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The US business cycle: power law scaling for interacting units with complex internal structure

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  • Ormerod, Paul
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    Abstract

    In the social sciences, there is increasing evidence of the existence of power law distributions. The distribution of recessions in capitalist economies has recently been shown to follow such a distribution. The preferred explanation for this is self-organised criticality. Gene Stanley and colleagues propose an alternative, namely that power law scaling can arise from the interplay between random multiplicative growth and the complex structure of the units composing the system. This paper offers a parsimonious model of the US business cycle based on similar principles. The business cycle, along with long-term growth, is one of the two features which distinguishes capitalism from all previously existing societies. Yet, economics lacks a satisfactory theory of the cycle. The source of cycles is posited in economic theory to be a series of random shocks which are external to the system. In this model, the cycle is an internal feature of the system, arising from the level of industrial concentration of the agents and the interactions between them. The model—in contrast to existing economic theories of the cycle—accounts for the key features of output growth in the US business cycle in the 20th century.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378437102010567
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    Bibliographic Info

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

    Volume (Year): 314 (2002)
    Issue (Month): 1 ()
    Pages: 774-785

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    Handle: RePEc:eee:phsmap:v:314:y:2002:i:1:p:774-785

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

    Related research

    Keywords: Business cycle; Power law scaling; Economic recessions; Agent-based model; Uncertainty;

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    Cited by:
    1. William Martin & Robert Rowthorn, 2004. "Will Stability Last?," CESifo Working Paper Series 1324, CESifo Group Munich.
    2. Wright, Ian, 2008. "Implicit Microfoundations for Macroeconomics," Economics Discussion Papers 2008-41, Kiel Institute for the World Economy.
    3. 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.
    4. Bell, William Paul, 2009. "Adaptive interactive expectations: dynamically modelling profit expectations," MPRA Paper 38260, University Library of Munich, Germany, revised 09 Feb 2010.

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