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Macroeconomic Fluctuations as Emergent Behaviour

by Paul Beaudry, Dana Galizia and Franck Portier

We, as human beings, like ups and downs on a roller coaster, but only on a roller coaster. We typically dislike fluctuations in our economic and social conditions.

A lot of our actions are designed to limit abrupt changes in our living conditions: we eat three times a day rather than once, we use central heating in the winter and air conditioning in the summer, we do save for our old age, we do subscribe insurance and vote for unemployment benefits, etc…

However, the economy as a whole is going though booms and busts, expansions and recessions, periods of exuberance and periods of despair.

How can we reconcile our individual quest for stability with the inherent instability of socio-economic systems? Why do our individual decisions aiming at stability translate into unstable macroeconomic outcomes?

The idea that aggregate outcomes have properties very different from individual level decisions is referred to in the system theory literature as emergent phenomena. Emergent structures can be found in many natural phenomena: hurricanes emerge from mutual positive feedback between wind, humidity, evaporation of warm surface waters and Coriolis effects. Swarm behaviour of marching locusts, schooling fish and flocking birds are famous natural life examples of emergent phenomena.

There has been little effort in economics at understanding emergent phenomena in a systematic way. The existence of a two-way feedback between microstructure and macrostructure has been recognised for a very long time, from the invisible hand of Adam Smith to the work of Hayek and Schelling. There are many examples where aggregate outcomes may display instability when individual level decisions are aimed at favouring stability, but it is unclear what are the key forces driving such phenomena.

Although we have a lot to learn from those natural emergent phenomena, studying economic emergent phenomena is somewhat different than in other fields for two reasons. First, the decisions units are not simply governed by habit or genes. Economic decision makers are constantly trying to understand the system in which they live and try to take decisions accordingly. Second, these agents are often forward looking, taking decisions that reflect how they think their environment may evolve over time. Both these characteristics give constraints on behaviour that are generally not present in the main body studying emergent phenomena.

Understanding emergent phenomena in a systematic way is crucial if we want to stabilise the economy and produce better macroeconomic outcomes.

Only a systemic understanding of what may cause instability will allow to specify well-targeted policies. The systematic study of emergent phenomena that we are undertaking under the auspices of Rebuilding Macroeconomics Instability Hub -- where the emergent behaviour could take different forms such as hysteresis, limit cycles or chaos -- will give us a way to better direct a twofold empirical exploration: I) what type of instability may be most prevalent at the macroeconomic level and II) what type of microeconomic phenomena may best explains it.

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2 comentarios

David Chester
David Chester
31 ene 2020

It is good that this writer recognizes the fact that there are business cycles of growth and slump. However the cause of these cycles seems to be a matter that nobody can exactly explain because each cycle seems to be related to some other different change.

However the more general cause of the cycles have been properly explained and is actually not so strange. It was first described in Henry George's classic book "Progress and Poverty" of 1879. Since then various supporters of his claims have expanded on it, particularly in "Boom--Bust" a book of 1995 that was reprinted in this century, by Fred Harrison and prof. Mason Gaffney both strong Georgists. I realize that not many of today's expert…

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David Chester
David Chester
30 ene 2020

The reasons for the fluctuations or "business cycles" in macroeconomics have never been properly explained, although several theories have been proposed. Often they seem to fit the particular circumstances of one sudden change but in practice they are not sufficiently general to apply to them all. There is an explanation that does truly and more generally apply and it is due to the way land values are varying when speculators withhold the access rights to their sites until the price rises and eventually bursts. This theory was first proposed by Henry George in 1879 in his classic book "Progress and Poverty" but today no serious economists seem to have heard of it, nor will they because capitalism and land ownership…

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