Yuriy Mishchenko Papers:
Mishchenko Y. (2014) "Oscillations in rational economies.", PLoS ONE 9(2), e87820

Economic fluctuations or business cycles are some of the most noted features of market economies also ranked among the most serious of economic problems. Despite a large number of economic cycle theories developed over the past two hundred years, the causes of the cycles remain a mystery and every new recession that hits global economy (such as the Great Recession of 2007) is attributed to a new set of reasons, notably, tied commonly to irrationalities in human economic behavior such as crowd effects, speculations, erroneous policy or strategy decisions, incomplete market information, etc. This paper shows that boom-bust cycles, in fact, are an integral part of open market economies caused by rational competitive dynamics in open markets. The paper does so by using an example of extremely simple and fundamental model of single commodity market with several rational producers. It is shown that already this most fundamental market setting possesses a property otherwise known as "Tragedy of the commons". The tragedy of the commons is the classic public goods dilemma, first publicized by Harding in a famous Science paper, which states that whenever a group of economically selfish agents accesses a common resource the competitive dynamics of the agents leads to excessive individuals' activity in exploiting that resource. In the case of a shared market, such rational competitive dynamics of the producers results in excessive production of the produce on the market that, coupled with the situation where the produce is durable and can remain on the market after the production and cannibalize new sales, depresses the market and can result in economic crash, giving rise to business cycle. This fundamental property of that basic model of market production not only associates market crashes and business cycles with systemic causes in market economies, thus implying that such cycles are systemic and largely deterministic, but also explains why such business cycles affect only durable goods production and construction economic sectors, leaving nondurable goods and services alone, and why inventories oscillate in phase with business cycles - counter-intuitively decreasing during the recession, when the sales are lower, and increasing during the boom, when the sales are higher -- both well known properties of business cycles in economics. Full text