Towards an Automata Approach of (Institutional) Economics
A computational approach towards economics potentially enriches economic science beyond increasing available mathematical techniques. Computational economics (CE) can foster a viable and rich institutional economics that encourages both mathematical rigor and historical relevance while avoiding the mechanical aspects of conventional neoclassical theory. Here we begin such an approach by regarding markets as computational entities or literal automata, where 'automata' refers to the formal notion of a computational device developed in computability theory (a branch of formal logic). We begin by introducing the reader to a literature that draws heavily on computability theory and from which we learn that an approach that is too abstract or context-insensitive is vulnerable to uncomputability results. For example, certain instances of neoclassical theory are possibly uncomputable, i.e., unable to be computed in countably many computations. These results suggest limited practical relevance to certain economic theories. We argue this critique can be avoided by specifying the context in which economic exchange takes place. Recasting the rules that constitute a market onto an automaton ensures that the economic context is explicitly defined, and further, it enables us rigorously to analyze the relevance of different market settings for economical performance. Already there is a large literature -- in particular in experimental economics and finance -- dealing with concepts similar to our suggested automata approach. In the case of the experimental literature, numerous experiments have been conducted that analyze the dependence of economical performance on the market institution. Similarly in the financial literature, as a consequence of the ongoing automation of markets, it has become an issue to analyze the relevance of different market designs. In other words, both situations treat economic performance as dependent on the context given by the market institutions. This paper takes this approach one step further by actually perceiving markets as computational entities. To illustrate this point we provide an example showing how markets can be encoded as automata.
|Date of creation:||01 Mar 1999|
|Date of revision:|
|Contact details of provider:|| Postal: CEF99, Boston College, Department of Economics, Chestnut Hill MA 02467 USA|
Web page: http://fmwww.bc.edu/CEF99/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- De Vany, A. & Walls, W.D., 1994. "The Law of One Price in a Network: Arbitrage and Price Dynamics in Natural Gas City Gate Markets," Papers 93-94-17, California Irvine - School of Social Sciences.
- Smith, Vernon L, 1985. "Experimental Economics: Reply," American Economic Review, American Economic Association, vol. 75(1), pages 264-72, March.
- John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
- Jack Hirshleifer, 1978.
"Natural Economy Versus Political Economy,"
UCLA Economics Working Papers
129, UCLA Department of Economics.
- Miller, Ross M., 1996. "Smart market mechanisms: From practice to theory," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 967-978.
- Herbert A. Simon, 1996. "The Sciences of the Artificial, 3rd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691914, March.
- Herbert A. Simon & Massimo Egidi & Ricardo Viale & Robin Marris, 1992. "Economics, Bounded Rationality and the Cognitive Revolution," Books, Edward Elgar Publishing, number 409.
- Timothy N. Cason & Daniel Friedman, 1997. "Price Formation in Single Call Markets," Econometrica, Econometric Society, vol. 65(2), pages 311-346, March.
- Dhananjay K. Gode & Shyam Sunder, 1997. "What Makes Markets Allocationally Efficient?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 603-630.
When requesting a correction, please mention this item's handle: RePEc:sce:scecf9:213. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.