This project aims to create computer models for Austrian economics. Austrian economics is a specific school of thought in economics founded by Carl Menger (1840-1921) and developed by eminent representatives such as Ludwig von Mises (1881 – 1973) and the nobel laureate Friedrich Hayek (1899 – 1992). Though many of its early representative were Austrian, it is now an international movement with supporters from all around the world.
What is special about Austrian economics? What makes it different from other ways of doing economics? Perhaps three points can provide a good start.
Austrian economics focuses on individual human beings. Unlike other ways of doing economics that use mathematical equations to represent the behavior of an entire economy, Austrian economics insists on focusing on individual human beings and their actions. The voluntary exchanges between individuals are what circulate money and goods around inside an economy. To truly understand economics, we need to begin with individual human beings.
Austrian economics considers subjective desires. People have needs and wants that they want to fulfil. They do not act because of mathematical laws but because of their personal desires. The value of things ultimately depends on how much they satisfy these needs and wants. Austrian economics does not only look at objective factors but at the subjective factors that drive human beings to pursue things.
Austrian economics sees the market as a complex process. An economic market is made up of millions of different individuals. The interactions between these individuals make the economy unfold as a complex system. Certain decisions among a few individuals can eventually create big ripples that affect everyone else. Austrian economics recognizes the economic market as a complex process that unfolds over time, often exhibiting surprising behaviors.
If it is your first time to encounter Austrian economics, a good resource to start with is Austrian Economics: A Primer by Eamonn Butler, which you can download for free.
The Austrian Economics Model uses agent-based modeling (ABM) to simulate Austrian economics. Agent-based modeling is a type of computer simulation based on “agents” with independent behavior that interact with other agents and their environment. Given the emphasis of Austrian economics on individuals and their economic interactions, agent-based modeling is a promising instrument to use in simulating and further understanding Austrian economics.
Agent-based modeling is still relatively new in economics. However, the financial crisis of 2008 increased interest in ABM as a valuable alternative to current economic models. As Jean-Claude Trichet, the president of the European Central Bank, acknowledged:
Macro models failed to predict the crisis and seemed incapable of explaining what was happening to the economy in a convincing manner. As a policy-maker during the crisis, I found the available models of limited help. In fact, I would go further: in the face of the crisis, we felt abandoned by conventional tools. […] We need to deal better with heterogeneity across agents and the interaction among those heterogeneous agents. We need to entertain alternative motivations for economic choices. […] Agent-based modelling dispenses with the optimization assumption and allows for more complex interactions between agents. Such approaches are worthy of our attention.
This project is also not the first attempt to create computer simulations of Austrian economics. In the 1990s, Don Lavoie and the “Agorics Project” at George Mason University came up with several attempts. More recently, in 2014, Hendrik Hagedorn published a model of Austrian economics that integrates “Austrian economics with aspects of evolutionary and post-Keynesian economics.” Though these are valuable precursors, the Austrian Economics Model uses a design that is significantly different. You can learn more about the design of the Austrian Economics Model here.