[Class] Chen Ping: “Complex Economics”

- Limits of Neoclassical Economics and Dialogue with Giants
2007 Spring Graduate Seminar (April 24 – June 24)
 
Schedule: April 24-June 24,
Time: Tuesday and Thursday afternoon at 14:40 – 17:40
Working language: English (Open to Chinese and international students)
 
中国经济研究中心陈平教授
 
《复杂经济学》
- 新古典经济学的局限以及与巨人们的对话
2007年春季中心研究生选修课(3学分)
 
时间：2007年春季后半学期（9－16周,4月24－6月24日）
课时：周二与周四下午7－9节（14：40－17：40）
地点：理教220（周二），文史213（周四）
对象：大学二年级以上的本科生及研究生中，真正有志于基础研究者。重要的不是基础知识，而是好奇心，以及观察、提问、与想象的能力。假如你不知道自己是否有研究的能力，最好的办法就是旁听和加入我们的讨论班，在思想的交锋中测试自己的潜力。
前提：基本的科学直觉与英语会话能力。想从事定量分析和数学模型的同学，最好具备微分方程的知识。只想研讨产权理论的同学，只需微观经济学的基本知识。
评分：无期终考试。可能有选择题的测验检查基本概念（30％），文献阅读与分析（20％），课堂讨论（20％）即可及格（B ）。能发现前人（包括教师）错误有所改进者加分到B+或A-。作出原创性贡献者给A，并鼓励独立发表论文，及提供深造机会。 本课目的不在传授知识，而在发现人才，提升中心学生研究的国际水平。
方法：要在各派思想的交锋中找问题，找观察，找新路。要学会“站在巨人的肩上”，而非跪拜在巨人的脚下，才能从前人的成就与局限出发，攀登更高的科学高峰。
 
Goal:
Develop “complex economics,” a new school of thought integrating science of complexity, nonlinear economic dynamics, evolutionary economics, and innovation economics. Examine the hidden assumptions and contradictions between theory and observations in mainstream neoclassical economics based on methodological individualism and linear equilibrium modeling. Learn new perspective of nonlinear non-equilibrium analysis through conflicting theories in fundamental problems, such as the nature of human behavior, stability and instability of market mechanism, and origin of firm and organization. We will encourage talented students to develop their critical thinking and original research during the dialogue with teacher and giant economists, including Frisch, Samuelson, Solow, Friedman, Lucas, Prescott, Granger, Sholes, North, Coase, and Plato.
 
Course Plan
 
I. Introduction: From Analytical Science to Science of Complexity
 
II. Basic Frame Work in Complex Economics: Nonequilibrium Physics, Evolutionary Ecology, Social Psychology, and Micro-Meso-Macro Economics
 
III. Historical Debates in Macro, Micro, and Finance Economics: Testing Competing Giant Economists
 
(3.1) Competing Models in Business Cycle Theory:
Linear deterministic model: Samuelson’s multiplier-accelerator
Linear stochastic model: ARMA model, unit-root, and Granger-Engel co-integration
Mixed model: Frisch model of noise-driven harmonic oscillator and historical puzzle of the First Nobel memorial prize in economics
Nonlinear deterministic models: Goodwin’s limit cycle model, Day’s white logistic chaos, and Chen’s color chaos with nonlinear feedback and time delay (Chen 1988)
 
(3.2) Trend-Cycle Decomposition and Copernicus Problem in Macroeconomic Dynamics
Friedman’s argument for first-differencing and against log-linear trend in Solow model
Granger’s argument for discrete-time and against spectral analysis and HP trends
Prescott’s argument for smooth trend and criticize of Granger’s approach
Chen’s natural experiment in supporting Schumpeter’s view of biological rhythms and negating econometric theory of noise-driven fluctuations (Chen 1996a,b 2005).
 
(3.3) Keynesian Revolution and Lucas Counter-Revolution:
Are there microfoundations of macro fluctuations?
Leotief’s critic of Keynes theory: a conflict between classical microeconomics and Keynesian macroeconomics
Lucas theory of microfoundations and rational expectations
Chen’s disproof of Lucas theory: the Principle of Large Numbers in probability theory and arbitrage against rational expectations (Chen 2002)
Heckman’s empirical evidence: unemployment distribution against Lucas theory
Natural experiment: Kornai’s policy of hard-budget constraints and transition recession in East Europe and former Soviet Union (Chen 2006)
 
(3.4) Does Demand Curve Is Always Negatively Sloped?
Friedman’s condition of invariant real income
Friedman’s criticism of marginal cost pricing having no empirical foundation
Cheung’s condition of non-existence of macro unemployment
Becker’s S-shaped demand curve caused by social psychology
Stiglitz’s efficient wage and Z-shaped labor supply curve
Kornai’s theory of soft-budget constraint and Transition Depression caused by credit-crunching in East Europe and former Soviet Union
What is the policy implications of neoclassical economics for development and transition economics? Can we test the validity of theory by social experiments?
 
(3.5) Brownian Motion or Random Walk in Stock Market?
From Osborne’s Discovery of Brownian Motion to Fama’s Efficient market Hypothesis
Ross theorem: equilibrium condition = no arbitrage opportunity = linear pricing
Empirical evidence of color chaos in stock market movements (Chen 1996a)
Unstable nature of Brownian motion and random walk and the birth-death process as a better alternative (Chen 2005)
 
IV. On-going Projects in Re-thinking Coase Theory and Price Theory in Microeconomics
We will share our ideas with students who are interested in Coase theory of transaction cost and property rights. We will show that Coase theory push the classical thinking beyond empirical boundary, so that Coase theory on firm and social cost not only generate conflicting views with evolutionary thermodynamics, evolutionary anthropology, history of science and division of labor, theory of corporate governance, but also raise fundamental questions to the classical price theory based on negative-sloped demand curve and validity of marginal thinking. We will also re-examine the contradictory nature of three basic cases in Coase theory: rancher-farmer conflicts, noisy neighbor, and sparks from railway locomotive. We will see if social conflicting interests could be solved by bi-lateral voluntary bargaining without social reference, power struggle, and historical constraints.
 
As Prigogine pointed out that conflict of paradigms is not a disaster but a creative opportunity. You may start from the following views of Coase theorem:
 
(4a) “Is this statement (Coase Theorem) profound, trivial, a tautology, false, revolutionary, wicked? Each of these has been claimed.”
-- “Coase theorem” by David de Meza,
The New Palgrave Dictionary of Economics and the Law, P.Newman ed., Macmillan, London (1998), page 270]
 
(4b) “Allocation of property rights – and how they are to be defined - matters mightily. They are the chips in the game of dickering, threatening, and litigating. …… Only in certain Santa Claus situations – constant returns to scale, infinite divisibility, free entry, dispensed ownership of each grade of factor, shared knowledge, complete markets – only then will Smithian self-interest be compelled to achieve Pareto-Optimality.
To try to capture all that which contributes to deadweight loss under the verbal rubric of “transaction costs” weakens a useful concept without gaining understanding of incompleteness of markets, asymmetries of information, and insusceptibilities of various technologies to decentralized pricing algorithms.
The vogue of vulgar and vague Coaseism, one hypothesizes, is strongest among libertarians and other devotees of laissez-fair who believe to find in it ammunition against regulation and voter’s activism.”
-- Paul A. Samuelson, “Some Uneasiness with Coase Theorem, Japan and World Economy, 7, 1-7 (1995).
 
(4c) “The transaction costs paradigm in which I was brought uo – and here I am sure Coase fully share my view – has the merit that it entails only the simplest of economic tools.
Only three fundamental propositions are present in the paradigm. First is the postulate of constrained maximization. Second is the downward sloping demand curve, which (because there is no need to separate consumption and investment activities) also covers diminishing marginal productivity. Third is the notion that cost is the highest-valued option foregone.”
Steven N.S. Chueng (张五常), “The Transaction Costs Paradigm,” Economic Inquiry, 514-521 (1998).
 
 
[Student Requirement]
For economic beginners, basic economic intuition and working English is necessary for understanding basic issues in complex economics and discussing problem IV of Coase Theory.
For advanced students interesting in empirical analysis and mathematical modeling in problem II and III, you better to know graduate economics and math knowledge in calculus and differential equations.
 
[Grade] No final exam for this class. Some tests with multiple choices could be used to test your understanding of basic concepts in equilibrium and complex economics.
Pass (B or C) or fail (D) based on test (40%), paper presenting (20%) and class discussions (10%).
Merit scores (A) will give for those students who make original contributions.
A-    or B+ will award  to those students who could discover mistakes from Nobel economists or improve our work in developing nonlinear Nonequilibrium analysis.
We will encourage the best students in class to further development at CCER or abroad.
Contributions can be in the form of empirical data analysis, math modeling, case analysis, or study in historical events. We judge student contribution first by its originality in ideas, second by its technical progress.
 
[Who can qualify this class] Any talented undergraduate students and graduate students interested in fundamental issues in economics could test your curiosity and creativity in our class. Remember, Marx, Schumpeter, and Coase did not have advanced knowledge in mathematics but made great impact in economic history. On other side of story, Einstein introduced non-Euclid geometry into general relativity did change the basic framework of theoretical physics. Classical economics is essentially a static theory in Euclid geometry, not just without nonlinearity and history, but also without time, wealth, and power, an utopian capitalism or primitive market before industrial society.
 
References:
[You may download Chen Ping’s papers and related articles from CCER faculty – Chen Ping –website]
 
Ping Chen, “Market Instability and Economic Complexity: Theoretical Lessons from Transition Experiments,” in Linda Yueh and Yang Yao eds., Globalisation and Economic Growth in China, World Scientific, Singapore (2006).
Ping Chen, “Evolutionary Economic Dynamics: Persistent Business Cycles, Disruptive Technology, and the Trade-Off between Stability and Complexity,” in Kurt Dopfer ed., The Evolutionary Foundations of Economics, Chapter 15, pp.472-505, Cambridge University Press, Cambridge (2005).
Ping Chen, “Microfoundations of Macroeconomic Fluctuations and the Laws of Probability Theory: the Principle of Large Numbers vs. Rational Expectations Arbitrage,” Journal of Economic Behavior & Organization, 49, 327-344 (2002).
Ping Chen, "A Random Walk or Color Chaos on the Stock Market? - Time-Frequency Analysis of S&P Indexes," Studies in Nonlinear Dynamics & Econometrics , 1(2), 87-103 (1996a).
Ping Chen, "Trends, Shocks, Persistent Cycles in Evolving Economy:  Business Cycle Measurement  in Time-Frequency Representation," in W. A. Barnett, A. P. Kirman, and M. Salmon eds., Nonlinear Dynamics and Economics,  Chapter 13, pp. 307-331, Cambridge University Press (1996b).
Ping Chen, "Imitation, Learning, and Communication: Central or Polarized Patterns in Collective Actions," in A. Babloyantz ed. Self-Organization, Emerging Properties, and Learning, Plenum Press, New York (1991).
Ping Chen, "Empirical and Theoretical Evidence of Economic Chaos", System Dynamics Review,  Vol. 4, No. 1-2, 81-108 (1988). Also in B. L. Hao ed., Chaos II, World Scientific, Singapore (1990).
Ping Chen, "Origin of Division of Labor and Stochastic Mechanism of Differentiation", European Journal of Operational Research, Vol. 30, No. 3, pp. 246-250 (1987).
陈平，“新古典经济学在中国转型实验中的作用有限”，经济研究，2006年10月，96－107页。
陈平，“私有制的神话和多种所有制的现实：德国蔡斯光学仪器公司，美国大学联邦信用社，和MIT学生之家的案例研究”，载于史正富，刘昶编，《民营化还是社会化：国企产权改革的战略选择》，上海世纪高教出版社，上海（2006）。
陈平，“劳动分工的起源和制约－从斯密困境到广义斯密原理”, 经济学（季刊）， 第1卷，第2期（2002年1月）.
陈平，“单一小农经济结构是我国长期动乱贫穷、闭关自守的病根”, 《人民日报》、《光明日报》1979年11月16日。
陈平，《文明分岔、经济混沌、和演化经济动力学》，北京大学出版社，北京（2004）。
 
More references and reading papers will be posted on Chen Ping’s website at CCER faculty column.