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![Page 1: Advanced Theoretical Economics (3 Credits) Spring 2005 Prof. Chen Ping China Center for Economic Research, Peking University.](https://reader036.fdocuments.us/reader036/viewer/2022083008/56649ef25503460f94c03605/html5/thumbnails/1.jpg)
Advanced Theoretical Economics (3 Credits)
Spring 2005
Prof. Chen Ping
China Center for Economic Research, Peking University
![Page 2: Advanced Theoretical Economics (3 Credits) Spring 2005 Prof. Chen Ping China Center for Economic Research, Peking University.](https://reader036.fdocuments.us/reader036/viewer/2022083008/56649ef25503460f94c03605/html5/thumbnails/2.jpg)
Complex Economics:A General Framework of Micro Behavior,
Industry Competition, Macro Dynamics, and Organizational Evolution
• March 4, 2005
• Introduction: • Why we need a new general theory of
complex economics?
![Page 3: Advanced Theoretical Economics (3 Credits) Spring 2005 Prof. Chen Ping China Center for Economic Research, Peking University.](https://reader036.fdocuments.us/reader036/viewer/2022083008/56649ef25503460f94c03605/html5/thumbnails/3.jpg)
A Strange Puzzle in History of Science
• Most of people would agree that economic phenomena are more complicated than biology, chemistry, or physics,
• But ……, if you look at theoretical models in mainstream economics, it is much simpler than the simplest model in physics: the ideal gas model, which has 6N degree of freedom with N particles
• In contrast, the famous rational-expectations Lucas model of island economy with N agents, only 3 degree of freedom
• No variety of species as biology, no structure as chemistry, no vector as physics (only price – a single scalar)
![Page 4: Advanced Theoretical Economics (3 Credits) Spring 2005 Prof. Chen Ping China Center for Economic Research, Peking University.](https://reader036.fdocuments.us/reader036/viewer/2022083008/56649ef25503460f94c03605/html5/thumbnails/4.jpg)
The Limitation of Methodological Individualism
• The Robinson Crusoe economy > against basic observation in sociobiology: human nature is social animal (family, community, state, division of labor, fashion, group warfare, ...)
• The representative agent model in macro analysis > ignore conflicting interests in market economy (rich/poor, lender/borrower, ...)
• Assumption of greed/selfishness (maximizing personal utility/profit) > ignore rich human behavior (parent-care and love, kin and group solidarity, non-profit organizations, . . . .)
![Page 5: Advanced Theoretical Economics (3 Credits) Spring 2005 Prof. Chen Ping China Center for Economic Research, Peking University.](https://reader036.fdocuments.us/reader036/viewer/2022083008/56649ef25503460f94c03605/html5/thumbnails/5.jpg)
Conflicting with Basic Observations in All Other Disciplines in Natural & Social Sciences
• Microfoundations of macroeconomics > against the Principle of large numbers in probability theory
• Noise-driven model in econometrics > against the second law of thermodynamics in physics
• Convexity of utility function > against biological constraints with lower and upper boundaries
• Universal rationality > ignore varieties in personality, culture, and society
![Page 6: Advanced Theoretical Economics (3 Credits) Spring 2005 Prof. Chen Ping China Center for Economic Research, Peking University.](https://reader036.fdocuments.us/reader036/viewer/2022083008/56649ef25503460f94c03605/html5/thumbnails/6.jpg)
Conflicting with Common Experiences in Industrial Society
• Market stability condition excludes increasing return to scale > no room for scale and scope economy
• Perfect/complete market has no room for strategic pricing, product innovation, product cycle, business cycles, market crisis, even profit opportunities …
• Long-run equilibrium and rational expectations > average people are always right > no room for learning, leadership, power, inequality, wars, scientific discovery, technology revolution, social change, social conflicts, even environment change . . . .
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Roots of Limits in Economic Theory
• Mathematical difficulties in analyzing complex economic systems: non-stationary time series, many variables, short time windows, non-controllable events, participants/observers, …
• Narrow Anglo-Saxon experience (UK, US) with small army and limited war > Fantasy with free trade and invisible hand (Not experience from continental countries as France, Germany, Russia, or China)
• Mathematical decoration for ideological war: Subjective utility theory against objective labor value theory > polarized economic assumptions: classical vs. Marxism, “free market” vs. socialism/nationalism, …
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Historical Failures and New Economic Thinking
• British power based on navy and commerce > Adam Smith and classical economics
• Increasing inequality and rise of socialism > Marxism and rise of labor union
• World wars and the Great Depression > Emergence of socialist countries and Keynesian revolution (macroeconomics & welfare state)
• Stagflation and limits of big governments > Lucas counter-revolution, new classical & supply-side economics
• Financial crisis and stock market crash > rise of chaos theory and complexity science
![Page 9: Advanced Theoretical Economics (3 Credits) Spring 2005 Prof. Chen Ping China Center for Economic Research, Peking University.](https://reader036.fdocuments.us/reader036/viewer/2022083008/56649ef25503460f94c03605/html5/thumbnails/9.jpg)
Misguidance of Equilibrium Economics
• Perfect competition theory > irrelevance with industrial society and organizational innovations
• Efficient market hypothesis > financial liberalization• Solow’s neo-classical growth model > ignore of
industrial & education policy• Lucas revolution of rational expectations and
microfoundations deny the governments role and wealth effect of macro policy
• Coase Theory of transaction cost > firm theory without firm, institutional theory without history and conflicts > failure of shock therapy in Eastern Europe
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Mean vs. Foresight Economics
• Blind investment (efficient market hypotheses) vs. value-creative investment (entrepreneurship)
• Risk diversification (portfolio theory) without industry information vs. strategic investment (Warren Buffet, Jim Rogers) with in-depth industry analysis
• Short-term opportunity cost analysis (static optimization approach) vs. time-window strategic timing (product cycle & business strategy)
• Greed (self-interest) vs. co-development of self & social interest.
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Knowledge Accumulation and Theory Sophistication
• Nonlinear supply-demand curve and nonlinear business cycles (Hicks, Goodwin, …)
• Bounded rationality and behavioral psychology (Simon, Tversky & Kahneman, …)
• Game theory, multi-equilibrium, and evolutionary game theory
• Information asymmetry and incomplete market• HP filter, nonlinear trends, filter, and testing
deterministic chaos• Laboratory experiments and computer simulation
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Course Plan
• I. Re-examining existing economic theories: micro, macro, finance, econometrics, institutional economics
• II. Introducing new methodology: empirical, historical, and theoretical
• III. Interdisciplinary dialogue and knowledge integration
• IV. New development