New Approaches to Macroeconomic Modeling: Evolutionary Stochastic Dynamics, Multiple Equilibria, and Externalities as Field Effects Review

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(More customer reviews)Can statistical physics methods be used to help understand and predict the behaviors of groups of people over time? Aoki, a well-known expert in optimal control theory and dynamic models applied to economic models, suggests that they can. This book offers an inspiring medley of technical ideas and probabilistic models -- based on analogies to spin glasses, self-organizing physical systems, and key ideas of statistical mechanics -- to make plausible the idea that behaviors of aggregates of rational actors, too, can be predicted statistically. (Enthusiasts of Isaac Asimov's Foundation series, take note!)
The book is worth studying carefully for its ideas and models, even though its main thesis may not ultimately be convincing. It presents and illustrates modeling techniques that will be useful to marketing scientists and quantitative social scientists as well as to economists. A central idea is that individual behaviors can be represented by transitions among discrete choices or microstates, while the rates at which these transitions take place may depend on the frequency distribution of the whole population (and/or of local subpopulations)among microstates. The result is an adaptive process in which individual choices define the aggregate macrostate (i.e., the frequency distribution of individuals of various distinguished types among microstates), which in turn affects subsequent choices. Whether this adaptive process will reach any equilibrium, and, if so, which one and how and when, are principal concerns addressed through various well-analyzed models.
The techniques introduced and illustrated are primarily, partition function and stochastic process methods, including jump processes, diffusion processes, and martingale methods. Other ideas, from critical process theory, stochastic epidemics, large deviations, and maximum entropy econometrics and physics, are introduced and exploited where appropriate. The practical value of such methods to modelers cannot be denied. Aoki's main theme, that such techniques can be used to predict behaviors of populations of individuals, is not buttressed by any real applications. The models presented may be too simple to capture what many social scientists would consider essential real-world complexities, such as the generation of new player types and roles and the effects of boundaries and spatial distributions of resources and environments on populations over time. Nonetheless, the collection of ideas and methods presented, and the overall vision of a social science in which inter-individual heterogeneities and choices are accounted for by discrete transitions, makes this monograph exciting and valuable.
Note: Readers who enjoy this book may also want to read T.C. Schelling's Micromotives and Macrobehavior. Schelling's book is much less technical, but follows some of the same big ideas and applies them to many homely, compelling examples.

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This book contributes substantively to the current state of the art of macroeconomic modeling by providing a method for modeling large collections of heterogeneous agents subject to nonpairwise externality called field effects, i.e. feedback of aggregate effects on individual agents or agents using state-dependent strategies.Adopting a level of microeconomic description that keeps track of compositions of fractions of agents by "types" or "strategies", time evolution of the microeconomic states is described by (backward) Chapman-Kolmogorov equations.

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