Towards a Microeconomic Theory of the Finance-Driven Business Cycle

Aletse López  | 16 de octubre de 2018  | Vistas: 198

Alejandro Jenkins, theoretical physicist, analyzes business cycles from a microeconomic point of view by making analogies between physics theorems and the business cycle theories from the Austrian and the Neoclassical economics.

Jenkins studies the four known responses of the Great Depression, by Hayek, Keynes, Schumpeter, and Fisher.  Also, he explains the famous Arrow-Debreu welfare theorems, which is the starting point of most Neoclassical economic theory to this day. These theorems are used even though people realize those conditions are not exactly met at practice.

Finance has always had a bad reputation”.

Vernon Smith emphasizes that even without perfect information and without a complete market, systems reach equilibrium very robustly. He explains that assets markets are not that efficient because in an efficient market, risks would be correctly estimated. If you find that instruments have risk ratings which seems badly off, that’s a possible indication that there’s an inefficiency going on.

Of course people preferences can change over time. If you look at an asset price and you see a spike and then coming down, that doesn’t necessarily imply an inefficiency, it could just be that suddenly people wanted to buy that and then they didn’t want it so much, that would be a perfectly efficient outcome”.

Finance in Neoclassical economics is a ghost, it really has no dynamics, Jenkins says.  So if somebody lends money to someone else, it adds up to zero. Based on this fact, he explains that banking is entirely a product of dynamics of information, which Neoclassical economics does not take into account.

I think there are very important ideas from the Austrian business cycle theory that should be embraced by the mainstream”.

Jenkins also explains the relationship between the physical term self-oscillation and microdynamics, the difference between equilibrium in physics and economics, how market bubbles work and what does statistical mechanics and thermodynamics have to do with economics.

Finally, he presents an outlook an solutions to business cycles based on the 2008 market crash in US and the 1992 market crash in Japan.