[DcifrThs]

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human being are irrational in many instances and their irrationality are the causes for business cycles (they 'we' extrapolate recent past trends into the future). unchecked, these mistakes pile up and lead to massive swings in economic indicators and economies in general.


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I'd really like you to expand on what you mean about the irrationality of people? How exactly does this cause business cycles? The great thing I have found about the market is that when individuals act irrationally it only means that there are opportunities to be made by those individuals who act rationally to make profit.

If by irrationality you mean irrational drops in the stock market like the great depression, then I am extremely skeptical. There is a natural mechanism in the free market to prevent stock markets from making big drops. When there is a huge crash I am led to believe that it only occurs because it is rational. I might be running up the wrong tree but this is always the arguement I hear, mabey you have something else in mind besides 'animal spirits'.

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not at all what i meant.

business cycles come from an inability to manage perfectly. when demand has been higher than previous periods, we order more (typically far more) on the assumption that the next period will have more of the same. it takes a realization of the decreased demand to reduce orders for the next period (again by too much). humans over-react and no matter what you do (as has been studied in oprations research), that extrapolation is unavoidable and thus business cycles will always be around regardless of whether we have a fed or not.

by the way, just to be clear, that is the reasoning behind why a business cycle exists. it is when that reasoning occurs in the demand for money and other less immediately fixable quantities that the business cycle occurs.

the fed tries to massage those issues, but even if it did it perfectly, we'd still have a business cycle.

that is what i mean by humans are irrational and thus a business cycle will arise.

Barron