Thursday, December 2, 2010

Understanding the Great Recession and the Potential for Recovery

Those wanting to understand the economics behind the Great Recession that were are still struggling through will benefit from a new scholarly article by John Cochran. He is the the dean of the School of Business and Professor of Economics at the Metropolitan State College of Denver. His article "Capital in Disequilibrium: Understanding the 'Great Recession' and the Potential for Recovery" was recently published in the Quarterly Journal of Austrian Economics. The abstract is as follows:
The process of reabsorbing an economy’s various unemployed resources into new or expanding enterprises (i.e., economic recovery) potentially begins in the same moment that the discovery of and adjustment to previous errors and resource misallocations take place (i.e., the onset of recession). If all resources were perfectly homogenous and all prices, wages, and interest rates perfectly flexible, then the recession and recovery phases would indeed be a single process. Yet the fact that declines in economic activity are coupled with factors like non-homogenous capital, price rigidities, and time lags in adjustment processes means that the recession phase precedes the recovery, which is a second and lagging phase. Recession is further prolonged by interventions, especially those that create “regime uncertainty.” This paper argues that a capital structure based macroeconomics is a superior guide to policy.
The entire issue which contains Cochran's article appears worth reading as it includes articles presented at a symposium about the Great Recession held at the 2009 Southern Economic Association convention in San Antonio.

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