A New Take on the Business Cycle / by Cristian Mitreanu

The concept of the Business Cycle, or Economic Cycle, is one of the most important topics in economics.   It represents the quest to understand why an economy tends to alternate between periods of growth and periods of decline, or recession (a subject all too common these days!).   Expectedly, this is a fiercely debated subject, and thus there are several related theories out there -- check Wikipedia's "Business Cycle" for a good introduction to the concept.   As I mentioned in the past, the business theory that I developed recently has the potential to provide novel explanations for broader economic phenomena; including the Business Cycle.   Since I just published the article "A Business-Relevant View of Human Nature," which details (as opposed to the more abstract explanations from BizBigPic or my book "Spointra") the basis of my fundamental theory of business, it is now possible and timely to elaborate a little on the new perspective on the Business Cycle.   Despite my efforts to keep this simple, though, you should read the article.

... Done? ... Let's move on, then.

As you know now, all business transactions can be represented on the continuum of problem-solving behaviors.  At any given time, a transaction occupies a particular position on the continuum.  Furthermore, over time, that position tends to move lower under the effect of commoditization.  Now, if we think of a national economy as the totality of business transactions that take place within that particular country, the economy can be seen as a collection of positions, or dots, that are moving lower on the continuum of problem-solving behavior. In addition, dots are continuously added (i.e., new offerings) or discarded (i.e., irrelevant offerings).  (For some help with visualizing these dynamics, you can check the second part of my video "Strategic Vision a la Spointra," with the note that: (1) it is a two-dimensional representation; (2) it refers to a firm; and (3) the continuum is placed horizontally, as opposed to the vertical orientation from the article.  So, instead of a top-down movement, you will see a right-left movement.)

We know that each of these dots has an associated stream of revenue that grows larger as the dot moves lower (a.k.a. commoditizes).  We also know that during its continuous evolution, the collection of dots tend to form a cluster, where a majority of the revenue is generated.   I will refer to this cluster as the Center of the economy.   Due to the continuous downward movement of all transactions in an economy, the Center will typically emerge at the lower end of the continuum of problem-solving behaviors.  Now, there are three general areas on the continuum, each associated with a particular business environment.  At the lower end, the environment is characterized by commoditized offerings, high levels of standardization, high levels of competition, low margins, etc.  All this implies that practices like consolidation through mergers & acquisitions, business-process outsourcing, and personnel reduction due to process automation are very common.


I will conclude for now with some thoughts.   It is clear that the Center's formation or migration to the bottom of the continuum is natural, being driven by human nature.   The way down is characterized by increasing revenues, and thus economic growth.   But once there, the conditions tend to worsen for most participants.  Moving up or dispersing the Center can be caused by technological revolutions (which would create a multitude of new high-level offerings).   However, it can also be caused by widespread divestures of irrelevant offerings, and profound social and political change (which would cause many transactions to be repositioned on the continuum), among others.   That is why it is often that we see recession, or economic contraction, being associated with these sort of events.

So, there you have it -- another view of the Business Cycle, or a general pattern for economic fluctuations.   I will come back with more thoughts in the future, but in the meantime let me know what you think.