The conventional explanations for fluctuations in output and unemployment all imply that there are unexploited profit opportunities in the world. They cannot hold true in an economy that is in continual equilibrium, where people are constantly seeking profit opportunities.
A more rational explanation for business cycles may be found in shifting demand and supply curves. Shifting tastes and shifting technology lead to wage differentials between different sectors of the economy. These will lead to unemployment as people move from low-wage sectors in search of jobs in high-wage sectors. Unemployment in the form of job layoffs—whether short-term or indefinite—occurs when differentials exist between current and future labor productivity.
The average severity of a society’s business cycles is largely a matter of choice. If people chose to invest in sectors with both high and low expected growth, the economy would be more diversified and exhibit lower fluctuations in output, but also lower growth, than it would if people invested only or primarily in sectors with high growth. Investments in sectors that do not move together will allow greater diversification, hence lower fluctuations; but sectors that move together will generate lower unemployment, since wage differentials will be smaller.
In this sense, forecasts of business cycle movements will not help in formulating countercyclical fiscal and monetary policies. The level of business cycle fluctuations we have is the level we want, given the tradeoffs people face between (A) expected growth, (B) fluctuations in output and (C) unemployment.
Nor will predictions of business cycle movements help in predicting stock price movements. On the other hand, stock market movements can be used to predict business cycle movements. For example, large moves in opposite directions in different sectors of the stock market should be followed, normally, by an increase in unemployment.