Economic Dynamics / Teaching Economics

Henri Meyer
Junior Member
Posts: 14
Joined: Fri Mar 29, 2002 3:39 am

Economic Dynamics / Teaching Economics

Post by Henri Meyer »


I would like to strike up an email exchange regarding
a certain economic modeling capability that is being
discussed at
starting at about Message 434. This model might be
described as synthesizing the dynamics of Forrester,
the generality of Leontief, and the optimality of
DeBreu. It has drawn a few mainstream economists out
onto the field of dynamics for a discussion of basic
theory. The upshot of this discussion would seem to
be that the essential aims of economic science were
never going to be realized until its dynamics were
gotten right – thus upsetting the currently
fashionable general equilibrium paradigm, even while
preserving its descriptive criteria as the goal by
which economic adjustment is controlled.

These models also seem to be very easy to teach, as
they are being discussed with considerable
intellectual sophistication by students using a sort
of valley-girl language. The models are certainly
simple owing to their fractal design (the economic
fractal being a cell of an I/O matrix). I am
interested in using this technology to create
instructional “video games” for teaching basic
economic principles. This teaching would subsume that
economic principles are only realizable in a dynamic

Henri Meyer

Bruce Hannon
Junior Member
Posts: 14
Joined: Fri Mar 29, 2002 3:39 am

Economic Dynamics / Teaching Economics

Post by Bruce Hannon »

Henri, you might also want to talk to Prof. N. Talbot Page at Browns
dept of econ. He developed something along the lines you mention.
Matthias Ruth and I have a book on the optimal use of natural
resources: Modeling Dynamic Economic Systems (Springer Verlag),
including a good bit of microeconomic models by way of introduction.
We use STELLA as the basic modeling program.

From: Bruce Hannon <>

Bruce Hannon, Jubilee Professor
Liberal Arts and Sciences
220 Davenport Hall, MC 150
University of Illinois
Urbana, IL 61801
reply to:

"George Backus"
Junior Member
Posts: 14
Joined: Fri Mar 29, 2002 3:39 am

Economic Dynamics / Teaching Economics

Post by "George Backus" »

One of the great problems in economic practice is the utility of equilibrium
analysis. Although computationally intensives, the approach is easy to
apply and logically easy to defend: "This is the most efficient solution
and, therefore, it is the way clever humans will make the world work."
(Sometimes I think Voltaire wrote Candide to mock economists: "We live in
the best of all possible worlds.") In seriousness, the world can be defined
as being at some finite distance from the optimal. Knowing the optimal
(equilibrium) conditions give and adequate approximation to reality that is
much easier to derive than a disequilibrium description of reality. The
implicit assumption is then that it is not worth the effort to describe
reality more realistically -- and that is where SD and economics depart

Nonetheless, some areas of econometrics have made great strides in
describing the disequilibrium dynamics. Cointegration (the separate works
of Clive Granger and David Hendry) comes a long way in terms of rigorously
defining the dynamic "causes" of change. Only two limitations come to mind
with this approach. First is that the work is often atheoretical. The way
the parameters come out is the way "truth" is. The fits to history are near
perfect and forecasts are almost as close. Why argue with success. Second,
there is an assumption of long-term equilibrium. (Each equation has a
dynamic and an equilibrium part. The equilibrium part is the called the
"error correction" and compares the actual conditions to the "what should
be" condition and uses a simple first-order delay (SMOOTH) to bring the
solution to the long term equilibrium when the transient goes away. There
is one delay and a single time constant. The multiplicity in time constants
is what makes our models produce most of their insights. Still
cointegration is a giant leap and valuable to SD as well as to mainstream

Second, Qualitative Choice Theory via Daniel McFadden (See my attractiveness
note) is finally being accepted in the economic community. The defendable
and quantifiable use of preferences (not just price) to describe
bounded-rationality choice is also a major step in reconciling economics
with reality.

Lastly, this years Nobel Prize winners in economics focuses on imperfect
information (This type of blasphemy would be grounds for a firing squad
execution in early economic times.) Imperfect information means we have to
form perceptions, upon which we make decisons. The manipulation of
information then produces an added vehicle to drive the dynamic evolution of
a (economic) system. This leap from perfect absolutism to perception in
economic choice vindicates our years of dealing with delayed perceptions.

Thus, it would appear that there is hope for our lost comrades, brainwashed
in purist economics. Nonetheless, there is a long war yet ahead. And it may
be that we are not really winning, but rather falling behind in the battle.
Recent, solid work in economics that advances SD appears to be ignored by
the SD community. Are we too busy dealing with the overabundance of
problems where the basic SD concepts still have so much to offer? Have we
become nostalgic that our old ways are good enough? Change is the only sign
of life. We may want to again raid the economic camp, take the spoils of
value, and then shape them for our own needs. I think we still have as much
to learn from them as they from us.


George Backus
Policy Assessment Corporation
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