Evolution of the modelers model

The economic system evolves over time, in its different manifestations. Time is generally considered as an extra-economic and exogenous variable supporting the evolution of the system. It is considered as continuous for many theoretical models, since most phenomena display a great deal of inertia. Economic growth, for example, is quite regular, even if some accelerations and decelerations are observable. But time can be discrete when exogenous phenomena create natural periods which influence economic operations. Agricultural production, for example, follows annual climatic and vegetative cycles, and market prices fluctuate accordingly. Time may also be discrete (and even endogenous) when economic events create discontinuities. For instance, the successive oil crises induce successive regimes in the economy.

The main properties of basic economic entities may change over the short-term, shifting from one class to another in the basic taxonomies. Goods evolve in terms of their quality through technological and social innovation. The technical or esthetical characteristics of cars, for example, are continually being modified. Agents see their determinants modified, due to exogenous factors, past experience or age. This is especially true for preferences, which vary at long term as to the relative weight attached to partial criteria, discount rates or aspiration levels. For instance, a producer may change his preferences following the discovery of new technological opportunities and a consumer may change his after experiencing a new product. institutions change their nature and even their function. money, for example, successively adopts different supports while keeping its role as a means of transaction. Relations are redistributed as regards their configurations and supports. For instance, coalitions between airlines are reconsidered and reshaped in changing circumstances.

The basic entities also evolve through the creation of new kinds and the extinction of old ones, giving rise to new taxonomies. New sorts of goods become available while old ones disappear. For instance, new labor qualifications are defined, traditional craftsmen being replaced by computer specialists. New types of agents enter the market while others exit. For instance, temporary employment agencies are appearing while traditional unions disappear. New kinds of institutions are created or result from the splitting or unification of old ones. For instance, new financial markets and new auction mechanisms are set up while old tax systems are reshaped. Finally, new forms of relations appear while old ones are abandoned. The web, for instance, has created a completely new system of relations on a worldwide scale.

8.1 Evolution of the modeler's model

The evolution of the economic system is subject to nested time scales, since some variables adapt faster than others. For instance, institutions are more stable than economic agents, economic agents are more stable than their determinants, and their preferences are more stable than their representations. The time scales are generally associated with specific relations between variables. The slow variables influence the fast variables over the short term, while the fast variables shape the slow variables over the long term. For instance, a consumer chooses the goods he buys with reference to his present preferences, but the experience of consumption modifies his preferences over the long term. Even more, fast variables establish short-term equilibria while slow variables establish long-term equilibria. For example, producers determine their production levels on a short-term basis, but adapt their goods, technologies or prices over the long-term.

For the modeler, the transformation of entities is generally attributed to explaining factors which may be either causal or intentional. For instance, new means of transportation act on economic activity in a causal way, while new technological devices act on a firm's structure in an intentional way. Similarly, the explaining factors may be extra-economic or economic. For instance, new consumers appear for purely demographic reasons while new producers appear when the economy offers opportunities for profit. Globally, all factors act together in a systemic way and contribute to the production of economic effects regulated by positive or negative feedbacks.

A special feature of evolution is the existence of 'emergent phenomena' arising at a social level. An emergent phenomenon is a phenomenon which looks surprising to the modeler in relation to the basic entities, but may nevertheless be explained. emergence is synchronic when it results instantaneously from the basic entities and diachronic when it appears progressively. It is unidirectional when it results solely from the bottom-up influence of the basic entities and bi-directional when there is a top-down feedback on the basic entities. An emergent phenomenon can be of different kinds, such as a statistical distribution of entities, a relational network between entities or even new entities. For instance, consumer income tends to follow a Pareto law, cartels of producers are progressively formed or new labor institutions are created.

In the employer-employee example, agents' preferences are adjusted over the short term according to the easiness of finding a job. If the employer can easily find another employee prepared to work at the given wage, he lowers his reserve wage, and vice versa. If the employee can easily find a new position, he increases his reserve wage, and vice versa.

In doing so, both agents face low adjustment costs. Over the long term, more profound transformations are taking place. New types of agents like unions appear with the aim of mediating the relation between the supply and demand of labor. New institutional rules are expressed, especially as concerns the hiring and firing conditions of workers by firms.

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