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

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  • Ormerod, Paul

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.

Suggested Citation

  • Ormerod, Paul, 2002. "The US business cycle: power law scaling for interacting units with complex internal structure," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 314(1), pages 774-785.
  • Handle: RePEc:eee:phsmap:v:314:y:2002:i:1:p:774-785
    DOI: 10.1016/S0378-4371(02)01056-7
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    References listed on IDEAS

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    1. Martin Eichenbaum, 1996. "Some comments on the role of econometrics in economic theory," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 22-31.
    2. Jordi Gali, 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," American Economic Review, American Economic Association, vol. 89(1), pages 249-271, March.
    3. Cogley, Timothy & Nason, James M, 1995. "Output Dynamics in Real-Business-Cycle Models," American Economic Review, American Economic Association, vol. 85(3), pages 492-511, June.
    4. Ormerod, Paul & Mounfield, Craig, 2001. "Power law distribution of the duration and magnitude of recessions in capitalist economies: breakdown of scaling," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 293(3), pages 573-582.
    5. Leslie Hannah, 1999. "Marshall's "Trees" and the Global "Forest": Were "Giant Redwoods" Different?," NBER Chapters,in: Learning by Doing in Markets, Firms, and Countries, pages 253-294 National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Wright, Ian, 2005. "The social architecture of capitalism," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 346(3), pages 589-620.
    2. Ormerod, Paul, 2015. "The economics of radical uncertainty," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 9, pages 1-20.
    3. William Martin & Robert Rowthorn, 2004. "Will Stability Last?," CESifo Working Paper Series 1324, CESifo Group Munich.
    4. Wright, Ian, 2009. "Implicit Microfoundations for Macroeconomics," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 3, pages 1-27.
    5. 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.
    6. Bell, William Paul, 2009. "Adaptive interactive expectations: dynamically modelling profit expectations," MPRA Paper 38260, University Library of Munich, Germany, revised 09 Feb 2010.
    7. Chris Noell, 2007. "A look into the nature of complex systems and beyond "Stonehenge" economics: coping with complexity or ignoring it in applied economics?," Agricultural Economics, International Association of Agricultural Economists, vol. 37(2-3), pages 219-235, September.

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