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LAZ Simulation Listening Exam 01 – Level B2 Prof. Peter Cullen Text April/2013 At the beginning of the 21st century, Traditional Economics offers us two competing hypotheses to explain the oscillating patters we see in the economy. On one side we have the micro-economics-based real business cycle theory, which holds on to the rationalequilibrium view and sees the economy as merely propagating external shocks. Under this theory, the key causes of economic oscillations are external political events, changes in technology and other factors. But such models cannot tell us why the cycles have been so persistent throughout history, despite the enormous changes in the types of external factors posited as causes. On the other side of the tracks, we have the macroeconomicsbased New Keynesianism. This body of literature has backed away from the Traditional orthodoxy and incorporated less-than-perfect rationality, dynamics and time delays in order to find internal explanations. In many ways New Keynesianism is a step in the Complexity Economics direction, but the New Keynesians have not been prepared to abandon equilibrium as a theory. As a result, the empirical success of the theory has been limited. The ultimate accomplishment of Complexity Economics would be to develop a theory that takes us from theories of agents, networks and evolution all the way up to the macro-patterns we see in real-world economies. Such a comprehensive theory does not yet exist, but we can begin to see signs of what it might look like. This theory would view macroeconomic patterns as emergent phenomena – that is, characteristics of the system as a whole that arise internally from interactions of agents and their environments. But how can something be more than the sum of its parts? Or as physicist Phil Anderson put it “Why is more, different?”. Emergence may seem mysterious, but it is actually something that we experience every day. A single water molecule does not feel wet, but a few billion of them together does. This is because the characteristic of “wetness” is a collective property of the slippery interactions between water molecules in a particular temperature range. Complexity Economics likewise views economic patterns as business cycles, growth and inflation as emergent phenomena arising internally out of the interactions within the system. Complex adaptive systems tend to have signature emergent patterns that are common across many types of systems. These patterns help us better understand the workings of those systems. We will look at three of these signature patterns: oscillations, punctuated equilibrium and power laws. 1 LAZ Simulation Listening Exam 01 – Level B2 April/2012 Prof. Peter Cullen ___________________________________________ Name, Date, and Registration Number Questions: Answer all 5 of the following questions. SIMPLE AND CORRECT IS BETTER THAN COMPLICATED AND WRONG. USE SHORT PHRASES AND SENTENCES. This exam requires interpretation and analysis. It is designed to test your ability to apply what you hear to possible discussion areas. 1. What are the two competing hypotheses of Traditional Economics? 2. Why is New Keynesianism NOT the same as Complexity Economics? 3. What is meant by the term emergent phenomena? 4. Why are water molecules an example of emergence? 5. Which economic phenomena does Complexity Economics view as emergent phenomena? 2 LAZ Simulation Listening Exam 01 – Level B2 Prof. Peter Cullen April/2012 Answer Sheet 1. What are the two competing hypotheses of Traditional Economics? On one side we have the micro-economics-based real business cycle theory, which holds on to the rational-equilibrium view and sees the economy as merely propagating external shocks. Under this theory, the key causes of economic oscillations are external political events, changes in technology and other factors. But such models cannot tell us why the cycles have been so persistent throughout history, despite the enormous changes in the types of external factors posited as causes. On the other side of the tracks, we have the macroeconomics-based New Keynesianism. This body of literature has backed away from the Traditional orthodoxy and incorporated lessthan-perfect rationality, dynamics and time delays in order to find internal explanations. 2. Why is New Keynesianism NOT the same as Complexity Economics? but the New Keynesians have not been prepared to abandon equilibrium as a theory. As a result, the empirical success of the theory has been limited. 3. What is meant by the term emergent phenomena? characteristics of the system as a whole that arise internally from interactions of agents and their environments. 4. Why are water molecules an example of emergence? A single water molecule does not feel wet, but a few billion of them together does. This is because the characteristic of “wetness” is a collective property of the slippery interactions between water molecules in a particular temperature range 5. Which economic phenomena does Complexity Economics view as emergent phenomena? business cycles, growth and inflation 3