Monday past at our colloquium Andreas Hoffman presented a fascinating paper attempting to depict Austrian Business Cycle Theory as a special case of a more general business cycle theory based upon Hayek’s later work on spontaneous orders. Hoffman’s general idea (I won’t do it justice in this brief summary, so please have a look at the paper) is that business cycles occur when a “displacement” creates a situation in which people are uncertain how to make “adjustments” to move back closer to equilibrium. The period during which people are groping about for what to do creates the slump, and the upturn comes, of course, once they have gotten the hang of the new situation.
A lively discussion followed, during which Israel Kirzner, Mario Rizzo, and others pressured Hoffman on just what he meant by an “adjustment,” a “displacement,” and why these things would create a cycle, rather than merely ongoing “churning,” to use Kirzner’s word. (He also mentioned Lachmann’s notion of the “kaleidic society” in this context.)
Riding home on the subway afterwards, what struck me was that we lacked a general framework of accepted definitions for talking about things like adjustments, displacements, and social cycles. (I will justify the use of “social” later.) As soon as I noticed this, the following thoughts entered my mind, essentially all at once. Some of them were drawn directly from the discussion. And they are all very preliminary: but that is one thing that blogs are for, is it not? In any case, feedback on these presently sketchy ideas is welcomed.
• “Adjustment” and “displacement” are only meaningful from the point of view of some subject or other.
• Some natural occurrences (an earthquake, a hurricane) may be displacements for all subjects.
• All intentional human action, however, represents an attempt at adjustment for at least one subject (the agent performing the action), and a likely displacement for some others.
• The response to what is, for an actor, a perceived displacement, will be an attempted adjustment on the part of that actor.
A minor example: You have hurt my feelings. That is a displacement for me. As an adjustment (for me, to assuage my injured pride), I punch you in nose. For you, that is a new displacement.
A more salient example: You have come out with a new product that directly competes with what I am selling. In response, I try to adjust by making an even better product that puts me ahead of you. While for me that was an adjustment, for you the appearance of this new product is a displacement.
• Stability and instability are relative to a time frame. Global nuclear war would produce great instability for a time, followed by a huge increase in stability, after life on earth had ceased.
Over a chosen time frame, we may define a stabilizing adjustment and a destabilizing adjustment as follows:
• A stabilizing adjustment creates, over the time frame in question, a series of further adjustments that are, at each moment, of a lesser magnitude than the initial adjustment.
• A de-stabilizing adjustment creates, over the time frame in question, a series of further adjustments that are, at each moment, of a greater magnitude than the initial adjustment. De-stabilizing adjustments can be termed “widespread displacements,” since so they will seem from the viewpoint of the actors forced to make these increasing adjustments. We may also call them simply “displacements” when it is clear from the context that we mean “widespread displacements.”
• Estimating the magnitude of adjustments necessary in response to some displacement may be a difficult matter fraught with divisive opinion. But let us take an easy case, and see how these terms may be made operational:
A car is racing up the on-ramp of a highway, evidently not planning to stop before merging into the right lane, in which I am driving. Let us imagine I have two responses that avoid a collision:
- I can slam on my breaks; or
- I can shift over to the left lane.
Which of these (if either) is stabilizing and which de-stabilizing will depend upon the traffic pattern around me. Now, imagine there are four cars following closely behind me in the right lane, but the left lane is empty. Then, hitting the breaks is de-stabilizing, since my adjustment will result in a greater magnitude of adjustments in its wake — in response to my breaking, four other cars must similarly adjust, resulting in adjustments of four times the magnitude of the original adjustment. Shifting lanes will be a stabilizing adjustment, since in response to my move, no one else has to do anything – there is zero times my adjustment that follows from it.
• During a chosen time frame, a displacement (or group of displacements) can be said to create a social cycle if, over the time period, it generates a significant period of de-stabilizing adjustments followed by a significant period of stabilizing adjustments. Alternately, the pattern may be reversed. (Query: Is Friedman’s plucking model an example of the pattern reversed?)
To match the ideal type “social cycle” as closely as possible, we would not merely want to see that the displacement(s) generate a period of instability followed by a period of instability, but we would also want to see a reason why such a pattern would tend to emerge. Best of all (most conformant to our ideal type of “the social cycle”) is if we can see a reason why the adjustment process itself tends to produce a new wave of displacements before it is complete, thus starting the cycle all over again.
An example: Aristotle and Polybius described a long-term cycle (which was, in fact, called a κύκλος by ancient authors) which we may dub “the constitutional cycle”: We begin with anarchy. The instability of anarchy is stabilized by monarchy. But that soon produces its own instabilities, leading to tyranny, which is stabilized by aristocracy. But the aristocrats become oligarchs, and are overthrown by the people, who create a democracy. That descends into anarchy, and the cycle begins anew. A crucial thing to note here is that Aristotle and Polybius gave reasons why these forms would cycle as they described.
Another example: The Malthusian population cycle.
• The fact that we can find such cycles in areas other than economics is why I refer to the “social cycle” rather than to the “business cycle,” which now appears as a special case of social cycles in general.