Computation and Complexity in Economic Behavior and Organization

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We model the firm as a type of artificial neural network. However, this learning game is in the background, as we focus on the endogenous adjustment of network size.

Via simulation analysis we show: 1 how organizations learn to estimate the optimal output over time as a function of the environmental dynamics, 2 which networks are optimal for each level of environmental complexity, and 3 the equilibrium industry structure. This paper proposes using computational learning theory CLT as a framework for analyzing the information processing behavior of firms; we argue that firms can be viewed as learning algorithms.

The costs and benefits of processing information are linked to the structure of the firm and its relationship with the environment.


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We model the firm as a type of artificial neural network ANN. By a simulation experiment, we show which types of networks maximize the net return to computation given different environments. At a practical level, quantitative modeling is applied to many areas of economics and several methodologies have evolved more or less independently of each other.

The great appeal of mathematical economics is that it brings a degree of rigor to economic thinking, particularly around charged political topics. For example, during the discussion of the efficacy of a corporate tax cut for increasing the wages of workers, a simple mathematical model proved beneficial to understanding the issues at hand. As an intellectual exercise, the following problem was posed by Prof. Greg Mankiw of Harvard University : []. How much will the tax cut increase wages?


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  • Behavioral economics.
  • To answer this question, we follow John H. Cochrane of the Hoover Institution. A corporate tax cut in this model is equivalent to a tax on capital. But that only considers the static effect, and we know that the dynamic effect must be accounted for. Moreover, if there are positive externalities to capital accumulation, the effect of the tax cut on wages would be larger than in the model we just derived. It is important to note that the result is a combination of:.

    This result showing that, under certain assumptions, a corporate tax cut can boost the wages of workers by more than the lost revenue does not imply that the magnitude is correct.

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    Rather, it suggests a basis for policy analysis that is not grounded in handwaving. If the assumptions are reasonable, then the model is an acceptable approximation of reality; if they are not, then better models should be developed. The Handbook of Mathematical Economics series Elsevier , currently 4 volumes, distinguishes between mathematical methods in economics , v. In it, a "Subject Index" includes mathematical entries under 2 headings vol. IV, pp. A widely used system in economics that includes mathematical methods on the subject is the JEL classification codes. It originated in the Journal of Economic Literature for classifying new books and articles.

    The New Palgrave Dictionary of Economics , 2nd ed. The corresponding footnotes below have links to abstracts of The New Palgrave Online for each JEL category 10 or fewer per page, similar to Google searches. Friedrich Hayek contended that the use of formal techniques projects a scientific exactness that does not appropriately account for informational limitations faced by real economic agents. In an interview in , the economic historian Robert Heilbroner stated: []. I guess the scientific approach began to penetrate and soon dominate the profession in the past twenty to thirty years.

    An Introduction to Behavioral Economics

    This came about in part because of the "invention" of mathematical analysis of various kinds and, indeed, considerable improvements in it. This is the age in which we have not only more data but more sophisticated use of data. So there is a strong feeling that this is a data-laden science and a data-laden undertaking, which, by virtue of the sheer numerics, the sheer equations, and the sheer look of a journal page, bears a certain resemblance to science. That one central activity looks scientific.

    I understand that. I think that is genuine. It approaches being a universal law.

    But resembling a science is different from being a science. Philosopher Karl Popper discussed the scientific standing of economics in the s and s. He argued that mathematical economics suffered from being tautological. In other words, insofar as economics became a mathematical theory, mathematical economics ceased to rely on empirical refutation but rather relied on mathematical proofs and disproof. Sharing Popper's concerns about assumptions in economics generally, and not just mathematical economics, Milton Friedman declared that "all assumptions are unrealistic".

    Friedman proposed judging economic models by their predictive performance rather than by the match between their assumptions and reality. Considering mathematical economics, J. Keynes wrote in The General Theory : []. It is a great fault of symbolic pseudo-mathematical methods of formalising a system of economic analysis In response to these criticisms, Paul Samuelson argued that mathematics is a language, repeating a thesis of Josiah Willard Gibbs. In economics, the language of mathematics is sometimes necessary for representing substantive problems.

    Moreover, mathematical economics has led to conceptual advances in economics.

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    Computational Industrial Organization – Jason M. Barr

    Some economists state that mathematical economics deserves support just like other forms of mathematics, particularly its neighbors in mathematical optimization and mathematical statistics and increasingly in theoretical computer science. Mathematical economics and other mathematical sciences have a history in which theoretical advances have regularly contributed to the reform of the more applied branches of economics.

    In particular, following the program of John von Neumann , game theory now provides the foundations for describing much of applied economics, from statistical decision theory as "games against nature" and econometrics to general equilibrium theory and industrial organization. In the last decade, with the rise of the internet, mathematical economists and optimization experts and computer scientists have worked on problems of pricing for on-line services their contributions using mathematics from cooperative game theory, nondifferentiable optimization, and combinatorial games.

    Robert M. Solow concluded that mathematical economics was the core " infrastructure " of contemporary economics:. Economics is no longer a fit conversation piece for ladies and gentlemen. It has become a technical subject. Like any technical subject it attracts some people who are more interested in the technique than the subject. That is too bad, but it may be inevitable. In any case, do not kid yourself: the technical core of economics is indispensable infrastructure for the political economy.

    That is why, if you consult [a reference in contemporary economics] looking for enlightenment about the world today, you will be led to technical economics, or history, or nothing at all. Prominent mathematical economists include, but are not limited to, the following by century of birth. From Wikipedia, the free encyclopedia.

    Complexity Economics Overview

    Part of a series on Economics Index Outline Category. History Branches Classification. History of economics Schools of economics Mainstream economics Heterodox economics Economic methodology Economic theory Political economy Microeconomics Macroeconomics International economics Applied economics Mathematical economics Econometrics.

    Concepts Theory Techniques. Economic systems Economic growth Market National accounting Experimental economics Computational economics Game theory Operations research. By application. Notable economists. Glossary of economics. Main article: History of economic thought.

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    Main article: Marginalism. Main articles: Foundations of Economic Analysis and Differential calculus. See also: Pareto efficiency and Walrasian auction. See also: Linear algebra , Linear programming , and Perron—Frobenius theorem. Main article: Input-output model. Main articles: Mathematical optimization and Dual problem. See also: Convexity in economics and Non-convexity economics. Main articles: Linear programming and Simplex algorithm.