The Business Cycle As a Recalculation Problem

Lynne Kiesling

The title to this post is my phrasing of an idea from Austrian economics that I think is incorrectly ignored in standard macroeconomic theory. I don’t have much insight to add, but this Arnold Kling post had two statements in it that I find very important. The first is Arnold quoting John Quiggin:

… we must accept, in the language of systems theory that macroeconomic phenomena are emergent, arising from complex interactions of behaviors we do not fully understand, …

Arnold’s observation on his claim gets at the overlooked role of foresight and adaptation in macro phenomena:

I would add that it is also a distraction to insist on closed-form mathematical solutions. Macro problems occur because the economy faces recalculation problems that are too complex for markets to solve. They are too complex for us to solve, also.

One thought on “The Business Cycle As a Recalculation Problem

  1. I don’t get it. I mean, I haven’t studied economics and being an engineer myself, I think this should have been obvious to economists?

    If the claim is true that a market actually is built from individual decisions and that mostly decisions in the corporate world behave on average rational. Then I’d say this should have been the standard approach to macroeconomic allocation problems. Of course systems need time to reallocate ressources to find the new proper balance (equilibrium). It is the same with complex natural systems that swing until they found the new equilibrium position….

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