Organizations and Markets

Business Cycles and the Structure of Production

30 May 2014 at 9:06 am Peter G. Klein 2 comments

| Peter Klein |

A new paper from former guest blogger Peter Lewin:

A Financial Framework for Macroeconomic Cycles: The Structure of Production is Relevant

Peter Lewin
University of Texas at Dallas – School of Management – Department of Finance & Managerial Economics

Nicolas Cachanosky
Metropolitan State University of Denver

A comprehensive understanding business-cycles needs to account not only for the allocation of resources over time, but also for resource allocation across industries at any point in time. Intertemporal disequilibrium has been a common theme of many theories of the business-cycle. But to properly understand how these “time-distortions” take place and how the price-mechanisms that drive them work, a clear and well-defined conceptualization of the “average length” of the structure of production, is required. The insights provided by Macaulay’s duration and Hicks’s Average Period do this. We show that financial duration and related concepts have a direct connection to macroeconomic stability. By doing this we point to important implications for macroeconomic policy. We claim not only that a low interest rate contributes to the creation of asset bubbles, we show also the market mechanism through which the real sector is affected. We argue that to accept that duration matters for resource allocation is to accept the core of the Austrian Theory of the Business Cycle (ABCT) and, therefore, that to reject the ABCT core thesis suggests also rejecting the importance of duration for resource allocation.

Management and entrepreneurship scholars new to business-cycle theory might find this, this, and this to be useful background reading.

Entry filed under: - Klein -, Austrian Economics, Bailout / Financial Crisis, Former Guest Bloggers, Recommended Reading.