Paper #: 11-02-008
This paper develops a dynamical price and quantity adjustment process for a fully decentralized market economy, and shows for the first time, using agent-based modeling techniques, that in the long-run, prices and quantities approximate their equilibrium states. The resulting dynamical system is also highly resilient in the face of exogenous shocks.
The key design element is that each trader has a set of private prices that are updated through experience, less successful agents copying the strategies of more successful agents, as well as varying private prices in response to personal trading success.
The efficiency of the market is economy is, however, low when there are more than a few types of goods. By permitting agents to buy and sell goods that they do not consume, we show that a money good emerges from market exchange, and the resulting monetary system is extremely efficient in comparison with non-monetary exchange. Moreover, when an object is available for trade that is neither produced nor consumed and has low exchange and storage costs, this object will emerge as fiat money when it is scarce and in fixed supply.