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Volatility in Catallactical Systems: Austrian Cycle Theory Revisited

34 Pages Posted: 18 Jun 2014  

James Caton

George Mason University, Department of Economics, Students

Richard E. Wagner

George Mason University - Department of Economics

Date Written: June 16, 2014

Abstract

Traditional Austrian cycle theory starts from general equilibrium and explains how an expansion of bank credit unmatched by an expansion of saving can create a cycle of boom-and-bust, and with the bust followed by restoration of normality. In contrast, this paper offers a non-equilibrium reformulation of those earlier Austrian insights, which expands and refocuses the analytical agenda of macro theory. Our key analytical feature is the conceptualization of a macro economy as constituted through an open-ended ecology of plans. Within this framework, macro variables are not primitives but are derivative from micro-level interaction. In turn, the computation of optimizing actions is beset with undecidability. The theory of entrepreneurial choice that is suitable for this analytical framework is based on rule-following or algorithmic choice and not on computational maximization. What results is a macro ecology, the internal operation of which entails natural volatility. What are called policy actions, moreover, operate inside and not outside the ecology, and can create induce volatility within the ecology.

Keywords: ecology of plans; natural volatility; induced volatility; Austrian cycle theory; non-equilibrium theory; kaleidic analysis; undecidability and choice; algorithmic choice theory; entrepreneurship

JEL Classification: B22, D85, E3, E5

Suggested Citation

Caton, James and Wagner, Richard E., Volatility in Catallactical Systems: Austrian Cycle Theory Revisited (June 16, 2014). GMU Working Paper in Economics No. 14-15. Available at SSRN: https://ssrn.com/abstract=2451276 or http://dx.doi.org/10.2139/ssrn.2451276

James Caton

George Mason University, Department of Economics, Students ( email )

Fairfax, VA
United States

Richard E. Wagner (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
334 Enterprise Hall
Fairfax, VA 22030
United States
(703) 993-1132 (Phone)

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