THE IMPACT OF PROCESS INNOVATION AND REAL BUSINESS CYCLES THEORY

摘要

The shockwaves from the September 15, 2008 Lehman Brothers collapse continue, with share prices still falling globally. Our position, however, is that the real economy is more important than financial markets. This paper addresses the cause of the current recession from a real-economy perspective. It does this with an analysis of real business cycles (RBC) theory using a new log(log(x + 1) + 1)-type utility function rather than either the log or constant relative risk aversion (CRRA) ones. Using the RBC theory with a new utility function enables us to demonstrate that the progress of process innovation leads to a transition from supply to demand constraints in developed such economies as those in the United States and Japan, and that weak demand in those countries, even without demand saturation, has caused the current recession. Our use of this function has also led to such previously impossible findings as a strict formulation of involuntary unemployment and the existence of business cycles. This paper demonstrates that utility functions' shapes affect whether they find that progress in process innovation results in increased or decreased hours of labor. Furthermore, although both process and product innovation give companies advantages, their impact on overall economies are different.