Business Cycles and the Internal Dynamics of Firms
19 Pages Posted: 2 Jul 2020 Last revised: 3 Dec 2020
Date Written: June 10, 2020
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, Innovation, Coordination, Prices, Schumpeter
JEL Classification: B52, E14, E32
Suggested Citation: Suggested Citation