conclusion

The Limits of the
ECONOMIC CYCLE
an exercise in nonlinear economic dynamic modelling

by Andrew Rowson, supervised by Prof. A.R.Champneys
Home A Dismal Science Economic Theory Classical Neoclassical Keynesian Cycles and Crises Measuring cycles Economic Time Series Data Processing Spectral Analysis Cycle Modelling Kaldor's Trade Cycle A Kaldorian model Conclusion Full Report	Conclusion Further research The model based on Kaldor's principles clearly has scope to be extended; indeed the range of available options is one of its appealing features. Two alternatives are considered; the first is to make the model more complicated by including, for example, a dependence on interest rates. This is easily done with the addition of a relation for the change in the interest rate that depends on the difference between demand for money and the fixed supply. Investment and savings both gain an interest rate element which ensures that investment falls and savings rise with interest rates. A second option is to make it simpler; the marginal impact of capital on saving could be dropped altogether and the numbers of parameters reduced by scaling members of related pairs such as A and ε or α and β. Having stripped the model down it could be included in a multisector model where national income is be determined by a (weighted) vector of the outputs of neighbouring economies. In conclusion In the future of economics has to embrace nonlinear models. This is not to say that there is no place for linear models, but if economics as a science is to shake off the 'dismal' label, it needs to be seen to be embracing opportunities to develop rather than relying on the 'poor set of alternatives' offered by its linear systems. Joseph Schumpeter Joseph Schumpeter is one of the few economists who has defied attempts to be categorised. In spite of this (or maybe because of it) he seems to have been admired by almost all of his peers, and has been variously described as being 'a generation ahead of his time' and 'a great innovator', although interestingly Goodwin recalls that his mathematical capacity was `sadly deficient.' Nevertheless he appears to have had a unique insight into the causes of cycles and the 'swarms' of innovation he describes that drive cycles are reminiscent of Kaldor's investment function. The simple elegance of the resulting dynamics and firm theoretical footing seems irresistible and surely preferable to a theory based on purely random events which as Lowe suggests implies that there is no theory to describe. Despite his own status as an outsider, Schumpeter was optimistic (in 1927!) about the future for economics, "our science shows hopeful signs of that ....convergence of effort, which is the necessary and suficient condition of serious achievement"