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Agent-based modeling offers a more realistic approach to economic systems than traditional equilibrium models. New approachs including generative agents (ABM+LL

Agent-based modeling offers a more realistic approach to economic systems than traditional equilibrium models. New approachs including generative agents (ABM+LLMs) are promising. J. Doyne Farmer's recent book "Making Sense of Chaos: A Better Economics for a Better World" is a great reading for those interested in this field. https://www.amazon.com/Making-Sense-Chaos-author/dp/0241201977 https://www.amazon.com/Making-Sense-Chaos-author/dp/02412019...

lamename 2y ago
Neat, now I'm curious. Can you explain why?
- dlojudice 2y ago
  Agent-based models capture the messy reality of economic systems by simulating heterogeneous actors making local decisions with imperfect information, allowing for emergent phenomena, non-linear dynamics, and adaptation over time, precisely the features that equilibrium models abstract away through unrealistic assumptions of perfect rationality, homogeneity, and static optimization that fail to predict or explain crises, bubbles, and technological disruptions that define actual economic evolution. To be honest, ABMs aren't perfect either. They face challenges with calibration, validation against empirical data, computational limitations, etc.
  - neilwilson 2y ago
    Not to mention non-ergodicity, path dependency and hysteresis.
jgord 2y ago
stands to reason .. if we assume the actual economy is full of autonomous agents [ people, companies, governments ] acting largely in self interest.
- jgord 2y ago
  Demis Hassabis seems to describe a process whereby an AI can accelerate the results of billions of simulations by efficiently encoding that predictive behavior.. making something that is computationally expensive to simulate perhaps several orders of magnitude more tractable. This has proven out in the acceleration of actual weather prediction using AI which means it can be feasibly run on a single desktop machine. I think its not a stretch to imagine that a) there is a way to simulate the whole economy at the same level of quality as a weather or climate simulation b) AI can accelerate the computations to the point they can run on accessible hardware. We need this whole economy simulation ... to answer practical questions such as - if we dole out UBI to everyone to cover basic living costs, will that simply result in the cost of rent going up to absorb the whole amount ?
  - LeonB 2y ago
    > if we dole out UBI to everyone to cover basic living costs, will that simply result in the cost of rent going up to absorb the whole amount? For that to be true, rent-seeking would have to literally capture all surplus. In which case UBI wouldn’t be an option in the first place. The marginal increase in the purchasing power of someone who went from having $0 to $n would always be greater than the increase in purchasing power for someone who went from $1 billion to $1 billion + n - even with inflation.
  - tbrownaw 2y ago
    > We need this whole economy simulation ... to answer practical questions such as - if we dole out UBI to everyone to cover basic living costs, will that "How will humans (in aggregate) behave under novel conditions?" Models tend to behave poorly when asked about things outside their training distribution.
airstrike 2y ago
Thanks for the link. If anyone has additional links, including scholarly references, this is an area of huge interest to me but I wouldn't know where to turn to for the latest research and models.
huitzitziltzin 2y ago
No. There is no macroeconomist who wouldn’t adopt these approaches if they were “better”. Agent based models have been around since the 1980’s at least. No one uses them in central banks, no one uses them in industry, and you can be very confident that they’ve tried.
- dlojudice 2y ago
  Sure, they've tried but it does not mean it hasn't evolved https://www.centralbanking.com/central-banks/economics/macroeconomics/7972592/agent-based-models-come-of-age https://www.centralbanking.com/central-banks/economics/macro... https://www.bankofengland.co.uk/working-paper/2025/agent-based-modeling-at-central-banks-recent-developments-and-new-challenges https://www.bankofengland.co.uk/working-paper/2025/agent-bas...
  - noitpmeder 2y ago
    Sure, just don't necessarily sell them as "more realistic" if they're not performing as well in real situations
    - littlestymaar 2y ago
      Its not like the classical models are any good in terms for performance in real situations, as they have proven to be unable to predict anything over the past 40 years better than a basic linear extrapolation from the trend would have. Current macro-economics models are arguably not much better than a broken clock in terms of predicting power.
- abdullahkhalids 2y ago
  Neural network based computer vision models also existed for decades. They weren't very good and weren't really used, till early 2010s when people figured out how to make them work. Now they are vastly superior to all the other ways. This is quite common across the sciences. Some technique doesn't seem to work because of missing crucial insights or technology. Then somebody fills the gaps, and the technique works. These types of models in economics might or might not become viable at some point.

lamename 2y ago

Neat, now I'm curious. Can you explain why?

dlojudice 2y ago
Agent-based models capture the messy reality of economic systems by simulating heterogeneous actors making local decisions with imperfect information, allowing for emergent phenomena, non-linear dynamics, and adaptation over time, precisely the features that equilibrium models abstract away through unrealistic assumptions of perfect rationality, homogeneity, and static optimization that fail to predict or explain crises, bubbles, and technological disruptions that define actual economic evolution. To be honest, ABMs aren't perfect either. They face challenges with calibration, validation against empirical data, computational limitations, etc.
- neilwilson 2y ago
  Not to mention non-ergodicity, path dependency and hysteresis.

jgord 2y ago

stands to reason .. if we assume the actual economy is full of autonomous agents [ people, companies, governments ] acting largely in self interest.

jgord 2y ago
Demis Hassabis seems to describe a process whereby an AI can accelerate the results of billions of simulations by efficiently encoding that predictive behavior.. making something that is computationally expensive to simulate perhaps several orders of magnitude more tractable. This has proven out in the acceleration of actual weather prediction using AI which means it can be feasibly run on a single desktop machine. I think its not a stretch to imagine that a) there is a way to simulate the whole economy at the same level of quality as a weather or climate simulation b) AI can accelerate the computations to the point they can run on accessible hardware. We need this whole economy simulation ... to answer practical questions such as - if we dole out UBI to everyone to cover basic living costs, will that simply result in the cost of rent going up to absorb the whole amount ?
- LeonB 2y ago
  > if we dole out UBI to everyone to cover basic living costs, will that simply result in the cost of rent going up to absorb the whole amount? For that to be true, rent-seeking would have to literally capture all surplus. In which case UBI wouldn’t be an option in the first place. The marginal increase in the purchasing power of someone who went from having $0 to $n would always be greater than the increase in purchasing power for someone who went from $1 billion to $1 billion + n - even with inflation.
- tbrownaw 2y ago
  > We need this whole economy simulation ... to answer practical questions such as - if we dole out UBI to everyone to cover basic living costs, will that "How will humans (in aggregate) behave under novel conditions?" Models tend to behave poorly when asked about things outside their training distribution.

airstrike 2y ago

Thanks for the link. If anyone has additional links, including scholarly references, this is an area of huge interest to me but I wouldn't know where to turn to for the latest research and models.

huitzitziltzin 2y ago

No. There is no macroeconomist who wouldn’t adopt these approaches if they were “better”. Agent based models have been around since the 1980’s at least. No one uses them in central banks, no one uses them in industry, and you can be very confident that they’ve tried.

dlojudice 2y ago
Sure, they've tried but it does not mean it hasn't evolved https://www.centralbanking.com/central-banks/economics/macroeconomics/7972592/agent-based-models-come-of-age https://www.centralbanking.com/central-banks/economics/macro... https://www.bankofengland.co.uk/working-paper/2025/agent-based-modeling-at-central-banks-recent-developments-and-new-challenges https://www.bankofengland.co.uk/working-paper/2025/agent-bas...
- noitpmeder 2y ago
  Sure, just don't necessarily sell them as "more realistic" if they're not performing as well in real situations
  - littlestymaar 2y ago
    Its not like the classical models are any good in terms for performance in real situations, as they have proven to be unable to predict anything over the past 40 years better than a basic linear extrapolation from the trend would have. Current macro-economics models are arguably not much better than a broken clock in terms of predicting power.
abdullahkhalids 2y ago
Neural network based computer vision models also existed for decades. They weren't very good and weren't really used, till early 2010s when people figured out how to make them work. Now they are vastly superior to all the other ways. This is quite common across the sciences. Some technique doesn't seem to work because of missing crucial insights or technology. Then somebody fills the gaps, and the technique works. These types of models in economics might or might not become viable at some point.