Utopia, you are standing in it!

An important factor behind business fluctuations arises not from the balance between aggregate output and aggregate consumption, but from the accuracy of entrepreneurial matching of the individual patterns of output with the pattern of actual consumer demand in individual sectors (Black 1987, 1995).

Fluctuations in the match between resource deployment to different sectors and product demand across sectors can create major fluctuations in output and employment because moving resources from one sector into another is costly and time consuming.

What consumers will want and what can be produced in the future is uncertain. A plethora of sectors produce highly differentiated products with increasingly specialised inputs to serve consumers. Modern economic growth is built on ever greater product differentiation, ever greater product variety and ever increasing product quality produced by ever more specialised workers, firms and sectors. This explosion in specialisation is increasing the vulnerability of the business cycle to technology and taste shocks (Black 1987, 1995; Mehrling 2005).

Mismatches in the sectoral pattern of installed production capacity with actual consumer demand will arise because investments are driven by entrepreneurial forecasts of what will be wanted by consumers in the future. The capacity to produce output requires prior investments based on speculations about future consumer tastes, resource availabilities and technology progress. Part of the volatility in output and employment growth is from these investments depending on the uncertain details of the future.

Entrepreneurial errors in forecasting consumer wants will lead to inevitable mismatches of the production capacity with unfolding consumer demand. If future consumer tastes and upcoming technologies were better known now, employment would grow and be reallocated more smoothly to new uses than otherwise (Black 1987, 1995; Mehrling 2005).

When the match between forecasted and realised demand is good, there is a boom. Resources are where consumers want them. When the match is poorer, there is a recession. If events unfold in a markedly unanticipated direction, existing plans, investments and contracts require revision (Black 1987, 1995).

The existing matches between consumer desires, resource allocations by sector and production technologies can deteriorate. While a reallocation occurs, resources are diverted from production and are scrapped or are unemployed while searching for new uses (Black 1987, 1995).

Fixing a deteriorating match requires the structure of production to shift more into line with the structure of consumer demand. This takes time and consumes resources because human and other capital is highly specialised. It takes time for the new investments consistent with the latest entrepreneurial forecasts of consumer demand to be planned, built and start producing (Black 1987, 1995).

What can appear to be cyclical unemployment comes from alternations between periods of above and below average accuracy on entrepreneurial forecasting and better and worse matches in actual consumer demand and actual capacity to supply at the sector level (Black 1987, 1995; Mehrling 2005).

This type of cyclical unemployment is not a product of monetary, fiscal or other policy shocks. Resources need to be reallocated into a better alignment with consumer tastes and technological and resource possibilities. Preventing these sectoral reallocations will keep resources from moving from lower to higher value uses.

After longer booms, more human capital is more specialised to specific sectors, firms and jobs. This increased specialisation that helped underpin the prior economic boom can slow the recovery of employment at the end of the recession.

Job seekers will take longer to find good new job matches if they have more distinct backgrounds and specialised human capital. Job seekers have an incentive to search for longer to find these higher-paid job matches.

Employers will take longer to fill vacancies. The applicant pool is more diverse because of the high degree of specialisation of labour that is a legacy of the long prior boom. This accumulation of specific human capital over the course of longer booms will mean the length of the burden will affect the depth of the subsequent recession.More highly specialised workers have to be re-matched with new occupations and new sectors. More workers than usual will be putting off the day of having to face up to scrapping a significant part of their old human capital.