On the Sources of Economic Growth, Structural Consistency of Agent-Based Models and Mental-Accounting Consumer Behaviour

Economic growth in agent- and general equilibrium-based models is the result of wage-led expansion or meta-time mechanisms. Such a modelling approach faces empirical and theoretical pitfalls. There is very little econometric and theoretical support for wage-led growth, while the market clearing assumption present in the general equilibrium framework has been questioned by numerous computational economists. To address these issues, a mental-accounting consumer demand framework is developed, and a method of evaluating macroeconomic structural consistency of agent-based models is devised. Results and the procedure of ensuring structural consistency suggest that agent-based models with this feature are as close counterparts of dynamic stochastic general equilibrium models as possible without compromising the assumption of no wage-led growth and while rejecting the meta-time simplification. Using three sectoral agent-based models, it is demonstrated that the variability of spending rates and including two final good sectors guarantee sustainability of growth, albeit at very weak rates due to structural consistency. Furthermore, it is found that including at least two final goods sectors is necessary for preventing collapse and ensuring realistic growth rates in agent-based models in which wage-led growth is forbidden. The main contribution of this paper is identifying the major sources of economic growth as the space for demand expansion and the structural inconsistency between demand, incomes, production, and firms’ internal division of funds structures