Jean-Philippe Bouchaud and I are pleased to be leading a research hub devoted to understanding why economies are unstable. Although the two of us, come from very different backgrounds, we have a shared interest in promoting genuinely interdisciplinary dialogue in our search for understanding. Farmer is Professor of Economics at Warwick University, Research Director at NIESR and a member of the Rebuilding Economics (RM) management team. Bouchaud is a physicist who is now working in finance. He is the founder and chairman of a successful hedge fund, Capital Fund Management, and co-director of the CFM-Imperial Institute of Quantitative Finance at Imperial College. Together, we seek to act as catalysts for transformational change in macroeconomics.
It has become clear to both of us, over the course of the past several years, that although there is a widespread perception that macroeconomics is broken, there are as many, or more, proposed ways to fix macroeconomics as there are participants in the conversation. What does it mean to claim that economies are unstable?
We begin with a working definition.
Economic instability is the tendency for national and world economies to experience periods of expansion and contraction that are often, but not always, associated with booms and busts in trade and global finance. These expansions and contractions lead to swings in economic activity that are often associated with financial collapse followed by periods of stagnation that are deleterious to human welfare.
Four Different Communities
We would not be involved in this project if we did not believe that we have a good idea of where to look for answers. Each of us has taken an unconventional approach to macroeconomics; I through my work on multiple equilibria in economics and Jean-Philippe through his application of techniques from mathematical physics to agent-based models, where multiple equilibria and instabilities frequently appear. We both have views about how macroeconomics should progress. But neither of us is dogmatic and we seek a genuine exchange of ideas with others.
The traditional approach to macroeconomics is based around Dynamic Stochastic General Equilibrium (DSGE) models. We bring an understanding and a respect for this tradition and we are aware of how DSGE models are evolving in response to the crisis. But we are also aware of the short-comings of the DSGE approach and each of us has not only been critical of the mainstream in our individual research, we have also provided viable and promising alternatives.
It is apparent from our conversations with economists, psychologists, mathematicians, physicists, complexity theorists, and anthropologists; that there are many alternative perspectives from diverse groups all of which have something to contribute. We are genuinely excited at the prospect of initiating a dialogue amongst these alternative viewpoints. In our initial conversations, we have identified four alternative groups.
First, there are relatively orthodox economists working on the fringes of the mainstream paradigm who do not subscribe to all of the tenets of the New Keynesian assumptions. Many of those in this group will feel at home at mainstream economic research meetings but have difficulty publishing in top journals which maintain a rigid control of what is and what is not considered to be knowledge. Second, there are those who are a little further from the mainstream and here we include post-Keynesians who maintain their own separate journals and who have not, in the past, been invited to the party. Third, there are those from the econo-physics and agent-based-modelling community who have also been considered to be well outside of the mainstream and whose work is unlikely to be accepted in a top economics journal. There are signs that the ABM modelling community is becoming more influential, but they too have a long way to go. Finally, there is work in behavioural economics that is also now breaking through to the mainstream journals and which has been recognized with a number of recent Nobel Prizes beginning with Kahneman and Tversky in 2002 followed by Bob Shiller in 2013 and Richard Thaler in 2017.
We have mentioned four diverse groups. We focused on these groups because we see commonalities between the topics they address that, although similar, are approached in different ways. We do not intend to interact exclusively with the groups or individuals we have mentioned, and we remain open to other proposals that are submitted in response to calls for papers. We will soon be issuing a call to fund proposals that seek to understand the causes of macroeconomic instability and it is our hope that we will receive interesting proposals from one or all of the communities we have identified. We hope to initiate a genuine dialogue between these communities in which we all can learn from each other.