The Macroeconomics of Radical Uncertainty

27 Pages Posted: 25 Jan 2016

See all articles by Michael W. M. Roos

Michael W. M. Roos

University of Dortmund - Lehrstuhl für Wirtschafts-un Sozialstatistik

Date Written: November 25, 2015

Abstract

Macroeconomics must take radical uncertainty into account, if it aims at contributing to the solution of serious real-world problems such as climate change. Allowing for radical uncertainty must happen at two levels: the level of modeling and the level of the scientific discipline. I argue that the complexity approach which sees the economy as a complex adaptive system is better suited to deal with radical uncertainty than the mainstream DSGE approach. I review a number of agent-based models that are promising starting points to incorporate radical uncertainty into macroeconomics.

Discussing the examples of the financial crisis and climate change, I establish why methodological monism is dangerous and why macroeconomics needs more pluralism and openness towards other scientific approaches. Radical uncertainty and the complexity approach have important implications for macroeconomic policy and the advice that economists can give to policy makers. Under radical uncertainty it does not make sense to look for optimal policies.

Keywords: Complexity economics; agent-based modeling; complex adaptive systems; non-linear dynamics; climate change; pluralism

JEL Classification: B41, B52, B59, C63, E12, E60

Suggested Citation

Roos, Michael W. M., The Macroeconomics of Radical Uncertainty (November 25, 2015). Ruhr Economic Paper No. 592, Available at SSRN: https://ssrn.com/abstract=2721683 or http://dx.doi.org/10.2139/ssrn.2721683

Michael W. M. Roos (Contact Author)

University of Dortmund - Lehrstuhl für Wirtschafts-un Sozialstatistik ( email )

D-44221 Dortmund
Germany

HOME PAGE: http://www.wiso.uni-dortmund.de/~gra-miro

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