Dear Friends,
It seems to me that the macro economy, in many ways, acts like distributed capacitance. Slowly ratcheting supply out of phase with demand. In the economy, once distributed capacitance in supply chains cause supply and demand to get too far out of phase, recession is the inevitable result. The lowered costs that the recession cause (to lower inventory) then drive the next boom cycle.
Whenever you transmit a wave form through a capacitor the wave form emerges ninety degrees out of phase. The voltage leads the amperage. A pair of wires is basically a capacitor. The longer the wires the greater the capacitance in Micro Farads. When we transmit signals through wires long distances we have to account for this distributed capacitance.
Since power is a factor of voltage times amperage power is reduced in the signal. Because when the voltage spikes in the waveform amperage is low. (Not in phase). When amperage is high voltage is low. Both dampen the signal.
The economy can be thought of similarly. As inputs move through the economy they are converted into outputs. Then some of the outputs are converted into more complex outputs, and so on. At each step in the process some inventory is held to form a buffer incase of a spike in demand or a temporary hiccup in some input. Labor is similar.
When a business is flush with increasing demand the firm is likely to hire a marginally cost effective worker because as the worker becomes more proficient demand will grow, creating a need for that worker, just as his efficiency peaks. This can be effective at keeping ahead of the demand curve. It also protects the quality of products.
All this angling, to protect against legitimate issues that may come up and to get the best advantage on our competitors in the demand cycle, makes business works like a capacitor. Storing up output and surplus workers on the bet they will be needed. At some point the macro supply gets too far out of phase with demand and a recession results. Selling backlogs of cheap inventory (and cheaper labor cost) starts the economy again.
History shows us that every economy goes through a boom bust cycle. This cycle was supposed to be stopped by enlightened Federal Reserve policies. These policies were supposed to at least lower the magnitude of future recessions. At best the Federal Reserve has been only marginally successful. Because it only controls a portion of the supply. Money.
Products, services and workers make up a far larger and more important part of the macro economy. A hiccup in the money supply can trip an economy into recession, (if supply and demand have grown out of phase enough), as it has in the recession we are now in. But the money supply is simply a means for the rest of the economy to do the real work. The ends, (output).
Money can be and has been used as a choke point to control an economy like the throttle to a car engine. This analogy quickly breaks down. Choking off money in the capacitive system that is the macro economy is more like lowering the amplitude of the waveform entering a distributed capacitor. The phases still get out of phase but it seems make the snap back smoother. It is only how it seems however. The real result of lowering the amplitude of the money supply is to lower the signal strength. In the case of the economy the total output and demand. (Equilibrium will be higher where money is not used this way).
Engineers use a different method to control the phases. Electrical engineers use inductors to balance the capacitive effect. In short an inductor is a coil that causes the opposite effect as a capacitor. It makes the amperage lead the voltage ninety degrees out of phase. When you place an inductor in parallel with distributed capacitance it puts the voltage and the amperage back in phase.
In a macro economic sense this would require many efficiency gains, like, real-time information on demand for output and availability of inputs for a given firm. Then just in time inventory would help alleviate some of the capacitive effect. Other means to lower the capacitive effect and raise the inductive effect in a macro economy would be the most effective means to slow or lower the amplitude of the economic boom bust cycle.
Wouldn’t it be something if Maxwell’s Equations can be applied to the macro economy?
