Abstract
The Great Depression stimulated a major outbreak of theorizing with respect to the origins of macroeconomic fluctuations. Of course the dominant work of this period was Keynes’ (1936) The General Theory of Employment, Interest and Money which inspired the view that such business cycles could be eliminated by the appropriate application of finely tuned aggregate demand management policies.1 Both bitter historical experience, as well as a variety of theoretical critiques, have since seriously weakened the most optimistic version of this view that held sway in the 1960s. Whether these cycles are exogenous or endogenous, regular or irregular, rational or irrational, or whatever, few are now so sanguine regarding our ability to utterly eliminate them.2
“Maxwell’s demon, Smoluchowski’s demon, Gödel’s demon and Ehrenfest’s demon all do not work. They are each blocked by a censor. Further demons and their corresponding censors deserve to be uncovered. For to recognize and understand limitations is even more important than to be completely free of them.”
Otto E. Rössler, 1998
Endophysics: The World as Interface, p. 53.
“The aim of teaching a horse to move beneath you is to remind him how he moved when he was free.”
Henry Taylor, 1985
“The Flying Change”
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Notes
Keynes rejected the idea of regular cycles except for Jevons-like, exogenously driven agricultural cycles. “Any fluctuation in investment not offset by a corresponding change in the propensity to consume will, of course, result in a fluctuation of employment. Since, therefore, the volume of investment is subject to highly complex influences, it is highly improbable that all fluctuations either in investment itself or in the marginal efficiency of capital will be of a cyclical character” (Keynes, 1936, p. 314).
Indeed it is questionable to what extent Keynes himself believed all fluctuations could be eliminated, despite his visionary statements regarding the “socialization of investment” at the end of The General Theory. For one thing he rejected actual socialism. For another, not only did he see “animal spirits” as volatile, but he warned of the unpredictability of the “average man” to a “changed environment” (Keynes, 1936, p. 377). This basic unpredictability of people and their behavior is the foundation of his view that the economy in the long run is subject to fundamental uncertainty.
Keynes hints at such a model in The General Theory (1936, p. 251).
Gabisch (1984) shows chaotic dynamics for the Samuelson model. A similar model due to Hicks (1950) can also exhibit chaotic dynamics if the accelerator is sufficiently nonlinear (Brock, 1988a; Hommes, 1991a, 1993, 1995).
Asimakopoulous (1988–89) argues that Kalecki is a much stronger influence on current Post Keynesian theory than is Keynes.
George (1981) presents a similar model using the catastrophe theory approach. Dana and Malgrange (1985), Hermann (1985), and Lorenz (1987a) show chaotic dynamics for Kaldorlike models. See Gabisch and Lorenz (1989) for an extended discussion of both approaches to this model. Furthermore, Hans-Walter Lorenz (1992) shows the possibility of both nonchaotic strange attractors and fractal basin boundaries for the Kaldor model, the first observations of such phenomena in economic models.
Kaldor also assumed a “reverse sigmoid” savings function as did Chang and Smyth (1971). This assumption is not significant for the results compared with Varian’s linear savings function assumption as long as the investment function is nonlinear.
The idea that “turning points” of business cycles reflect discontinuous structural shifts has been developed in an alternative, non-catastrophe theoretic approach. Goldfeld and Quandt (1973) modeled discontinuous shifts of expectations of output driving business cycle turning points using the model of switching regressions in a Markov process. Other advocates of this approach have included Wecker (1979), Neftçi (1982), and Hamilton (1988, 1989, 1990). The latter (1989) applied a nonlinear filter and smoother due to Coslett and lee (1985) to US real GNP data and concluded that a move from expansion to recession is associated with a 3% drop in the present value of GNP and also a 3% drop in the long-run forecast level of GNP. Following Mitchell (1927) and Keynes (1936), a major theme of much of this literature has been the asymmetry of the business cycle with downturns being sharper (if usually shorter) than upturns (Neftçi, 1984; Rothman, 1991; Hussey, 1992; Potter, 1994; Ramsey and Rothman, 1996;) with DeLong and Summers (1986), Westlund and Öhlén (1991), and Rothman (1996) raising doubts. Mittnik and Niu (1994) find stronger evidence of such asymmetries in unemployment than in output.
Although Keynes has been criticized for alleged inattention to wealth effects on consumption, such a charge is untrue. “Unfortunately a serious fall in the marginal efficiency of capital also tend to affect adversely the propensity to consume. For it involves a severe decline in the market value of Stock Exchange equities…With a ”stock-minded“ public as in the United States today, a rising stock-market may be an almost essential condition of a satisfactory propensity to consume…” (Keynes, 1936,p. 319).
An alternative approach to multiple equilibria and discontinuities in macroeconomic systems is the statistical mechanics/interacting particle systems approach discussed in Chapter 2. Durlauf (1991) in particular uses a variation of the model to explain large differences in growth rates between countries, with coordinated decisionmaking regarding production technology being the key to the bifurcations involved. Brock (1993) also suggests macroeconomic applications of this approach and Rosser and Rosser (1997) provide an application with respect to large-scale coordination failure in the transition economies. Aoki (1994) provides another variation on this approach. Some economists prefer this approach to that of catastrophe theory because of a perception that there might be a greater chance to model the actual phase transition points with it.
Rosser (1998) argues that hysteresis is one of the few concepts shared by both New and Post Keynesians, despite their different interpretations of it. Another is that of financial fragility (Minsky, 1972) which both New Keynesians (Woodford, 1989; Delli Gatti, Gallegati, and Gardini, 1993) and Post Keynesians (Foley, 1987; Semmler and Sieveking, 1993; Keen, 1995, 1997) see as potentially generating complex dynamics. Colander (1996b, 1998) and Rosser (1996b) that what these schools have in common is complexity which should be folded into a broader category of Post Walrasian macroeconomics.
Other applications of hysteresis have been to import penetration in monopolistically competitive markets in international trade models in the face of exchange rate shocks (Baldwin. 1988; Baldwin and Krugman, 1989; Dixit, 1989).
The term “hysteresis” comes from the Greek hysterein, meaning “to be behind” (Katzner, 1999). Krasnosel’skii and Pokrovskii (1989) provide a more detailed discussion of the physics applications of hysteresis.
The Regulation School emphasizes social and political structures and their coevolution with technological regimes. A somewhat related paper by Albin and Hormozi (1983) considers both fold and cusp catastrophes in an analysis of technological change in conjunction with information limits and institutional evolution. This was one of the early papers in economics to consider cellular automata and one of the very few to combine such an approach with that of catastrophe theory.
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Rosser, J.B. (2000). Catastrophe Theory and Hysteresis in Macroeconomics. In: From Catastrophe to Chaos: A General Theory of Economic Discontinuities. Springer, Dordrecht. https://doi.org/10.1007/978-94-017-1613-0_6
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