Macroeconomics and Complexity: Inflation Theory

Axel Leijonhufvud

Working Papers from University of California at Los Angeles, Center for Computable Economics

Abstract: The complaints about today's macroeconomics are familiar to all. The economy is not modelled as an evolving system exhibiting emergent properties. Behavior is represented as precalculatedly optimal rather than adaptive. Actions are assumed to be prereconciled by rational expectations rather that brought into consistency by market interaction. Heterogeneity of goods or of agents is all but completely denied. The infinite horizon optimizing representative agent model is not altogether representative of today's macroeconomics. We also have models with two types of mortal agents (overlapping generations) and some models with asymmetric information or externalities capable of producing coordination failures of a sort. But generally speaking these too tend to be subject to the same complaints. A overview of today's macroeconomics for a Santa Fé audience might only too easily deteriorate into a catalogue of models to which these complaints and reservations apply in varying combinations. Rather than tire you with such a litany, I will describe a set of (somewhat atypical) empirical phenomena, explain why I do not think they are handled well by current macroeconomics, and end with a few suggestions about how they might be attacked. If these suggestions were to start a critical discussion, I would find that helpful.

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