Is the Market Really a Good Teacher? Market Selection, Collective Adaptation and Financial Instability

Pascal Seppecher, Isabelle Salle and Dany Lang

No 2016-15, GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France

Abstract: This paper proposes to model market mechanisms as a collective learning process for firms in a complex adaptive system, namely Jamel, an agent-based, stock-flow consistent macroeconomic model. Inspired by Alchian’s (1950) "blanketing shotgun process" idea, our learning model is an ever-adapting process that puts a significant weight on exploration vis-à-vis exploitation. We show that decentralized market selection allows firms to collectively adapt their overall debt strategies to the changes in the macroeconomic environment so that the system sustains itself, but at the cost of recurrent deep downturns. We conclude that, in complex evolving economies, market processes do not lead to the selection of optimal behaviors, as the characterization of successful behaviors itself constantly evolves as a result of the market conditions that these behaviors contribute to shape. Heterogeneity in behavior remains essential to adaptation in such an ever-changing environment. We come to an evolutionary characterization of a crisis, as the point where the evolution of the macroeconomic system becomes faster than the adaptation capabilities of the agents that populate it, and the so far selected performing behaviors suddenly cease to be, and become instead undesirable.

Keywords: Evolutionary economics; Learning; Firms' adaptation; Business cycles (search for similar items in EconPapers)
JEL-codes: B52 C63 D83 E32 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2016-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Is the market really a good teacher? (2019)
Working Paper: Is the market really a good teacher ? Market selection, collective adaptation and financial instability (2019)
Working Paper: Is the Market Really a Good Teacher? (2016)
Working Paper: Is the market really a good teacher ? (2016)
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