From Dynamics to Novelty: An Agent-Based Model of the Economic System

Abstract

Abstract The modern economy is both a complex self-organizing system and an innovative, evolving one. Contemporary theory, however, treats it essentially as a static equilibrium system. Here we propose a formal framework to capture its complex, evolving nature. We develop an agent-based model of an economic system in which firms interact with each other and with consumers through market transactions. Production functions are represented by a pair of von Neumann technology matrices, and firms implement production plans taking into account current price levels for their inputs and output. Prices are determined by the relation between aggregate demand and supply. In the absence of exogenous perturbations the system fluctuates around its equilibrium state. New firms are introduced when profits are above normal, and are ultimately eliminated when losses persist. The varying number of firms represents a recurrent perturbation. The system thus exhibits dynamics at two levels: the dynamics of prices and output, and the dynamics of system size. The model aims to be realistic in its fundamental structure, but is kept simple in order to be computationally efficient. The ultimate aim is to use it as a platform for modeling the structural evolution of an economic system. Currently the model includes one form of structural evolution, the ability to generate new technologies and new products.