Business cycles and the internal dynamics of firms

Kushal K. Reddy and Vipin P. Veetil ()
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Kushal K. Reddy: Indian Institute of Technology Madras
Vipin P. Veetil: Indian Institute of Technology Madras

The Review of Austrian Economics, 2023, vol. 36, issue 1, No 3, 43-60

Abstract: Abstract Most business cycle theories originate from a paradigmatic vision with a two fold simplicity. The first of which is that firms are bound through simple relations in which they influence each other anonymously via prices but not directly through non-price rivalrous competition. And the second is that firms have immutable and transparent cores. These presumptions yield an economy whose natural state is one of stability. Macroeconomic dynamics, or change more generally, is brought about by exogenous shocks. This paper develops an alternate vision for understanding business cycle dynamics. We consider the dynamics that emerge from micro changes that originate from deep within firms. Each firm is surprised by externally visible innovations of other firms because they cannot observe each others’ high dimensional interiors. Innovations can cascade because of the complex microeconomic interrelations between the plans of firms. The interaction between external-observable attributes and internal-unobservable active cores of firms is capable of generating change without exogenous shocks.

Keywords: Business cycles; Macroeconomic turbulence; Innovation; Coordination; Neutral variation (search for similar items in EconPapers)
JEL-codes: B52 E14 E32 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11138-020-00538-1

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