Economics

Figure 1 depicts Model I. Here, we imagine an economy that produces only consumption goods. To keep Model I as simple as possible we further suppose that the only consumption good is cars. These cars are produced by firms which are staffed by the households and owned by the households.

From using the forecasting method above it should have been possible to predict that the economy would stagnate, and with high likelihood enter a recession, about 1,5 years before the dated recession. Also I argued that forecasters using this method should have been able to predict that the future recession would with high likelihood be of great magnitude at least 6 months before December 2007.

After the introduction to economic indicators in section : macroeconomic forecasting through economic indicators, this section will look at the possibilities of predicting the recession starting in December 2007 using these indicators. Again it is important to remember that as this paper is written ex. post with revised data and a broad understanding of what went wrong¹, it could easily be pointed at numerous of relatively detailed and complicated indications that something was fundamentally wrong with the US economy ahead of the recession.

There has long been something appealing for economists about the idea that the economy may behave with the same mathematical predictability of scientific laws such as Newton’s laws of motion. Newton’s laws reduce the whole complex, teeming, physical universe to three simple, reliable mathematical relationships. Is it possible to find similar relationships in the complex, changing world of markets?

IN CONTEXT

FOCUS

Markets and firms

KEY THINKER

Alfred Marshall (1842–1924)

BEFORE

1776 Adam Smith explains how large firms can lower unit costs through labor division.

1848 John Stuart Mill suggests that only large firms can adapt successfully to certain business changes, and that this can lead to the creation of natural monopolies.