Why do we need agent-based macroeconomics?

Abstract

We are entering the third decade of the twenty-first century with profound uncertainties and crucial challenges for the world economy. Phenomena like climate change, digital transformation, migration, demographic changes, and the ongoing COVID pandemic need to be understood and promptly addressed. We argue that the agent-based approach in economics is well suited to tackle these topics, because of its capacity to integrate the “micro” and “macro” dimensions by modelling the network of interactions among heterogeneous economic agents and their aggregate outcomes. This paper explains why the agent-based methodology is needed to overcome the limitations of the neoclassical approach in economics, which has not been able to properly address those challenges. To do so, the paper retraces the main stages of the scientific evolution in a general historical and epistemological perspective, showing how the paradigm of reductionism, which led to extraordinary advances after the scientific revolution of the seventeenth century, is less effective when addressing the main challenges ahead. On the other hand, the sciences of chaos theory and complex systems can provide the economic discipline with more suitable instruments to face those challenges. Finally, the paper briefly presents the contributions of the special issue, which use applications of agent-based models to study the main problems of our times.

The leakage effect may undermine the circular economy efforts

“…We use an agent-based modeling (ABM) technique that has been increasingly popular in economic studies 30 , 31 . The method allows for the relaxation of assumptions commonly used in economic models for the purpose of analytical tractability.…”

sfctools - A toolbox for stock-flow consistent, agent-based models

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One of the most challenging tasks in macroeconomic models is to describe the macro-level effects from the behavior of meso-or micro-level actors. Whereas in 1759, Adam Smith was still making use of the concept of an 'invisible hand' ensuring market stability and economic welfare (Rothschild, 1994), a more and more popular approach is to make the 'invisible' visible and to accurately model each actor individually by defining its behavioral rules and myopic knowledge domain (Castelfranchi, 2014;Cincotti et al, 2022). In agent-based computational economics (ACE), economic actors correspond to dynamically interacting entities, implemented as agents in a computer software (Axtell & Farmer, 2022;Klein et al, 2018;Tesfatsion, 2002).

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Essays on the pricing behavior of firms using an agent-based modeling approach

“…With these three characteristics, Richiardi (2018) differentiates ABMs from other economic model classes and approaches used in evolutionary economics or complexity theory. This class of models in macroeconomics began to emerge in the early 2000s (Cincotti et al, 2022). These models explain the behavior of macroeconomics aggregates as the outcome of the interactions of heterogeneous agents (such as firms, customers, and banks) making a plethora of decisions to produce and exchange a wide variety of goods.…”