Rethinking Economic Behaviour: How the Economy Really Works by David Simpson

By David Simpson

Treating the industry financial system as a fancy adaptive process deals a greater clarification of the way it really works than does the mechanical analogy of neoclassical equilibrium concept. The nonlinear interactions of hundreds of thousands of person humans, coupled with the impact of likelihood, bring about the emergence of markets. different regularities emerge within the styles of financial progress, company cycles and in spatial situation of monetary job. The process is proven to be congruent with Classical and Austrian theories and offers a chance for a unified social science.

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In this regime, none of the observed characteristics of actual financial markets were manifested. What is significant about this work is that it retained most of the other assumptions of traditional neoclassical equilibrium theory. Each individual was assumed to optimise their portfolio, and full market clearing was achieved in each time period. Only in the way in which expectations were assumed to be formed did it depart from the conventional approach. The remarkable difference in the results obtained underlines the inadequacy of the rational expectations hypothesis.

But, just when equilibrium theorists had concluded that productivity increases were the result of externalities and the production of new knowledge (these results being implicit in their assumptions), there was emerging amongst those organisations whose function it is to promote growth in developing economies a rediscovery of Adam Smith’s perception that the most important ingredients in any formula for economic growth are institutional. 17 The Pretence of Knowledge 39 Econometrics One other postwar development epitomised the pseudo-scientific characteristics of equilibrium theory.

As Abramovitz has observed: 38 Rethinking Economic Behaviour . . 16 What seems particularly inappropriate in applying equilibrium methods to the process of economic growth is that, being a longterm process, it is characterised by cumulative rather than repetitive change to an even greater degree than other economic phenomena. Thus the proper methods of study should be closer to history than to mechanics. In the case of the endogenous growth model, the reduction of the complex interactions of factors involved in the process by which investment in research and development is turned into improvements in productivity, with all the variable time lags and uncertainties, to a single mechanical relationship between two aggregate variables might be acceptable as a backof-an-envelope calculation but can hardly be regarded as a contribution to scholarship.

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