Investment project selection and firm turnover are integrated in a market self-coordinated macro model (Eliasson, 1976b; Eliasson, 1991a; Eliasson, 1991b; Eliasson, 1995). We simulate a Schumpeterian Creative Destruction process driven by endogenous entrepreneurial entry causing reorganization or exit of firms that acquire and release resources in markets under different institutional conditions. While too fast structural change may make endogenous prices unreliable as conveyors of information, increasing the rate of economic mistakes and slowing econmic growth, an optimal balance between the rate of firm turnover and long run sustainable growth is demonstrated to exist. Optimal growth depends on the balance between entries and exits, the performance and size of new firms compared to incumbents, and on variation in the same characteristics. There is also the general problem associated with selection based, initial state dependent non linear micro based models that the incidence of even minor mistaken investment decisions may cumulate with time into major macro consequences (“deterministic chaos”). We conjecture that the negative tilting (as some “high speed” market entry simulations close up with the 75 year horizon) of the macroeconomic trajectories depends on the incidence of Type II econmic mistakes, or winners getting lost along the way.

The evolutionary firm based model MOSES of an Experimentally Organized Economy (EOE) is introduced and then outfitted with increasingly more sophisticated financial markets that take us from a stylized industrial banking system (standard in the model), to a (capital) market oriented monetary system, and then on to a securitized financing system where options and market derivatives play a role in allocating financial resources. We study the consequences for long term economic growth of introducing different financial market regimes.The markets of the financial system and those of the real economy are integrated within the business plans of model firms. The immense micro to macro complexity thereby created reduces the transparency of the economic environment of all actors in the model, including Government as a policy maker, to a fraction of what is needed for informed decisions. The policy maker thereby loses its presumed information advantage of economy wide overview and becomes one bounded rational actor among all other ignorant actors. Because of the strong leverage on the entire economy of its actions the competence and information demands on Government, when conducting policy, however, becomes far more exacting than what is required of any other actor.When Government engages in ambitious policy making its interventions in markets affect the behavior of all other actors. The entire market regime is therefore affected to the extent that the Central Government often cannot possibly be in control of what it is doing, especially when it comes to the long run consequences of its actions, and therefore often would do better by taking it easy (Eliasson and Taymaz, 1992). We find that financial markets matter for long term economic development and that seemingly insignificant respecifications of the financial market regime can cause considerable differences in long term GNP growth outcomes, amounting to as much as a difference of 1.5 percentage points per annum and a per capita GNP, that is up to 2.5 times larger on the 60 year horizon than in the worst scenario.The capital market regime is found to outperform the industrial banking system. When introducing a crudely modeled securitized system (call options), the only one our computer system could handle, financial market transactions were, however, speeded up to the extent that resource allocations worsened. Mixing the capital market regime with the simple securitized system generally lowered long run economic growth. Adding options not only increased the speed of arbitrage, destabilizing fundamentals, but also made expectations unreliable and raised the exit rate, notably by making manufacturing firms lose money on their financial investment portfolios. The results on options cannot however be generalized beyond the very specific experimental designs implemented, but they indicate that speeded up market arbitrage, which is what financial derivatives are all about, has mixed economy wide consequences, that may be long term negative in an economy that is not otherwise diversified and robust. While the simulation analysis of the markets for derivates in the MOSES model is still too primitive to allow any empirical generalizations, the results so far should be taken seriously as indicative of possible surprise dynamics that makes it even more important to conduct more inquiries of this kind.A final methodological note. The excessive demands on computer capacity of the options experiments have prevented us from testing the results for robustness (as for instance in Eliasson and Taymaz, 2000) by running a whole spectrum of experiments with small changes each time in the four different blocs where stochastic specifications are used. The non-linear specifications of the model often generate large differences in very long run outcomes when the stochastic seeds are changed marginally. Hence, the results to be reported should be regarded as explorative, suggesting new credible hypotheses, rather than empirically calibrated results, and also telling what kind of future analyses the new expanded model is capable of.

The Swedish micro to macro model MOSES is presented in terms of original technical publications and early empirical studies. It is shown how autonomous firms form expectations, make up plans, set prices, and revise plans after having been confronted with other firms’ plans in product, labor, and financial markets, and how all market agents together endogenously self-coordinate the macro economy, and keep it evolving over time. Agents learn from their expectational mistakes to improve next period anticipations and plans. Combined with endogenous Schumpeterian entrepreneurs that enter markets unexpectedly, this unique Stockholm School feature confers radically new dynamic properties to the macro economy. Entrepreneurial entry not only subjects the model economy to a constantly ongoing Creative Destruction process (endogenous structural change), but also keeps incumbent firms under constant competitive pressure that forces them to innovate preemptively, not to be competed out of the market (exit), and thus propels the economy forward in time, leaving in its wake an endogenous population of firms. A master version of the MOSES model has been calibrated to represent a Sweden like advanced industrial economy. The selection of publications also demonstrates how the modular design of the model has been gradually expanded, around its original dynamic market module, to become a model approximation of what I call an Experimentally Organized Economy (EOE) in which decisions of boundedly rational agents become economic experiments to be tested in markets. In fact, the model economy can even be used by boundedly rational policy makers, who should not conduct experiments, but fortunately can learn about the limits of their policy ambitions by practicing on the MOSES model.

While innovation supply is creative, unpredictable, and not necessarily related to future economic usefulness, resource provision is focused on economic returns, experience based and narrower, implying a positive economic risk of not understanding innovative commercial winners. We demonstrate through simulation experiments on an economy wide firm-based model that industrial growth is explained by industrially competent identification and financial support of winners that are carried on to industrial scale production and distribution. The simulations capture the dynamic economic systems effects on the entire economy, from micro responses to macro and the feedback on micro behaviour of expectational mistakes. Competence bloc theory is used to model the supply of innovations and their commercialization in what we call an Experimentally Organized Economy. We demonstrate that lack of commercialization competence, notably industrial competence embodied in venture capitalists´ ability to identify, select and finance radically new innovations breaks the conventionally assumed linearity between innovation supply and economic growth. We also demonstrate the existence of long-term and possibly very large losses in output from the loss of winners during the commercial filtering of the competence bloc, and that the economy wide costs incurred by protecting losers may be large.

Markets, I argue, matter significantly for macroeconomic development. The reason for this strange statement is that policy practice in industrialized market economies is routinely governed by models that ignore the role of markets. Policy makers are therefore at risk of misunderstanding the economic situation and of mismanaging the economy. Some macroeconomic models with sufficient nonlinearities and a production lag, two pioneering articles by Day (1982,1983) demonstrated, exhibit phases of erratic fluctuations (or deterministic chaos). Shortly thereafter Eliasson (1983, 1984) observed the endogenous emergence of similar unpredictable irregularities in simulating a complex, agent based, market self-coordinated economy wide model implemented on Swedish data. The irregularities originated in a failure of markets to coordinate production, employment, and investment decisions as they were pushed excessively by policy to become more efficient. In this agent based model of an Experimentally Organized Economy, called MOSES, progress is governed by a dominant flow of successful business experiments conducted by firms, trailed by a flow of mistaken projects. The coordination of these flows by autonomous market agents was shown to be easily disturbed by external interferences, for instance unwitting policies. Markets, simulation experiments however also showed have great endogenous capacities to restore disturbed order. Large private investment mistakes at the agent level, experiments furthermore indicate, incur only minor social costs if production on the site is promptly terminated, and markets organized to efficiently reallocate resources. Bold private investments should therefore be encouraged, corrections of identified mistakes made without delay, and the efficiency of markets to reallocate resources paid attention to. I conclude that central policy in “Sweden like industrial economies” can only effectively be pursued by taking advantage of the endogenous capacity of functioning markets of effective self-coordination. Coordination failure being created by policy failure masquerading as market failure should be considered before market failure is blamed.

The economy-wide dynamic cost-benefit study of the Swedish industrial subsidy program 1976 through 1984 (Carlsson et al. Res Policy 10(43):336-354 1981; Carlsson J Ind Econ 32(1):9-14, 1983a, b) is revisited in light of later economic development. Since the Swedish Micro to Macro model (Eliasson Am Econ Rev 67(1):277-281 1977a, 2017a) was used for quantification, this article is both (1) a study on the calibration of high dimensional micro-based and nonlinear economic systems models, and (2) a post inquiry into the empirical credibility of the cost-benefit calculations performed. We find that the Micro-based Macro model represents the minimum of detailed resolution necessary for the dynamic cost benefit calculations of the micro interventions in the Swedish economy we study. Even though the increased model complexity meant significant parameter calibration difficulties, a thoroughly researched model specification with exactly defined policy interfaces (with the markets of the economy) should take priority over parameter estimation problems, and always be preferred to estimating the parameters of a wrongly specified model perfectly. The oil price shocks of the 1970s caused radical market disorder in the western economies, bankrupting some 35% of Swedish manufacturing and threatening the Swedish government with massive unemployment. We confirm the earlier results that the government choice of a radical employment rescue policy came at enormous social cost in the form of economic stagnation, and still did not prevent the unemployment of the rest of OECD Europe from hitting Sweden a decade later, and persisting well into the next millennium. According to an alternative simulated policy scenario on the model, had the subsidies been replaced with a general lowering of the payroll tax of the same magnitude and the consequent increase in unemployment taken immediately during 1976-1980, production structures would have been radically and rapidly reorganized, normal employment would have been rapidly restored, and neither the stagnation nor the radical increase in unemployment of the early 1990s would have occurred. In retrospect we see no reason to worry about the empirical credibility of this computed dynamic trade off between Keynesian demand and Schumpeterian supply effects (caused by resource reallocations and endogenous structural change due to the price change), as we did then. We conclude with certainty that this trade-off would not even have been discovered as a possibility had we used a traditional model that did not embody these micro-macro linkages.

Questions are often raised about the economy-wide long-term consequences of micro (policy) interventions in an economy. To answer such questions, complex high dimensional, agent-based and difficult to estimate models are needed. This soon takes the economist outside the range of mathematics s/he is comfortable with. Such was, however, the ambition of the Swedish micro firm to macroeconomic systems modelling project presented in this essay, initiated almost 45 years ago. This model is presented as a Reference model for theoretical and empirical studies, with the ambition to understand the roles of the "birth, life and death" of business agents in the evolution of a self-coordinated market economy, without the help of a Walrasian central planner. Mathematical simulation is argued to be the effective tool for such theoretical and empirical analyses. Four problems have been chosen that demand a model of the Reference type to address, and that the Reference model has been used to address. They are (1) exploring the interior structures of the model for surprise analytical outcomes not previously observed, or thought of; (2) quantifying the long-term costs and benefits of large structure changing micro-interventions in the economy; (3) studying long-term historical economic systems evolutions, and asking what could have happened alternatively, if the historic evolution would have originated differently, and (4) generalizing from case observations.

The Micro to Macro model MOSES, for Model of the Swedish Economic System, is presented as a synthesis of Austrian/Schumpeterian and Swedish/Stockholm school economics. That connection unfortunately failed to be achieved at the time, as Swedish economists abandoned their ambition to take their Ex ante Ex post analysis down to the micro level for neoclassical static equilibrium economics, and therefore also failed to establish a Swedish platform for evolutionary economics. I argue that evolutionary models have to be micro based to make sense as driven by entrepreneurial competition and selection among autonomous market agents, be economy wide as an economic system, and should feature endogenous evolutions of firm populations, a complex dynamic that makes the model unsolvable for a market clearing equilibrium. The initial state dependency of such highly non linear selection models furthermore makes them unavoidably empirical. Since empirical models are always related to a case economy, the Moses model has been drawn up within the general theoretical framework of what I call an Experimentally Organized Economy (EOE), and applied to the Swedish economy. The estimation/calibration problems associated with such models are addressed, and the empirical credibility of the surprise economics that they generate discussed. Entrepreneurial entry drives competition and growth of the Micro to Macro model economy through a Schumpeterian type Creative Destruction process, that however also endogenously both raises the rate of exit, changes the population of actors, and lowers (because of the consequent structural change) the reliability of market price signaling as predictors of future prices. Simulation experiments suggest that an optimal growth maximizing rate of firm turnover exits. When MOSES is deprived of its micro based evolutionary features and firms are aggregated to sectors a traditional computable general equilibrium (CGE) sector model is shown to emerge as a special case. The static equilibrium properties of that model, however, are incompatible with the operating domain of the dynamic MOSES model, and a neoclassical capital market equilibrium comes out as an undesirable state to aim policies for. I conclude by demonstrating that the Wicksellian Cumulative Process can be nicely fitted into the Micro to Macro model. 

1990 saw the break up of the Soviet political system. The liberated, but poor formerly planned economies were left on their own to restore their institutions to that of an open market organization. Even though roughly on par with the Nordic countries before being annexed, 50 years of Soviet isolation had left the formerly planned Baltic Sea Region (BSR) economies in an industrially backward state. Critical market institutions did not exist, and corruption made normal business life impossible. Catch up with Western industrial economies therefore became a policy priority. During the 1970s also the industrialized BSR economies had introduced elements of centralized planning that restricted free entrepreneurial activities. By the Soviet collapse stagnation had therefore also brought the need for entrepreneurship onto the policy agenda of Western BSR nations. Institutional obstacles to economic progress were gradually being dismantled. Historic developments in the BSR have therefore accidentally staged a unique economic policy experiment. Using a competence bloc based method of identifying the role of the entrepreneur in observed macroeconomic catch-up, we can distinguish between the relative roles in economic progress among the BSR economies of improvements in local entrepreneurial environments, and of individual entrepreneurial action. We found that successful catch-up among the formerly planned BSR economies still has a long way to go, and that policy focus should be set on improving the local entrepreneurial environments to support both new firm formation for long run development, and to encourage immediate FDI for short term effects. Significant obstacles to trade and ownership transactions, however, remain across the BSR. Hence, success in catch-up should be expected to differ significantly among the BSR countries. We propose a policy competition among the transition countries in improving their entrepreneurial environments to beat each other in long run catch-up performance, that will benefit both catch-up of individual economies, and growth of the entire BSR economy.

During the early post WWII years Walrasian minded static equilibrium economists managed to disconnect a promising merge of Schumpeterian and Swedish School economics, and for decades more or less block the development of evolutionary dynamics. This paper is a fresh start of what should then have been done. I link my discussion to Loasby's (1998) two forms of coordination failure of; (1) failure of economists to model the coordination of an economy "out of equilibrium" and (2) failure of economists of competing schools to understand and benefit from each other. I find that 2 may explain 1.