ABSTRACT
Introduction May one speak of a cycle of business cycle theories between the end of the First World War and the end of the twentieth century? There were intense discussions of business cycle theories in the 1920s that were amplified, deepened and transformed during the 1930s because of the impact of the Great Depression and under the impression of Keynes’s new theory. Then, business cycle theory receded and economists became more and more interested in theory of growth. This transition was complicated, as is argued elsewhere in this volume (Baslé, 81-96). Growth theory was for a while relegated to the background when the oil price crisis resulted in stagflation and monetarism strengthened. Neoclassical growth theory had also been challenged by the critique of capital theory. But then, the new growth theory with endogenous technical progress arose about simultaneously with real business cycle theory and, when financial crises grew in intensity, interest in the business cycle theory in the broader sense revived. We shall look at this phenomenon concentrating on two post-Keynesian economists, Joan Robinson and Nicholas Kaldor, who were very prominent in their time. The difference from the earlier approaches will be illustrated by means of Alfred Müller-Armack; his example illustrates the insecurity created by business cycle theory in the intellectual environment of Germany in the 1920s (Schefold, 1989). Alfred Müller-Armack provided a characteristic and powerful combination of a theory of the business cycle with one of the development of capitalism. He had written an influential article on business cycle theory in the Ergänzungsband of the Handbuch der Staatswissenschaften (Müller-Armack, 1929) and expanded what he thought to have implications for the transformational growth of capitalism in a book (Müller-Armack, 1932). Here, under the influence of Schumpeter, he reflected on the openness of the development of a capitalist system. He rejected both materialist determinism and an idealist explanation of such a development through the pursuit of leading ideas; he defined the intermediate position as a process of “self-realization”. He tried to describe the consequences of the discovery of the then new visions of the development of capitalism for the philosophy of history, thus trying to say what Keynesianism might imply before it
had been created. Other German pre-Keynesians did not indulge in such speculations that were, however, fashionable at the time. The spectrum of the preKeynesian German economists like Wilhelm Röpke (1932) has been analysed by Gottfried Bombach (1992), and some of the results have also been presented, after further researches, in English (Hagemann, 1999; Klausinger, 1999). The Keynesian treatment of the trade cycle at the end of the General Theory (Keynes, 1973 [1936], pp. 313-332) has been regarded as a relatively weak part of his great work. It consists in an application of the different conceptual instruments like the multiplier and liquidity preference that he developed in his book; these instruments of static analysis are here combined to represent the different phases of the cycle. Its dynamic is thus not represented vividly, and important – admittedly difficult – problems remain unsolved. In particular, Keynes’s argument to explain the end of the depression is conventional. Net investment resumes when fixed capital has been reduced through wear and tear. But the turnover time of fixed capital varies from sector to sector. The connection between the cycle and growth is not really explained. Hence, it is not so surprising that other aspects of the General Theory were taken up primarily. Those conceptual instruments were discussed which seemed to justify intervention and suitable to steer the economy. Joan Robinson, already famous as the author of The Economics of Imperfect Competition (Robinson, 1972 [1933]) and closely involved in the discussions accompanying Keynes’s writing of the General Theory, immediately set out to popularise the main results. Nicholas Kaldor, five years younger and well known as a neoclassical economist, converted to Keynesianism and developed, among other conceptions, a business cycle model that could be said to contain the fundamental ideas for the later limit cycle models associated with the name of Richard Goodwin (Goodwin, 1967). Among the many other authors who could be named in this context, Kalecki stands out. There was widespread optimism that the Keynesian instruments could be used to avoid future lapses from full employment, and many thought that the end of the war would also make it necessary to intervene. For it had been obvious that the real end to the Great Depression came with the rearmament and the war economy. Hence, it seemed logical that disarmament would lead to a lack of effective demand. The German economists after the war were not so quick to adopt Keynesianism. Erich Schneider, as its leading exponent, adhered to what came to be known as hydraulic Keynesianism. He had to struggle with the doubts of neoclassical and ordoliberal authors. The controversy that developed within the Theoretische Ausschuss im Verein für Socialpolitik has been described elsewhere (Schefold, 2004). Herbert Giersch, for instance, tried to analyse the working of the multiplier in greater detail and arrived at sceptical conclusions. The victorious march of the proponents of the theory of growth began in earnest in the middle of the 1950s. As Bombach (1992) has pointed out, Harrod, the real founder of growth theory, was a pessimist regarding the stability of the growth process. His growth economics were almost business cycle theory. But
business cycles became growth cycles after the war, and their shorter duration called for somewhat different explanations. The Keynesian optimism regarding the possibility to control the cycle found its strongest expression in the law for promoting stability and growth of 1967 in Germany. The multiplier-accelerator model, introduced by Paul A. Samuelson (1939), modified by Hicks (1950), made it clear that time lags played an important role in the generation of cycles. Nevertheless, there were two basic interpretations: Wicksell and Fritsch used the analogy of the rocking chair. The oscillations are damped. They result from external shocks – the new macroeconomics (real business cycles) are a modern extension of the approach. The other analogy is that of the billiard ball with tendentially explosive oscillations, moving between limits. When these analyses began, the multiplier was regarded as a relatively safe and reliable concept and the accelerator as more speculative. Later, after the criticisms of the Keynesian consumption function, this hierarchy was reversed (Bombach, 1994, p. 39). Today, the model is not popular any more. Empirical research has yielded a number of stylised facts for the theory of business cycles such as that profits represent the time series subject to the most extreme oscillations or that the productivity of labour moves pro-cyclically. That cycles are asymmetrical was observed already in the nineteenth century. Despite many failures, since the 1930s, there have always been attempts to control the economy by means of Keynesian measures and mostly with explicit reference to his framework of thought. When monetarism was strong, President Reagan promised to abstain from such measures, but when he ended his politically rather successful term of office, the indebtedness of the United States had increased considerably. Automatic stabilisers were used on an increasing scale throughout of the second half of the twentieth century. One was thus far from having a common theory of business cycles shared by a large majority of the economists who were more interested in the theory of growth and, in the end, in the theory of growth with endogenous technical progress. But bits and pieces of business cycles research popped up here and there all the time, and a true revival of business cycle theory could be expected. After this rough general overview we turn to the study of the three individual economists who have been mentioned.
