Economic Complexity and Equilibrium Illusion Essays on market instability and macro vitality 1st editon by Ping Chen ISBN 0415746841 9780415746847

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ISBN 10: 0415746841
ISBN 13: 9780415746847
Author: Ping Chen

Economic Complexity and Equilibrium Illusion Essays on market instability and macro vitality 1st Table of contents:

Part I Methodological review

2 Equilibrium illusion, economic complexity, and evolutionary foundation in economic analysis1

2.1 Introduction

2.2 From methodological debate to fundamental thinking in economic complexity

2.3 The economic beliefs and equilibrium illusions in economics

2.3.1 The belief in self-stabilizing markets

2.3.1.1 The unique equilibrium in linear demand and supply curves

2.3.1.2 General equilibrium without non-convexity, social interactions, and product innovations

2.3.1.3 The Frisch utopia of noise-driven persistent cycles: a perpetual motion machine of the second kind

2.3.1.4 The Friedman spirits of the risk-free arbitrager for efficient market argument

2.3.1.5 The whitening filter of first differencing and illusion creator in econometrics

2.3.2 The belief in social equilibrium and institutional convergence

2.3.2.1 The Lucas fantasy of microfoundations and rational expectations

2.3.2.2 Structural instability of the random walk and the geometric Brownian motion models as a result of the representative agent model in the stock market

2.3.2.3 Monetary neutrality and the Ricardo device: a fiction without conflicting interests

2.3.2.4 The Coase world with zero-transaction costs

2.3.2.5 The myth of knowledge accumulation and endogenous growth without ecological constraints

2.4 Computational experiments in testing economic theories

2.4.1 Noisy equilibrium vs. persistent cycles

2.4.2 Representative agent vs. collective movements

2.4.3 Economic interruption and economic depression

2.4.3.1 Economic interruption and market resilience

2.4.3.2 Meta-stability in multiple equilibriums

2.5 Natural experiments: lessons from the Great Depression and Transition experiments

2.5.1 Instability and complexity in price mechanism

2.5.1.1 Price structure and network effect

2.5.1.2 Product cycle and adjustment speed

2.5.2 Macrofoundation of micro behavior and soft-budget constraints in financial market

2.5.2.1 Equilibrium pricing vs. disequilibrium growth in transition strategies

2.5.2.2 Hard-budget constraints for firms and the credit crunch during recession

2.5.3 Structure of mixed economies and essence of institutional changes

2.5.3.1 Trade-offs between private and non-private economies

2.5.3.2 The driving force of institutional changes: top-down design vs. decentralized experiments

2.6 Evolutionary perspective as a better alternative in theoretical foundation of economics

2.6.1 Biophysical foundation and mathematical framework

2.6.2 Three levels of economic structure: micro-meso-macro in economic organism

2.6.3 Unsolved problems in theory and policy

2.6.3.1 Population dynamics with resource constraints and culture factors

2.6.3.2 Trend-cycle separation in growth dynamics and scenario analysis in production, distribution, and development

2.6.3.3 Pricing strategies and price-expectation dynamics

2.6.3.4 Origin of the coordinated hand and disciplined hand

2.6.3.5 Rethinking human nature and economic wellbeing

2.7 Conclusion

Acknowledgment

3 Evolutionary economic dynamics

3.1 Introduction: bridge the gap between economics and biology

3.2 Endogenous fluctuations and statistical nature in macro dynamics: from equilibrium noise to persistent cycles

3.2.1 The Copernicus problem in macro econometrics: linear and nonlinear trends in macroeconomic indexes

3.2.2 Equilibrium illusion in business-cycle theory: the challenge of large and persistent fluctuations

3.2.2.1 The Frisch fantasy of noise-driven cycles: a perpetual motion machine of the second kind?

3.2.2.2 The Lucas issue of microfoundations and the Principle of Large Numbers

3.2.2.4 Monetary neutrality and coordination cost: the Ricardo device, the Loschmidt paradox, and uneven distribution

3.2.3.1 The uncertainty principle and the Gabor wavelet

3.2.3.2 Separating noise and cycles in time—frequency space

3.2.3.3 Natural experiments with an economic clock: intrinsic instabilities and external shocks in evolving economies

3.2.3.4 Structural instability and market resilience

3.3 Market share competition, excess capacity, and creative destruction: behavioral dynamics and the complexity in the division of labor

3.3.1 Resource-limited growth and market-share competition: disruptive technology and economic metabolism

3.3.1.1 Logistic growth and dynamic return to scale

3.3.1.2 Two-species competition and the source of excess capacity

3.3.1.3 The Lotka- Volterra wavelet and the stages of economic growth

3.3.2 The risk attitude and corporate culture in behavioral dynamics

3.3.2.1 Learning by trying: risk-aversion vs. risk-taking behavior

3.3.2.2 Resource-saving and resource-consuming cultures

3.3.2.3 Market extent, resource variety, and economy of scale and scope

3.3.2.4 The latecomer ‘s opportunity and entrepreneur ‘s advantage

3.3.2.5 Progressive culture and a pluralistic society

3.3.2.6 The culture dimension and the thermodynamics of evolution

3.3.2.7 The number of resources and the competition exclusion principle

3.3.3 The complexity puzzle and the Smith dilemma

3.3.3.1 Monolithic society and stability under environmental shocks

3.3.3.2 The trade-off between stability and complexity and a two-way evolution of division of labor

3.3.3.3 The generalized Smith theorem: the division of labor is limited by the market extent, resource variety, and environment fluctuations

3.4 Conclusion: understanding market resilience and economics complexity

Acknowledgments

Part II Macro vitality

4 Empirical and theoretical evidence of economic chaos1

4.1 Introduction

4.2 Simple pictures of deterministic and stochastic processes

4.2.1 Phase space and phase portrait

4.2.2 Long-term autocorrelation

4.3 Testing economic chaos in monetary aggregates

4.3.1 Monetary aggregates

4.3.2 Observation reference and first difference detrending

4.3.3 Log-linear detrending and growth cycles

4.3.4 Empirical evidence of deterministic and stochastic processes

4.3.5 The numerical maximum Lyapunov exponent

4.3.6 The correlation dimension

4.3.7 Some remarks about numerical algorithms

4.4 A delayed feedback model of economic growth

4.4.1 Continuous versus discrete time

4.4.2 Deviations from the trend and feedback behavior

4.4.3 The flow diagram and the symmetric control function

4.4.4 Theperiod-doubling route to chaos

4.4.5 Phase transition and the pattern stability

4.4.6 Simulating empirical cycles

4.4.7 Implication for forecasting and control policy

4.5 Summary and discussion

Acknowledgments

5 Searching for economic chaos

5.1 Introduction

5.2 Distinguishing between deterministic and stochastic processes

5.2.1 Phase space and phase portrait

5.2.2 Long-term autocorrelations

5.2.3 The numerical maximum Lyapunov exponent

5.2.4 The correlation and fractal dimensions

5.3 Pitfalls in statistical testing for chaos

5.3.1

5.3.1.1 Sparse data

5.3.1.2 Noise

5.3.1.3 Continuous and discrete time and the time unit

5.3.2 Limitations of statistical inference

5.3.2.1 Inseparability of nonlinear systems

5.3.2.2 Changing strangeness under the residual test

5.3.2.3 The pitfall of linear stochastic filter in detecting deterministic chaos

5.3.2.4 The roots of non-stationality and non-normality

5.3.2.5 Some conclusions about numerical algorithms

5.4 Testing economic chaos in monetary aggregates

5.4.1 Data processing and path smoothing

5.4.2 Detrending methods and attractor models

5.4.3 Empirical evidence of deterministic and stochastic processes

5.4.3.1 The numerical maximum Lyapunov exponent and autocorrelations

5.4.3.2 The correlation dimension

5.5 A continuous-time model of growth cycles with delayed feedback and bounded expectations

5.5.1 Deviations from trend and time delay in feedback

5.5.2 What can we learn from the model

5.5.2.1 Phase transition and pattern stability

5.5.2.2 Long wave and short cycles

5.5.2.3 Simulating empirical cycles and testing numerical algorithms

5.5.2.4 Implications for forecasting and control policy

5.5.3 Linear approximations of nonlinear model

5.6 Brief summary and future directions

Acknowledgments

Appendix A: a direct test for determinism in monetary time series

Appendix B: testing correlation resonances in searching for chaos

6 A random walk or color chaos on the stock market?

6.1 Introduction

6.2 Roles of time scale and reference trend in representation of business cycles

6.3 Trend cycle decomposition and time window in observation

6.4 Instantaneous autocorrelations and instantaneous frequency in time-frequency representation

6.5 Time variant filter in Gabor space

6.6 Characteristic frequency and color chaos

6.7 Risk, uncertainty, and information ambiguity

6.8 Persistent cycles and the Friedman paradox

6.9 Conclusion

6.10 Appendix: the uncertainty principle and Gabor space

Acknowledgments

7 Trends, shocks, persistent cycles in evolving economy

7.1 Introduction

7.2 Time-frequency representation and complex economic dynamics

7.2.1 Time-frequency distribution and the uncertainty principle

7.2.2 Time-frequency analysis of noise and chaos

7.3 Trend-cycle decomposition and cycle identification

7.3.1 Correlation cancellor (FD) and trend smoothing filter (HP)

7.3.2 Correlation analysis of noise and cycles

7.3.3 Characterizing the randomness and instability in the frequency domain

7.3.4 Color residuals and time unit consistency

7.4 Frequency patterns and dynamical changes in business cycles

7.4.1 Frequency stability and structural flexibility

7.4.2 Frequency evolution and pattern classification

7.4.3 Breaking points and propagation mechanism

7.4.4 Oil shocks, stock market crash, and the Vietnam War

7.5 Theoretical implications of persistent cycles and economic instabilities

7.5.1 Characteristic frequencies and endogenous cycles

7.5.2 Time scale and observation reference in measurement and theory

7.5.3 Dynamical instability and information ambiguity

7.7 Brief conclusion: evolving economy and complex dynamics

Acknowledgments

8 Origin of division of labor and stochastic mechanism of differentiation1

8.1 Introduction

Part III Micro interaction and population dynamics

8.2 A behavioral model in learning competition: the origin of division of labor

8.2.1 An information diffusion model

8.2.2 A learning competition model

8.3 The stochastic mechanism for the breakdown of Gaussian distribution in social differentiation

8.3.1 A stochastic model of multi-staged growth

8.3.2 The bifurcation at the last meal

8.4 Concluding remarks

Acknowledgments

9 Imitation, learning, and communication

9.1 Introduction

9.2 Stochastic models for imitation and collective behavior

9.3 Ising model of collective behavior

9.4 Socio-psychological model of collective choice

9.5 Potential applications of collective choice

10 Needham’s question and China’s evolution

10.1 Introduction: Needham’s question and Prigogine’s theory

10.2 Openness of the economy and the stability of agriculture

10.3 Historical bifurcations caused by fluctuations in the environment

10.4 The Darwin dilemma concerning complexity and stability and cultural factors in learning and competition

10.5 Some observations on China’s reform and the Beijing crisis

10.5.1 The origin of socialism and the cost of capitalism

10.5.2 Volatile interactions between the international environment and domestic balance

10.5.3 The ecological and economic sources of cultural and political orientation

10.5.4 The predicament of rational sequence in China’s reform: which should come first, economic reform or political reform?

11 China’s challenge to economic orthodoxy

11.1 Introduction

11.2 Rational design versus decentralized experiment

11.3 Decentralized social change and paradigm conflict in economic science

11.4 Nonequilibrium economics, positive feedback, and growth

Acknowledgments

Part IV Equilibrium illusion and meso foundation

12 The Frisch model of business cycles

12.1 Introduction

12.2 Some historical notes on the Frisch model of business cycles

12.3 Structural instability of linear deterministic cycles

12.3.1 Samuelson model in discrete time

12.3.2 Samuelson model in continuous time

12.4 Brownian motion for a harmonic oscillator

12.5 US business cycles as Brownian motion of a harmonic oscillator

12.6 Conclusion

Acknowledgment

13 Microfoundations of macroeconomic fluctuations and the laws of probability theory

13.1 Introduction

13.2 Some statistical background

13.2.1 The relative deviation of a positive random variable

13.2.2 The relative deviation in a system of two positive variables

13.2.3 The relative deviation in a system of many positive variables

13.2.4 A nonstationary stochastic process

13.2.5 Implied number of degrees of freedom and potential relative deviation

13.3 The empirical order of relative deviations and theoretical implications for business cycles

13.3.1 Detrending methods and observing windows

13.3.2 Potential sources of business cycles

13.4 Fundamental issues in microfoundations approach and rational expectations

13.4.1 Essential difference between one-body and many-body problems

13.4.2 The statistical nature of economic information and market diversity

13.4.3 Intertemporal substitution, relative price movements, and arbitrage opportunities

13.4.4 Path variability and the Lucas critique

13.4.5 Multiple time scales, information complexities, and the neutrality of money

13.5 Conclusion

Acknowledgment

14 Complexity of transaction costs and evolution of corporate governance1

14.1 Introduction

14.2 Unsolved issues in corporate governance

14.3 Fundamental problems in the Coase approach of transaction costs

14.4 China’s experiences in corporate governance

14.5 Life cycle theory of firm development and symmetry breaking in social evolution

14.6 Conclusion

Acknowledgments

Part V Market instability, natural experiments, and government policy

15 Market instability and economic complexity

15.1 Introduction: the forgotten lessons from the Great Depression

15.2 The stylized facts in the Great Depression and the Transition Depression

15.3 Monetary power and trade imbalance in nonequilibrium world

15.4 Complex dynamics, path dependence, and learning space

15.4.1 Inflation constraints and path-dependence

15.4.2 Complex patterns under a dual-track price system: production cycle and roundabout production

15.5 Conflicting analysis in equilibrium thinking and economic policy

15.5.1 Hard-budget constraints and credit crunch

15.5.2 The MM theorem and the property rights school

15.5.3 Privatization vs. competition policy

15.6 Conclusion

Acknowledgments

16 From an efficient to a viable international financial market1

16.1 Introduction

16.2 Empirical observations and policy implications: econometric illusion in the efficient market and an alternative strategy for a viable market

16.2.1 Endogenous nature of US persistent business cycles and a new perspective on risk management

16.2.2 The meso foundation of macro fluctuations and competition policy in the global economy

16.2.3 Rethinking the theoretical foundation of trend collapse, higher moment risk and the financial crisis in the derivatives market

16.2.4 Economic complexity of transaction costs and the selective mechanism of industrial organization

16.2.5 The danger of Friedman ‘s theory of exogenous money and the tri-polar world of the Great Depression

16.3 China’s development and a changing world order

16.3.1 The American disease and the China puzzle

16.3.2 China’s realistic role in a changing world order

16.3.3 Basic considerations in reforming the international financial market

16.4 Conclusion

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