The emergence of agent-based modeling in economics: Individuals come to bits

Complex adaptive systems theory can be distinguished from complex systems theory in terms of the emphasis the former places on self-organizing agents. This paper uses Simon’s hierarchic view of complex systems as adaptive and self-organizing to frame an explanation of complex adaptive systems as ultimately occupied by individuals understood as ‘basic’ agents. What distinguishes ‘basic’ agents from agents made up of agents such as firms is that they are made up of collections of decision rules – ‘bits’ – that in Simon’s sense are fully rather than nearly decomposable. An explanation of the identity of these agents is then used to explain how crisis can emerge in economic systems. Crises are endogenously produced in periods of rapid sectoral innovation that significantly changes the overall structure of the set of groups/subsystems that make up the economy, and which break down the boundaries on individuals’ collections of decision rules. In contrast to mainstream market failure theory, crisis analysis then depends on explaining the complex and hierarchic institutional structure of those domains where it arises.