Doyne Farmer
speaker
145 appearances
1 recordings
1 series
first heard Oct 2024
last heard Oct 2024
Doyne Farmer’s voice in public audio — every appearance, attributed to the second.
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Appearances
And so I think they were just, their hands were, they were in a straitjacket because you really had, it was a very explicitly disequilibrium event. And by the way, note that the two big, events that just happened in recent history, they're both this equilibrium of events.
Well, let me actually, I would say chaos has two things. One is sensitive dependence on initial conditions, which is what you just said. Things that are, you know, maybe so close together in the state space that you can't distinguish them. and therefore could correspond to the same measurement, could eventually become very far apart. So that's the sensitive dependence part.
But the other part is endogenous motion. Chaos is really, you can get endogenous motion two ways in dynamical systems, which is what I did before I started doing economics. And one is through oscillations, which don't need to be chaotic. But there's even a theorem that says once you have more than two frequencies oscillating, you almost always get chaos.
And so that says that if you're looking at an endogenous motion and it's not periodic or quasi-periodic with two periods, then it's got to be chaos. And that has not been absorbed by the economics community. And I think it's essential because basically if you want to have irregular business cycles that are endogenous, they must be chaotic. There's no other way to do it.
Yeah. Well, you know... Imagine we didn't have shocks somehow. We just live in a smooth world where we're not getting hit by surprises. Now, first of all, that doesn't mean we're not going to grow, right? That's another endogenous phenomenon.
It's also worth noting that the economy is full of feedbacks. That's one of Kane's brilliant insights, is that it requires demand to produce stuff. And if we have a situation where demand falls, for example, because people become unemployed, then we automatically are going to produce less, which means more people are going to become unemployed, which means we're going to have less demand.
So there are feedback loops like that in the economy. We do things to try and control those feedback loops. Another brilliant insight, the reason we have central banks is to do things like control interest rates and set the rules up, adjust rules as we need to keep the economy on a steady path. But if we do that imperfectly, then we might expect oscillations.
It's back to my point about the drunk driver on the windy road. Or in live lectures, I like to illustrate pole balancing. If you take a pole, it's gotta be about longer than three feet. You put it in your hand and you try and preserve the pole vertical. Maintain the pole as vertical as possible. Well, you can keep it more or less vertical, but it oscillates around vertical.
Now think of the pole as the economy and think of my hand as the central bank or all the planners that are making economic decisions all the time, trying to anticipate what the economy is going to do. You know, I decided to start a business. I decided to borrow money, lend money. All those things are like my hand trying to steer that pole now and,
Having the pole be perfectly vertical is keeping the economy on the nice steady path. So it deviates from vertical. I move my hand to correct. I tend to over or under correct. The pole then comes back toward the center, but I miss it as I come back. And so the pole endogenously wobbles back and forth. Now, to illustrate the difference in viewpoint,
If, again, that pole is the economy in a standard model, the story goes like this. I am a perfect pole balancer. So somebody knocks the pole. All right. So the pole gets knocked. I then calculate exactly how to move my hand to bring the pole smoothly to rest back at the top, maximizing consumption in the economy as I do it. And before I get to the top, somebody knocks the pole again.
Now, there can be elements of both stories. If I'm standing on a sailboat in a storm, I'm getting knocked all the time. That happens. But the point is, even if I'm standing on level ground, the pole's oscillating, and there's no breezes. There's no outside influences. It doesn't take outside influences. So that's the side of the story that's missing, whereas
Mainstream tries to explain everything in the way I said.
They are secretly unstable. But you have to assume, like with a rational decision maker, the rational decision maker can keep it pinned at its stable point.
And in their favor, taking their side of viewing things, they would say, well, maybe it's a good enough approximation to say it's an equilibrium. It's true. For some purposes, just saying the pole's vertical is good enough. If it's oscillating through a 10-degree angle, Well, 10 degrees, you know, it's not a big deviation.
But on the other hand, I would argue that, yeah, the economy tends to go up, but business cycles are the swerves around it, and that's the pole deviating from equilibrium.
Yeah, exactly right.
Well, Going back to what I described before is called an agent-based model. Agent-based models are just simulations on computers that involve agents who make decisions. And the challenging part is you have to figure out how those agents are making decisions. What decisions are they making in each situation? Now, first of all, take the example of the COVID model I made.
That model actually has no agents making decisions. Okay. Because all we have to understand is that industry can't produce if it doesn't have demand, labor, or the inputs it needs. So the production function, as it's called, the recipe for making stuff, does all the work. And the dynamics of the simulation, which tracks what everything's doing. Now, that's...
You often do need agents making decisions. That model, by the way, it worked. It was very simple and it didn't have prices, but that meant we couldn't address things like inflation. Now, we correctly guessed. We said, we think that's okay because for the first year or so, we don't think there's going to be inflation.
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