Notes on a General Theory of the Social Cycle

by Gene Callahan

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:
1) I can slam on my breaks; or
2) 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.

24 thoughts on “Notes on a General Theory of the Social Cycle

  1. a) There are a limited number of ‘technological innovations’ resource, or informational asymmetries which create opportunities that people can exploit that are in play at any given time.

    b) People ‘school’, ‘swarm’ or ‘flock’ (whichever term you prefer) to exploit these opportunities. WHen they do so, they attract other people to the ‘flock’, and in doing so create sub-opportunities. Flocks have momentum. Long running flocks form a pattern of sustainable specialization and trade (PSST). This process continues until some signal informs flock-leaders that the opportunity is disappearing. (consumed).

    c) meanwhile other people entering the market cannot break into the flock and so they seek alternatives. (Generations) Some of which are simple things like experiments with new status signals.

    Arnold Kling has been saying the same thing. He calls it recalculating.

    We’re all trying to solve the same problem: macro aggregates are grossly correlative but not causally explanatory. We know that the austrian cycle is right intuitively but we can’t create enough data to prove it.

    The question the Keynesians and Monetarists pose is whether or not the ‘aggregates’ in macro are sufficient to simulate the ‘recalculation’ of plans.

    On some absurd level they’re right: between demographic changes, energy prices and interest rates everything else may just be noise. On the other hand, it’s clearly a problem when we use a lot of credit to increase employment and in doing so misallocate human capital — when human lives are not fungible, and when skills that are harder to learn and more valuable must be learned at an earlier age, and where credit removes the incentive to climb that learning curve, and where policy should assist in solving that problem rather than unemployment.

    Because when we find we have unemployment, it means that we’ve already failed.

  2. Not sure why…but the fascinating paper isn’t loading for me.

    Regarding the topic…it’s got to have something to do with perspectives. Why does your perspective matter? How does your perspective matter? If perspectives do not matter then the study of scarcity is meaningless. One use of a limited resources would be as good as any.

    In a monarchy…did your perspective have any influence on how much resources were allocated to war? In our democracy…does your perspective have any influence on how much resources are allocated to war? Cause mine sure doesn’t.

    I advocate that 150 million taxpayers should be able to choose which government organizations receive their taxes. Why do the perspectives of 150 million taxpayers matter? How do you measure the value of 150 million taxpayer’s perspectives? How do you value the measure of your own perspective? Is your perspective more or less valuable than my own?

    One use of a limited resource is not as good as any. Some uses are better than others. But “better” only has meaning in terms of everybody’s perspectives. The more perspectives you integrate the better the outcome. How do you integrate people’s perspectives? By allowing them to choose how they spend their limited time/money.

    Why am I having such a difficult time selling the tax choice concept? Why is it so hard to convince people that perspective matter? Why waste limited resources worrying about business cycles when the integration of 150 million taxpayer’s perspectives would produce so much much much more value?

    Maybe you know something I don’t? Probably…but that’s my point.

  3. Andreas is working on business cycles but the same reasoning can be applied to historic notions of very long term economic cycles, typically set into motion by clusters of new technologies — Kondratieff cycles come to mind but there are different versions. Adjustment involves the spread of the technologies and the changes this requires. Much of what you say would go for this type of adjustment.

  4. I knew it, Gene. You’re becoming an Austro-Marxist (in a new sense of the term).

    Not that there’s anything wrong with that.

    Seriously, a language involving tendencies, pressures, limits, counter-pressures,contradictions, and the like is very reminiscent of E. P. Thompson’s style of Marxist history. Of course I think EPT was a rather good historian.

    And of course (or perhaps) it can all sail under a neo-Aristotelian flag of structures, causal powers, and all that. Unless you had something else in mind.

  5. Well, I have a stricter view of cycles. Business cycles can only be caused by monetary expansions because money is demanded because of it’s expected purchasing power. The simplest description of a cycle would be:

    An unexpected monetary expansion temporarily increases the purchasing power of the economic actors,. This is a boom, however, once they spend the newly acquired monetary stocks, prices rise and the purchasing power of the actors fall back. In other words, a bust.

    Roger Garrison wrote that we have to add capital to this model of cycles since “it gives money time to cause trouble”. Monetary expansion in modern sophisticated economies increases the supply of credit that as result leads to the decision makers overestimating the availability of capital. The same process happens but the discovery of the errors is made only several years later.

    I cannot see how other types of shocks can induce cyclical fluctuations of economic activity.

  6. @Jose Cruz: “Business cycles can only be caused by monetary expansions because money is demanded because of it’s expected purchasing power.”

    Jose, that may well be so. But in my post here, I am interested in setting forth a general theory of social cycles. I don’t see how your restriction is relevant to what I’ve written here.

  7. @ xerographica: “Why does your perspective matter? How does your perspective matter? If perspectives do not matter then the study of scarcity is meaningless. One use of a limited resources would be as good as any.”

    I don’t understand in the least why this follows. It would seem to me that the ideas of “scarce” and “use” can only be defined from some perspective!

  8. @ gcallah yeah, I wish I was better at communicating. Might want to reread my comment…my point was exactly the same as yours.

    Clearly perspectives matter. The problem is that I’m the only one seriously advocating that taxpayers be allowed to directly allocate their taxes. In other words…I’m the only one saying that, all things being equal, it would be extremely valuable to allow the unique perspectives of 150 million taxpayers to determine the distribution of public funds.

    Libertarians and anarcho-capitalists want to reduce or eliminate taxes. But why do we need to say anything about the tax rate? The problem has nothing to do with the tax rate and everything to do with our failure to understand why perspectives matter. If you understand how and why perspectives matter then you would join me and invest a bit of time and effort to advocate that taxpayers be allowed to choose which government organizations receive their hard-earned taxes.

    You would be willing to forgo lowering taxes in order to gain the integration of millions and millions of people’s unique values, desires, wants, needs, concerns, fears, hopes, dreams, tastes, preferences, priorities and partial knowledge.

    Why do people believe that 538 congresspeople can accurately represent 150 million taxpayer’s unique perspectives? Addressing this issue should be our priority…not worrying about business cycles. There’s no doubt that perspectives matter…therefore…it’s entirely possible that business cycles might only be caused by our failure to integrate the perspectives of the most productive people in our society. How could putting too many eggs in one basket (congress) not have negative repercussions? Isn’t that exactly why command economies fail?

    I get the feeling that we don’t need to convince people that their perspectives matter…I get the feeling that we need to convince people how and why other people’s perspectives matter. I don’t advocate tax choice because my perspective matters…I advocate tax choice because your perspective matters.

  9. @xerographica: “The problem is that I’m the only one seriously advocating that taxpayers be allowed to directly allocate their taxes.”

    That’s cool and all, but i don’t see what it has to do with creating a general theory of social cycles.

  10. @ gcallah, it boils down to hedging bets. We all make mistakes…aka fallibilism…therefore…we shouldn’t put all our eggs in one basket. Let’s evaluate this on three levels…

    Epic Fail = Socialism resulted in epic fails because all the eggs were in one basket. One committee controlled an entire nation’s resources.

    Substantial Fail = Mixed economies like our own result in depressions and recessions because we allow a committee of 538 congresspeople to control the distribution of 150 million people’s taxes. In other words…we have way too many eggs in one basket. For example, a tax rate of 25% means that 538 congresspeople control around one quarter of our nation’s resources.

    Micro Fail = I gambled my home on a business idea that doesn’t pan out…so I lose my home…but this doesn’t have any impact on my neighbors’ homes.

    A business cycle…boom and bust…success and failure…is the result of misallocated resources. The scale of the success and failure merely depends on how many resources were misallocated.

    As we established…the efficient use of limited resources depends entirely on our perspectives. Does congress have any idea what your perspective is on how they should use your individual taxes? Does it matter that they do not? What difference does it make that 538 congresspeople do not know 150 million people’s unique perspectives?

    People think that voting reveals their perspectives. Nothing could be further from the truth. The only way to reveal somebody’s perspective is to allow them to make decisions with their own, individual time/money. This is exactly why taxpayers should be able to choose which government organizations receive their individual taxes. This would allow them to integrate their unique perspectives…which would lead to the efficient allocation of public funds…which would reduce…if not eliminate…business cycles.

    Of course…I could be wrong! But then again…this very concept is based on the idea of fallibilism…

    “It follows, then, that a less centralized society has the advantage of a greater diversification of its performance across a larger number of preceptors. This is because diversification here dilutes the impact of the ability, or the lack thereof, of each preceptor on the aggregate societal performance.” – Raaj K. Sah, Fallibility in Human Organizations and Political Systems

  11. @xerographica: Every single thing you say may be true, but you are still trolling: none of it has anything to do with my post!

  12. @ gcallah, the problem is that congress misallocates substantial resources. Your post tried to find labels for the symptoms while my comment addressed the problem.

    Basically I was just offering feedback. We all only have limited resources…so why not focus on addressing the problem rather than the symptoms?

    From your perspective I was trolling…from my perspective I was offering constructive criticism. Honestly I had no intention to bait you or get a reaction out of you. What good would that do?

  13. Xerographica, the thing about comment sections is that they are supposed to be used to address the post, not to write about your own pet peeve. You have been showing up at lots of blogs lately, and everywhere you appear, you write about the same things, whatever the topic of the post may be.

    Recommendation: Start your own blog. There you can go on at length about your concerns without bothering anyone.

  14. I’m not convinced that ‘social cycle’ is meaningful or describes reality in the same way that ‘business cycle’ does. Sure, we’ve got displacements and adjustments, but what is the cyclical social behavior we are trying to explain?

    ABCT is sensible because of the unique nature of capital and its structure. External manipulations take their time to work their way through and business booms into unsustainable activity. The seeds of the bust have already been sown. The critical factor that makes this a cycle is the period of time that the capital structure adapts to its environment.

    Simply: the business cycle is one of boom and bust. What is this social cycle?

  15. There is nothing that is “the” social cycle. But I gave to examples of social cycles other than the business cycle in my post.

  16. > You’re becoming an Austro-Marxist

    What I thought when I first read this was: here’s a strange rendering of Marxist Dialectics. But, if you read it again there’s quite a bit more than that.

    I don’t think that materialist dialectics are inherently Marxist. Mises wrote a section of “Socialism” explaining why they aren’t.

  17. I don’t think anything Prof. Callahan is saying is shocking at all. I see the roots of it in Rothbard’s “Power and Market” and to a lesser extent in the last chapter of “Man, Economy, and State.” Indeed, I recall pointing out in a working paper that the business cycle was a special case of state intervention.

    I do think Prof. Callahan has taken it a step further by labeling ‘social cycle.’ What’s really novel is the adjustment/displacement dichotomy. Literally, we are adjusting every day to other peoples’ behavior, but usually it is minor and the resulting displacements are also minor.

    It would be interesting to take this further. For example, are social cycles that involve many people long lasting? Whence do they originate? Are we talking any and all social upheaval? Revolution? Evolution? Gradual changes in culture may not be cyclical. Cycle implies repetition. What are we doing over again?

    I am also reminded of Prof. Ikeda’s book “Dynamics of the Mixed Economy.” The social cycle there is the waxing and waning of the level of state involvement in the economy, but one can bring this into the social realm as well, as Prof. Robert Higgs has done with “Crisis and Leviathan.”

    A general theory linking these ideas would be most welcome, and I think all the threads are there.

  18. This is really good Gene, and really interesting to me having spent so much time worrying about the meaning and significance of “equilibrium”. It seems notions like “displacement” “destabilizing” etc. must have a large “mental” component. Something is destabilizing if it is unexpected, surprising – which produces the need for an “adjustment” – a human action regarded by the actor as an “adjustment”. So a displacement is an event that causes a break in a sort of Hayekian equilibrium of coordinated plans.

    These, of course, occur all the time. But some are more significant than others – like a wave of related technological developments – provoking us to see a cycle.

  19. @Gene

    RE: “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.”

    Now, that’s an interesting idea. It’s a much better way of framing the discussion. I’ve come back to this post twice because you’ve go something good to work with in there. Thanks.

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