Skip to main content
SpringerLink
Log in

The pausing view of unemployment

  • Note
  • Published:
Evolutionary and Institutional Economics Review Aims and scope Submit manuscript

“Wise is the man who sees inaction in action and action in inaction”.

(Bhagavad Gita, 4:18)

Abstract

This paper develops a theory of business cycle unemployment based on the idea that the economy may temporarily pause in response to heightened uncertainty. The pausing of actions in some quarters of the economy eases decision-making in other quarters, thereby leading the way to recovery. Both the heightening of uncertainty and the ‘pausing phenomena’ emerge from the interaction between firms with inter-related plans in a high-dimensional system. Unemployment therefore is an emergent phenomena and occurs without the imposition of sticky wages or appropriability problems at the micro level.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Notes

  1. By ‘uncertainty’, we mean the Knightian notion that outcomes and or the probabilities associated with outcomes are unknown (Knight 1921). See Hoogduin (1987) for a discussion of the difference between Knightian and Keynesian uncertainty.

  2. This is partly because many macroeconomists do not view the notion of ‘disequilibrium unemployment’ as a sensible or workable idea (Rothschild 1973). Others with some interest in disequilibrium unemployment have implemented it via Keynesian wage stickiness (Dosi et al. 2010).

  3. Bennion (1943, p. 342) recognizes that during the process of adaptation to innovation “it becomes increasingly difficult to plan new things and the risk of failure increases greatly”. He however goes on to add Keynesian elements to Schumpeter’s business cycle theory to generate unemployment dynamics, rather than developing Schumpeter’s own theme of the ‘difficulty of planning new things’ and the processes by which the difficulty may be resolved.

  4. Note that firms do not suspend economic actions and related investments because they are waiting for the economy to get out of recession. The knowledge which dormant firms gain by waiting is not knowledge about macroeconomic variables but about the specific actions of particular other firms on whose plans their own plans depend (Reddy and Veetil 2021, Section 2). Aggregate variables do not tell firms how well their plans fit within the plans of others (Hayek 1974). The plans of economic agents are a bit like pieces of a puzzle that must fit together: knowledge of the average shape is not a particularly useful statistic.

  5. The unemployment generated by the ‘pausing of economic activity’ is capable of generating secondary unemployment via demand constraints in the market for final goods and services. More specifically, while the problem of unemployment initially originates from the interdependencies between firms and therefore in the market for intermediate inputs, it may be propagated via the market for final goods. This is simply because unemployment will necessarily generate a decline in the demand for final goods and therefore a shrinking of economic activity.

  6. See Caballero and Hammour (1996a) and Caballero and Hammour (1998) for mild variants of the model. Caballero and Hammour are primarily concerned with short-term fluctuations in the rate of unemployment, for a treatment of long-term unemployment along similar lines see Neisser (1942) and Aghion and Howitt (1994).

  7. Schumpeter appears to have implicitly worked with a high-dimensional economic systems. An explicit statement to the effect is found in Goodwin (1991, p. 30), who says that a true representation of a Schumpeterian economy would be a “large, multidimensional” system.

References

  • Aghion P, Howitt P (1994) Growth and unemployment. Rev Econ Stud 61:477–494

    Article  Google Scholar 

  • Anderson PW (1972) More is different. Science 177(4047):393–396

    Article  Google Scholar 

  • Baumol WJ (1996) Entrepreneurship: productive, unproductive, and destructive. J Bus Ventur 11(1):3–22

    Article  Google Scholar 

  • Bennion EG (1943) Unemployment in the theories of Schumpeter and Keynes. Am Econ Rev 33(2):336–347

    Google Scholar 

  • Boulding KE (1956) General systems theory: the skeleton of science. Manag Sci 2(3):197–208

    Article  Google Scholar 

  • Caballero RJ, Hammour ML (1996a) On the ills of adjustment. J Dev Econ 51(1):161–192

    Article  Google Scholar 

  • Caballero RJ, Hammour ML (1996b) On the timing and efficiency of creative destruction. Quart J Econ 111(3)

  • Caballero RJ, Hammour ML (1998) The macroeconomics of specificity. J Polit Econ 106(4):724–767

    Article  Google Scholar 

  • DeLong BJ (1990) Liquidation cycles: old-fashioned real business cycle and and the great depression. NBER Working Paper No. 3546

  • Dosi G, Fagiolo G, Roventini A (2010) Schumpeter meeting Keynes: a policy-friendly model of endogenous growth and business cycles. J Econ Dyn Control 34(9):1748–1767

    Article  Google Scholar 

  • Eliasson G (1977) Competition and market processes in a simulation model of the Swedish economy. Am Econ Rev 67(1):277–281

    Google Scholar 

  • Frankl VE (1969) Reductionism and nihilism. Beyond reductionism: new perspectives in the life sciences. The Hutchinson Publishing Group Ltd., pp 396–416

    Google Scholar 

  • Goodwin RM (1991) Schumpeter, Keynes and the theory of economic evolution. J Evol Econ 1(1):29–47

    Article  Google Scholar 

  • Gualdi S, Mandel A (2019) Endogenous growth in production networks. J Evol Econ 29(1):91–117

    Article  Google Scholar 

  • Hayek FA (1974) The pretense of knowledge. In: The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel Lecture

  • Hoogduin L (1987) On the difference between the Keynesian, Knightian and the ‘classical’ analysis of uncertainty and the development of a more general monetary theory. De Econ 135(1):52–65

    Google Scholar 

  • Keynes JM (1936) The general theory of employment, interest and money. Palgrave Macmillan

    Google Scholar 

  • Knight FH (1921) Risk, uncertainty and profit. Houghton Mifflin

    Google Scholar 

  • Lange O (1941) Schumpeter’s business cycles. Rev Econ Stat 23:190–193

    Article  Google Scholar 

  • Lucas RE (1977) Understanding business cycles. Carn-Roch Conf Ser Public Policy 5:7–29

    Google Scholar 

  • Neisser HP (1942) Permanent" technological unemployment: “Demand for Commodities Is Not Demand for Labor.” Am Econ Rev 32(1):50–71

    Google Scholar 

  • Reddy KK, Veetil VV (2021) Business cycles and the internal dynamics of firms. Rev Austrian Econ (Forthcoming)

  • Romer D (1993) The new Keynesian synthesis. J Econ Perspect 7(1):5–22

    Article  Google Scholar 

  • Rothschild M (1973) Models of market organization with imperfect information: a survey. J Polit Econ 81(6):1283–1308

    Article  Google Scholar 

  • Schumpeter JA (1927) The explanation of the business cycle. Economica 21:286–311

    Article  Google Scholar 

  • Schumpeter JA (1939) Business cycles: a theoretical, historical, and statistical analysis of the capitalist process, vol 1. McGraw-Hill, New York (Reprinted in (2005) by Bartleby’s Books (Chevy Chase, MD) and Martino Publishing (Mansfield Center, CT))

    Google Scholar 

  • Shackle GL (1972) Epistemics and economics: a critique of economic doctrines. Cambridge University Press

    Google Scholar 

  • Simon HA (1984) On the behavioural and rational foundations of economic dynamics. J Econ Behav Organizat 5:35–55

    Article  Google Scholar 

  • Veetil VP, Wagner RE (2015) Treating macro theory as systems theory: how might it matter? New Think Austrian Polit Econ Adv Austrian Econ 19:119–143

    Article  Google Scholar 

  • von Bertalanffy L (1968) General systems theory: foundations, development, applications. George Braziller

    Google Scholar 

  • von Bertalanffy L (1969) Chance or law. Beyond reductionism: new perspectives in the life sciences. The Hutchinson Publishing Group Ltd., pp 56–84

    Google Scholar 

  • Weaver W (1948) Science and complexity. Am Sci 36(4):536–544

    Google Scholar 

  • Weiss PA (1969) The living system: determinism stratified. Beyond reductionism: new perspectives in the life sciences. The Hutchinson Publishing Group Ltd., pp 3–55

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Humanities and Social Sciences, Indian Institute of Technology Madras, Chennai, 600036, India

    Vipin P. Veetil

Authors
  1. Vipin P. Veetil
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Vipin P. Veetil.

Ethics declarations

Conflict of interest

There are is conflict of interest. No human or animal subjects were used. This paper complies with the ethical standards of the publisher.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Veetil, V.P. The pausing view of unemployment. Evolut Inst Econ Rev 18, 435–446 (2021). https://doi.org/10.1007/s40844-021-00221-5

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40844-021-00221-5

Keywords

JEL Classification

Search

Navigation