Explaining the Four Economic Schools of Thought

There are four primary macroeconomic schools that address the economic depressions brought on by every technology cycle. Essentially, they are all rifle-shot approaches in modeling. Hanging an entire model on one factor is so 20th century (perhaps even worse – even 19th century). If we have learned anything in the 21^st century, complex models always have several significant factors. Global economic systems today are the most complicated systems in the history of humanity. Ever. A quarter of the way through the 21st century, we now understand the complexities of networks and ecosystems. Global economic systems share many traits with complex networks and ecosystems.

The four major macro schools are explored below to demonstrate why technology cycles can never be adequately addressed by them. I hope you walk away shaking your head, knowing it is time to put these models into the history books. Considering these four models are in use today should give you pause. Technology Cycles will never be understood utilizing oversimplified one-trick pony models.

Technology Cycles impact market dynamics.

We know that the market dynamics shift depending on where we are in the greater technology cycle. The beginning of a cycle is also the end of the prior cycle. At the start, the installation period of the new core of rapidly growing technologies come together. They are to immature to power the economy yet and but valuations quickly grow. A kind of casino mentality follows as more investors jump on these core technologies rapidly forming an overvaluation bubble.

Think of Intel and Microsoft in the 1990s as the “gilded age” of the microprocessor technology cycle. Then, when the valuations exceed any semblance of reality, the market abruptly crashes. As we see today, a series of missteps ensue politically and economically. Only after the pain becomes acute does the cycle move past the turning point of the downturn and move into a sustainable economy. The new technologies are mature enough to drive the economy in the second half of the technology cycle. The last time we saw this was in the 1950s and 1960s, when technologies surrounding auto production were at the core of the prior technology cycle.

Each twist in the technology cycle requires different approaches, as the history is always different for each technology cycle. This is why technology cycles must be understood in a greater context than ever before, particularly in light of where we are dangerously dangling within the cycle. Don’t forget George Box’s quote saying all models are wrong, but some are useful. Instead, we must move beyond these ancient models and construct a useful technology cycle-centric model. To do that, we must know where we have been before displacing these aged, inadequate curios. A link is provided for the relevance of technology models today.