Fecund, Cheap and Out of Control: Heterogeneous Economic Agents as Flawed Computers vs. Markets as Evolving Computational Entities

Abstract

Our objective in this paper is to try and clarify what we perceive to be two major approaches to the problem of heterogeneous interactive economic agents, and argue in favor of the option which we feel has suffered relative neglect. The first option, perhaps best represented by the work of Alan Kirman, but found throughout the avant garde of the profession, tends to characterize agents as flawed automata or limited computational entities. Exercises in this tradition tend to produce simulations of specific economic situations. While there is much to admire in this program, we maintain that invoking a gestalt reversal which regards markets as computational devices, or literal formal automata, would achieve many of the same goals as the former research program, but would foster a rich and viable evolutionary economics to boot, one which would encourage both mathematical rigor and historical relevance, while avoiding many of the mechanistic excesses of neoclassical theory. Because the second path is the road less traveled, we survey what we call a computational understanding of markets, in order to provide a framework for incorporation of automata theory into a consciously evolutionary approach. For after all, what is the purpose of acknowledging the heterogeneity of agents, if not to then subject them to some form of selection process? We work through an explicit example of the automata theory approach, using two papers by Gode & Sunder [1993, 1997] to illustrate how some recent literatures could be recast into this novel approach. We close with the suggestion that it is experience with real-time markets being run as automata on computers, and not just some academic simulations, which will induce both economists and market participants to come to an appreciation of this kind of evolutionary economics.