Business Cycles: Competition Between Suppliers and Consumers

Abstract

Drastic fluctuations of economic indices (stock market indices, gross domestic product, inflation rates, etc.) are a common phenomenon from country to country. Such economic fluctuations often contain the periodicity of boom and bust, thus forming business cycles. Then searching for the origins of business cycles has received extensive attention in the literature. Although controlled human experiments in the laboratory offer a direct way to reveal causalities, researchers have seldom been able to use such experiments to directly study business cycles because of the complexity of human systems. Here we propose a free-competition market, which consists of two types of alternative products to trade with, and then recruit human subjects into the market to do a series of controlled experiments. Strikingly, business cycles emerge in this market, which is due to the endogenous competitions among the subjects (acting as suppliers and consumers) with heterogeneous preferences and a decision-making capacity that matches with environmental complexity. The accompanying agent-based simulations also confirm the emergence of business cycles, thus generalizing our experimental results beyond specific experimental conditions. Moreover, we reveal that by changing the adaptability level of agents, the business cycles undergo a new phase transition from a nonstationary fractional Brownian motion to a stationary fractional Gaussian noise. This chapter should be of value to different disciplines, such as physics, economics/finance, complexity science, and sociology.