A Model of Primary and Secondary Waves in Business Cycles

Abstract

Schumpeter maintained that oscillations of macroeconomic variables are only the “secondary wave” of business cycles, a reflex of more fundamental “primary waves” at the microeconomic level caused by the innovating activity of entrepreneurs. Blending Schumpeter’s concern for innovation with Keynes’ concern for uncertainty and expectation formation, this article focuses on the behaviour ofentrepreneurs in front of the uncertainty caused by innovation. Entrepreneurs’ behaviour is reconstructed modelling the functioning of their cognitive processes when technological novelties appear. The avalanche process that generates a macroeconomic wave out of the microeconomic behaviour of single entrepreneurs is described as a selforganisation phenomenon. A rudimentary business cycle model is set forth, its qualitative behaviour is analysed by means of a potential function, and simulations are presented. While the basic model produces oscillations only because new technologies force entrepreneurs to change their confidence in the future, a more sophisticated version considers the effect of labour force, too.