Saturday, October 3, 2009

Complexity and Business Cycles

I’ve mentioned before that I think there are a number of problems in the Austrian business cycle theory as it is originally expounded. Some of these problems are small and only of theoretical importance. They relate to the intricate and subjective nature of the capital structure and the role of expectations. Although the theory may be correct for a simple economy (or in a single sector of an economy) which is relatively stable and has easily identifiable stages of production, this does not mean, a priori, that the theory generalizes to a complex and dynamic economic system.
I am trying to communicate the idea that in a complex system, we may be unable to apply the standard theory. In a world where the lattice-work of heterogenous goods in subjectively interpreted relationships is constantly shifting, are Hayekian triangles any more than an easy to understand piece of pedagogy, not unlike Samuelson’s pitiful defense of the production function as a mathematical “parable”?

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