Such is my misfortune that many of my best ideas occur to me when I am or ought to be contemplating sleep. Right now I am quite tired, yet I am driven to write this so it will be a matter of permanent record, rather than simply losing it when I go to bed and dream of other things. Or, as my dreams are wont to become, dream of managing a centralized state economy. Those are dull bureaucratic dreams but they do pose interesting economic problems to consider. I consider them valuable if unorthodox research.
I wish to beg forgiveness for the distraction though, as those dreams have nothing to do with the latest thing that occurred to me. I was considering the consequences of market equilibria theories and the often pointed out fact that the markets do not, in fact, appear to trend at all towards full employment. I was also considering the conventional wisdom that all business cycles seem to end up leaving the market at a slightly higher level than they were at before.
The fact that “upswings do not die of old age” as the saying goes, implies that the psychological explanation of business cycles is not wholly accurate. At the very least, it cannot be the whole story, or else the real economy would be level on average, also known as being at equilibrium. So I was instead attracted to the innovation-overproduction theory, which states that economic booms are triggered by new technologies. The theory goes that new technologies spur increased demand as everyone clamors for this new technology. The boom end of the cycle ends when overproduction slams the suppliers, leaving them with massive stocks and no alternative but to liquidate them at a pitiful price. (Incidentally, this side of the cycle is what allows the poorer parts of society to finally claim access to these new goods.) As I have seen the theory stated, the final remnant of the economic growth, that lasting contribution, is the result of a smaller, steadier stream of replacement goods for the new technology.
The first thing I would like to say before I launch into my own theory on this, is that I admit a seriously possibility that what I saw was the innovative-consumption cycle misrepresented. I got that description out of a macroeconomics textbook. I haven’t seen innovative economic growth theory debated too seriously anywhere else in my life, except for one page long article that my economic professor clipped out of a paper, and that article only mentioned innovative-consumption cycles in passing.
Now, with that formality out of the way, I propose an Innovative-Irrational Cycle instead. I start out with the premise that market cycles are caused by irrationality in investment and consumptive patterns. I take as axiomatic the theories of reactive human behaviour which imply that over time people will learn with increasing accuracy just what is and isn’t a sound investment.
From this we can then presume that this will cause gradual shrinkage of the extent of the business cycle, leaving a slight growth each time as rational investments remain, and likely a larger growth (but only larger as a percentage of the gap to equilibrium, because exponential growth cannot continue forever). The business cycle will decrease because of decreasing amounts of irrational investment. When a market is “fresh” for some reason and faces wholly new situations then investments will represent a shotgun approach with a high failure rate for individual investments. When a market has been in a situation for some time then the metaphorical choke on the shotgun will get smaller, and more of the “pellets” (investments) will hit the target (profitability). Eventually, one presumes, the market approaches equilibrium and persists on a steady state for as long as conditions do not change. I personally am not at all sure that unchanging market states are a rational assumption, which leads me to my next point…
Innovation is the next point. Rather than spurring consumption, innovation spurs productivity growth as it is applied. However, it also increases the overall level of irrationality in the market due to uncertainties as to the full possible usage of the new technology. Consequently, malinvestment and investment are both present. Some investors in new technology find benefits, and they promote the technology either directly, or indirectly through signalling their heightened profits or reduced prices in standard market operations. The new technology is then adopted elsewhere and spreads throughout the economy. Malinvestment takes the form of misapplications of the technology, overspending on the technology, blind adoption of new tech for new techs’ sake, and other irrational behaviours in the market. New technologies therefore create a boom-bust cycle. They spur increased investment, increased production, and increased productivity. They also insert irrationalities that must eventually be corrected. These irrationalities may persist until something upsets the balance of the markets, in which case they’ll correct abruptly (‘hard landing’) in a dramatic and painful correction. Alternatively, they may simply drag growth gradually downwards as they fade out (‘soft landing’). A certain level of growth will remain very permanently even after this however, in the form of permanently increased productivity. This effect will expand as subsequent business cycles use the technology more responsibly and its proper usage expands.
From the pure standpoint of correcting present and preventing future irrationalities, a hard landing is preferable, as it creates a more significant/noticable disincentive against malinvestment in the future.
The Innovative-Irrational Cycle theory sets a grounds for lasting economic growth as well as explaining the business cycle. It is not a united total theory of economics, and quite possibly isn’t even anything particularly new. It is simply one of the many endogenous theories of growth, and a meager contribution of a rather tired person who meant to be in bed an hour ago.
