framework. But I'd like to draw an analogy to fluid flow. The Navier-Stokes equations, you can derive them from Newton's laws. And you can write them down.
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take one line that looks pretty simple, a few little upside down triangles that confuse the math to calculus. But once you understand what the math means, simple to write down. Solving them, they're not solvable in general. And we now know why. It's because they have chaotic solutions.
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When you have chaotic solutions, there are typically no shortcuts to just grinding things out numerically one step at a time. They're intrinsically complex in that regard. But now back to theory, well, One of the big changes in fluid dynamics is we now have numerical fluid computation. We can make use of computer power to simulate what fluids do pretty accurately.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
But that's also been a big driver of theory because now you can test your theory without having to set up a wind tunnel and get a big grant from the NSF. And so there's a rich interaction between the simulators and the equation guys. So I actually think being able to simulate is ultimately going to give us a deeper theoretical understanding
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And by the way, let me say, when we see a phenomenon in an agent-based model, the first thing we do is try and strip it down. We go, let's give it the pulse of what's causing this. So we start throwing stuff away or using really simple dummy versions for a component. If it keeps on doing it, we go, OK, that's not the cause.
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So we try and figure out the causality by doing what biologists would call knockout experiments. Also, we often get the phenomenon by doing addition experiments, meaning we start simple, we add a feature, we look at what happens, we add another feature, we look at what happens. So you can go from either direction to try and pin down the causality.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And then once you do that, the theoretician can step in and try and make a stripped down mathematical model, and in some cases, explain what's happening.
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By and large, no. A few exceptional individuals do. My book has an endorsement by Larry Summers. There you go. Who really surprised me because, you know, I sent the book to the early manuscript to him saying, Larry, I use your name several times in the book. Just search for your name. Look and see if what I said is OK. And let me know. I don't you know, I want to be nice to everybody.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
So to my astonishment, he sent it back saying, I read your book, and I really agree. I think you have a really good point. You made some errors. He corrected a bunch of my errors. But he said, I overall agree. So wow, I was blown away. My old friend John Giannacopoulos, who was actually Larry Summers' roommate when they were graduate students at Harvard,
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
He's also, we've been arguing about this stuff since the late 80s. So yeah, he appreciates it. I've co-authored papers with him. My colleague Andrew Lowe at MIT, there's a few people like that. But by and large, what we're doing is ignored by the mainstream. We can't publish in their journals. They'll just say, you're not making the kind of theory we consider acceptable.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
It's like a loop quantum gravity person trying to publish in a string theory journal. For those of you who happen to know that controversy. There's not a lot of traction with the mainstream. Now, things are changing. I sent some cracks opening up. We're getting interest from central bankers.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
We now have a variation on our housing model is used by, I would say about six or eight central banks in Europe. There is now an agent-based macro model being used by the Bank of Canada, being developed at the Bank of Italy. So we're starting to get traction in that domain. And I've started a company called Macrocosm that is dedicated to scaling up the solutions and reducing the practice.
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So, you know, if a journalist calls me and said, what's going on and, you know, what's going to happen with the war in Ukraine, I just look at what the model is doing because it's ingesting the inputs all the time and staying up to date. And so we were starting to see practical applications. And my theory of change is that
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Once those practical applications get enough traction, and once, you know, as economists will say, it takes a model to beat a model. Once our models start beating their models in hard empirical terms, they'll have to start paying some attention.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Yeah, yeah. Well, sometimes, let me correct that a little bit. If you think it's cool and you're within the main paradigm, you can get a paper published because it's cool. But if you're outside of the main paradigm, no matter how cool it is, they're not going to pay attention to you until you have empirical results.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Well, I mean, I think it is inevitable there will be one. You know, you just look through the history of economies, they happen regularly. Before we instituted the Federal Reserve in 1913, the US on average had a financial crisis of some form about every seven years. And now, since we did the Federal Reserve, They're less frequent, but the ones we've had have been doozies.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
We have the Great Depression and the Great Financial Crisis. We've had some whoppers. So we still don't know how to control the economy properly. And until we do, we should expect we're going to have crashes.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And it could even be that the way we're controlling it works well most of the time, but when it fails, it actually makes a bigger crash than would have happened in the old days, where we weren't really controlling much of anything. other than doing weird stuff with the metal we used to base the currency on, which was pretty arbitrary. So, yeah, I think we are going to have more crashes.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Now, I do think that agent-based models can help guide us better. And maybe once we get good models, we can soften the intensity of those crashes. or maybe even just to understand how to keep them from occurring. I don't know. The jury's out, but I'm optimistic.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Yeah, definitely. One of the things I talk about in my book is what I call market ecology. The classic theory of markets that's dominated a lot of the discourse is efficient market theory. And the idea is that you can't beat the market, but also, so that's informational efficiency, but also is allocational efficiency. The allocations of effort we're making to different activities are correct.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And the market's pretty informational efficient. I managed to beat it. We managed to beat it at Prediction Company by a pretty steady rate. Odds that we were just lucky monkeys are so close to zero as to be negligible. But the allocations can be quite wrong. And that's what happens in crises. And so...
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
So under the theory of market ecology, it's like the theory I said before about the production system and the real economy, but The way you think about it is there's different species of investors and they're all specialized. Warren Buffett does his thing. There's another guy, John Henry. He's a trend follower.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
He says if the market's been going up, it'll keep going up and looks at little patterns in the prices to decide when to buy and sell. You know, they're market makers. You can make a list of, I can easily write down 15 or 20 different types of strategies in financial markets. And While there's variation in how people execute those strategies, they're broadly, it's like species and biology.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And so under the theory of market ecology, we need to think of the market as an ecosystem with specialized actors. They feed off of the inefficiencies in the market. They are what's making the market efficient, but they never achieve perfect efficiency. We see swings around perfect efficiency, particularly when new stuff happens.
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You know, mortgage-backed securities are only one of several examples of new financial instruments that caused bad stuff to happen in markets. And so under that theory, you can then simulate what's going on in markets and understand why markets malfunction. The efficient market theory assumes they work perfectly, so it doesn't give you any insight into why they malfunction.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
It's like the poor old balancing In efficient market theory, it's always straight up. If you want to understand why it deviates from straight up, you have to do something else. And I maintain theory of market ecology is the key. And so that then will allow us, one of the things, to back to your question, regulators, I argue, should be simulating the market.
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They have all the data to understand the species and who they are and how they interact because they can see what everybody does. And so we could have a standard simulation of markets, and whenever a new financial instrument comes in, we put it in there. It's like an invasive species in ecology, and we test it out to see what its side effects are.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And if we were doing that leading up to the great financial crisis, we would have seen the side effects of mortgage-backed securities used with high leverage.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Well, I'm actually trying to convince the SEC because central banks, as a central bank, you only see your part of the story. You know your positions. You don't know what everybody else is doing. But the SEC can look at anything it wants to. and does whenever something goes haywire. Okay, that makes sense.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
So the data could just be flowing in, they could be simulating what's happening, and they could be doing counterfactual experiments. So do we need to be worried about leverage getting too high here? Crank it up. Oh, wait a minute. We got to get people to lower their leverage.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Yeah. Well, they've certainly been helped by that. You know, in my career, I've always had the problem that I never fit into any discipline. So I'm one of the most interdisciplinary people around because I've straddled disciplines without being in one. through my whole career. And by the way, you said, oh, you're at Oxford, but actually I'm in the Department of Geography and the Environment.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
I'm not in the Economics Department.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And that's characteristic. There are no economics departments in the US that do complexity economics. I mean, okay, Blake LeBaron sits in an economics department at Brandeis. He's one guy. There's a few people, but I can name them on the fingers of one hand. You know, there's a computational social science program at George Mason run by Rob Axtell, but it's not economics.
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And now in Europe, there are some economics departments that do this, but they're not the ones with a lot of status in the field, they're forced to publish in what are viewed as inferior journals. And so it's an out group. And so So it's still a struggle to get jobs for students that want to do this kind of thing.
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I'm approached by perceptive young students who say, I'm not happy with what I'm getting taught or would be taught in economics. Can I work with you? And the first thing I have to say is, yes, but you're not going to get a job in the Harvard Economics Department when you're done. I do have students now who are at the World Bank at the International Monetary Fund.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
They're getting out there at the Bank of Spain. I have students who are now in that side of things, but there's more open-mindedness there.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Thank you.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Yeah, well, I sometimes worry it's not the best term. The term is there to indicate that it's coming from the science of complex systems and that we're using methods and maybe even a scientific philosophy of epistemology that's coming out of complex systems, which, although economists like to point to Adam Smith and so on, it's very different than the way they do things
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And I think it's much more explicitly complex systems than the way they do things.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Well, yes and no. That is, you know, first of all, I'm bending over backwards to be nice to the economists. I hope they appreciate that. And so I intentionally took as much criticism of economics as I possibly could out of the book. I had several editors help me do that. Now, I think there are some things that conventional economics is pretty good at.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
in a simple situation where you need to understand strategic interaction, and that plays an important role, or strategic thinking plays a role, but in a simple context where you can understand, then I think it can work pretty well. I think where it fails is when things get more complicated, when you need to put in more institutional structure, or when
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
individual agents can't reason well about what's going on. And so you really have to fall back to heuristics and more simple reasoning. And maybe to amplify a little bit on that first point, because I think it's a central one. And in my book, I quote economists laying the problem out. And the problem is,
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And maybe we need to digress to how mainstream economics works and what the difference between the two approaches are. And then I think this will become more apparent. But in mainstream economics, in the capsule version, is that you begin by assigning all the agents, all the decision makers, utility functions, scorecards that say what they like better and what they don't like as much.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And then you give them some way of reasoning about the world. Traditionally, that's rational expectations, meaning they're like Mr. Spock in Star Trek. They can reason about everything, and they're very logical, and they can process all the information and arrive at the correct conclusions. And so you give them those things, and you furthermore assume equilibrium.
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which in a standard economic model means supply equals demand. But sometimes you're in a strategic setting where it means you're doing something like game theory, where it's a strategic equilibrium, meaning we've all arrived at strategies that make decisions that are as good as we can do, given that everybody else is not changing what they're doing. And everybody does that.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
So that'd be the standard thing, rational expectations. Now, And then just to finish, you write all that down in equations. You solve what economists call the first order conditions, meaning you set the derivative to zero. And you compute the decisions that maximize utility for all the agents. And then you calculate the economic consequences of those decisions.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Now, so in complexity economics, we do things completely differently. So it's really throwing out stuff that's been in economics since the 19th century. And we say, well, let's assume we have some agents. Let's give them some ways of making decisions that could be very simple or more complicated, but we're not assuming optimality. So information flows in.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
The agents use their rules to make decisions, which might be learning algorithms or they might just be simple heuristics like buy undervalued assets or imitate the best. Look around and see who's doing the best. Imitate them. Or it might be trial and error. Try something. If it works, keep doing it. Doesn't work, try something else. Simple stuff. And so they make their decisions.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
We then calculate the economic consequences of the decisions. That generates new information. In addition, new information may flow in from the outside. And then we repeat the process. And we just go around and around that loop. We may arrive at an equilibrium where supply equals demand or agents decisions get locked in.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
If so, that's what we would regard as complex system scientists as an emergent property or we might not. And actually oftentimes we don't. And I think that's one of the important strengths of this formalism that we more naturally capture dynamics And endogenous dynamics, that is dynamics that arises from within.
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Things like business cycles, where if you take, say, the financial crisis of 2008, the so-called great financial crisis, I think it's pretty clear it's an endogenous crisis. It wasn't like a meteor hit the earth and that caused the crisis or that people suddenly changed. It was that we introduced new types of technologies
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
Financial instruments, mortgage-backed securities, housing market got overpriced, it crashed. All these things happened from within the economy. In a mainstream model, you can't get that to happen. And so you just don't get, it's very, you can get endogenous dynamics, but you have to push the economy into extreme, you have to make what seem like unreasonable assumptions in order to get there.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
There's actually something called a turnpike theorem that says things are just gonna settle into a fixed point unless certain conditions are satisfied, like very myopic reasoning, et cetera. But if under normal reasonable conditions, You know, it's like a turnpike. You look down the road. You see where things are going. You make corrections as needed because you can see everything well ahead.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And so you're not steering wildly. Now, in the book, I show several examples where behavioral errors, bounded rationality, making mistakes we should expect people should make, lead to endogenous dynamics. And, you know, the analogy I make is that the economy is more like a drunk driver on a mountain road, you know, swerving and not quite always doing what he or she is supposed to do.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
So maybe one more thing. Sure. So it gets me back to what caused the whole digression. The part that economists, I think, will all agree on is when you're computing optimal strategies for each agent, you're deducing those strategies, you can't make things very complicated. Once the system gets nonlinear, once you have more than a dozen agents, you can't solve the equations anymore.
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293 | Doyne Farmer on Chaos, Crashes, and Economic Complexity
And so you have to keep the models simple. You're just forced to do that. You're also writing down equations. You have to write down everything in equations. In an agent-based model, those constraints don't exist. We have models, we've run simulations with millions of agents making decisions. And there's just a lot more room to put in institutional structure, heterogeneity, real world stuff.