Scale Invariance, Bounded Rationality and Non-Equilibrium Economics

TL;DR

This paper introduces a scale-invariant, agent-based economic model analyzing fluctuations, market transitions, and instabilities, including monetary phases and speculative bubbles, using methods inspired by physics perturbation theory.

Contribution

It develops a novel framework combining scale invariance and near-equilibrium analysis to study complex market dynamics and phase transitions in decentralized and centralized economies.

Findings

Identification of spontaneous monetary phase transition

Demonstration of phase instability and potential for bubbles

Analysis of relaxation dynamics towards equilibrium

Abstract

We study a class of heterogeneous agent-based models which are based on a basic set of principles, and the most fundamental operations of an economic system: trade and product transformations. A basic guiding principle is scale invariance, which means that the dynamics of the economy should not depend on the units used to measure the different products. We develop the idea of a "near-equilibrium" expansion which allow us to study the dynamics of fluctuations around economic equilibrium. This is similar to the familiar "perturbation theory" studied in many areas of physics. We study some simple models of both centralized and decentralized markets. We show the relaxation to equilibrium when appropriate. More interestingly, we study a simple model of a decentralized market that shows a spontaneous transition into a monetary phase. We use mean field theory analysis to provide a statistical interpretation of the monetary phase. Furthermore, we show that such phase can be dynamically unstable. Finally, we study some simple centralized financial markets, one of which shows a speculative bubble and a crash.