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Power law distribution of the duration and magnitude of recessions in capitalist economies: breakdown of scaling

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  • Ormerod, Paul
  • Mounfield, Craig
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    Abstract

    Power law distributions of macroscopic observables are ubiquitous in both the natural and social sciences. They are indicative of correlated, cooperative phenomena between groups of interacting agents at the microscopic level. In this paper, we argue that when one is considering aggregate macroeconomic data (annual growth rates in real per capita GDP in the seventeen leading capitalist economies from 1870 through to 1994) the magnitude and duration of recessions over the business cycle do indeed follow power law like behaviour for a significant proportion of the data (demonstrating the existence of cooperative phenomena amongst economic agents). Crucially, however, there are systematic deviations from this behaviour when one considers the frequency of occurrence of large recessions. Under these circumstances the power law scaling breaks down. It is argued that it is the adaptive behaviour of the agents (their ability to recognise the changing economic environment) which modifies their cooperative behaviour.

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    Bibliographic Info

    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 293 (2001)
    Issue (Month): 3 ()
    Pages: 573-582

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    Handle: RePEc:eee:phsmap:v:293:y:2001:i:3:p:573-582

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    Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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    Keywords: Econophysics;

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    Cited by:
    1. Guilmi, Corrado Di & Gallegati, Mauro & Ormerod, Paul, 2004. "Scaling invariant distributions of firms’ exit in OECD countries," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 334(1), pages 267-273.
    2. Wright, Ian, 2008. "Implicit Microfoundations for Macroeconomics," Economics Discussion Papers 2008-41, Kiel Institute for the World Economy.
    3. Wright, Ian, 2005. "The duration of recessions follows an exponential not a power law," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 345(3), pages 608-610.
    4. Redelico, Francisco O. & Proto, Araceli N. & Ausloos, Marcel, 2008. "Power law for the duration of recession and prosperity in Latin American countries," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(25), pages 6330-6336.
    5. Salvador Pueyo, 2013. "Is it a power law distribution? The case of economic contractions," Papers 1310.2567, arXiv.org.
    6. Noell, Christian, 2006. "Self-Organization in Agricultural Sectors and the Relevance of Complex Systems Approaches for Applied Economics," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25516, International Association of Agricultural Economists.

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