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Paul Ormerod, now at Volterra along with Craig Mounfield, published an interesting paper last year entitled "Power Law Distribution of the Duration and Magnitude of Recessionin Capitalist Economies: Breakdown of Scaling". The results were partly summarized last year in the Economist. Now that we appear to be in an unqualified contraction of GDP, it is worthwhile examing their analysis which can be found at

http://www.volterra.co.uk/

The authors examined recessions in 17 capitalist economies during the 1870-1994 period for both duration and magnitude. On both, they noted clear power laws on the distributions. N = a/D^b

On duration the entire data set gives a=209.6 with b=-1.69. The standard error is 13.54. However, they found that the number of recessions of one year or less in duration seemed out of line with the remaining data set. In other words, the regression model overpredicted the number of recessions with long duration. When they removed the less than one year recessions from the data set they found a much better power law fit with a standard error of only 0.05. Therefore, it is possible that two data sets exist.

This suggests that there may be two separate processes going on in the process which generates data on capitalist recessions. When a recession arises, for whatever reason, agents appear to have some capacity to react quickly, which often prevents the recession from being prolonged beyond one year. Once this has happened, however, recessions can take place on all scales of duration, exactly as in a sand pile experiment.

Keynes [5] emphasised the importance of expectations in recessions in the capitalist economies. He suggested that once expectations, particularly those of companies, about the future become particularly depressed, they are then very hard to revive. In these circumstances, companies, far from adapting in a positive manner, continue to cut back on investment and employment, thereby further prolonging the recession. The empirical evidence is certainly consistent with this view.


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