on the island, and it's all driven by Crusoe's rational reaction to changing
weather. That's just what we see in actual
business cycles: People don't switch from consuming to investing in a boom,
they do more of everything.
So you can see where I'm going: A change in the weather really is a technology shock. But can this possibly be relevant for
explaining the boom-bust cycle in real-world economies? Not always, for sure, but I'm no monocauser:
Monetary policy seems to matter a lot, as Friedman/Schwartz
argued; and other business cycle stories
But I'd like to know whether good ideas come in clusters and
whether these waves of innovation (positive technology shocks) are big enough
to move the whole economy: And when these waves do come along, do they usually boost output, hours of work, and investment? When the waves go away, do hours fall? And are the effects big enough to matter, or
do they just become background noise in an economy as big as the US?
Alexopoulous looked into this in two papers (one
coauthored), one of which appeared in the prestigious American
Economic Review. She looked at technical
books: When a lot of new books are published in a promising technical field,
does that predict a boom? And what about
reverse causation: Even if books predict booms, is that just because people
publish technical books when the economy is already doing well?
She found that books really do predict booms. In her paper
looking at new books from 1955-1997, she found that new technical books predicted
between 1/6 and 1/5 of all medium-term changes in business capital
investment. Total GDP and (to a more
modest extent) hours of work moved together with new tech books, usually with a
lag of a couple of years.
Further, she found that a good economy didn't predict more tech
books, and a bad economy didn't predict fewer.
So reverse causation isn't the story.
Finally, as a placebo, she checked to see whether years when
lots of history books were published tended
to precede economic booms. They didn't. Alexopoulos made a good effort of kicking
the tires on this hypothesis. And
remember: She only looked at technical books: There are surely a lot of other new ideas
in fields like management, biotech, and accounting that matter for business
productivity, and they also seem to come in waves.
What does this mean for rich-country economies? It means that real-world technology waves are
big enough to shift the whole economy within a few years: Investment, hours,
GDP, all moving together. Technology
shocks can create real Real Business Cycles.
Normally, macroeconomists assume that technological change
matters for the long run--big ideas diffuse over a generation, too slowly to
matter for the boom-bust cycle. But a glance
at the business media will demonstrate that executives and managers are
constantly in the hunt for new ideas, the next big thing. Key players always want that first-mover
advantage. The race to be first--so obvious
from the rise of the Internet
economy -- pushes up the demand for excellent labor and new capital when a promising