Technological innovation, business cycles and self-organized criticality in market economies

Abstract

In the market economies, sustained output growth is always accompanied by persistent fluctuations. Whether the fluctuations are caused by external shocks or deterministic forces has been a controversial issue in economics, with the dominant mainstream paradigm favouring the former. Here we examine the hypothesis that an important determinant of periods and sizes of expansion and recession is the constructive and destructive effects of innovations and the consequent chain reactions. We show that an evolutionary two-dimensional Bak-Sneppen model is able to generate results which are very similar to the empirical fluctuations which we observe in GDP dynamics of OECD countries. The finding provides a different framework for understanding aggregate market dynamics from that of conventional economic theory. © 2012 Europhysics Letters Association.