Theories of the Business Cycle: From Frisch, Kalecki & Tinbergen, to Lucas, Prescott & Kydland
In his Nobel Memorial Prize Lecture, Prescott ‘announced’:
“[T]he meaning of the word macroeconomics has changed to refer to the tools being used rather than just to the study of business cycle fluctuations." Prescott’s Nobel predecessor, George Stigler, in reviewing - somewhat pungently - Paul Samuelson’s magnum opus, the Foundations of Economic Analysis, was more measured in his claims for the characterising role for ‘tools’ (which is, usually, an euphemism for ‘mathematical tools’): “[B]ut who can know what tools we need unless he knows the material on which they will be used.” Moreover, Macroeconomics, from the outset, was much more than ‘just .. the study of business cycle fluctuations’.
Monetary theory and banking policy were the defining origins of the subject, especially in Wicksell (1898), to which, much later, the theory of employment and business cycle theory were grafted, as it became clearer, particularly in the works of Lindahl, Myrdal and Keynes, that its defining scope was the interaction of real and monetary variables, in studying the pathology of aggregate dynamics. These pathologies were identified, first by Wicksell and Fisher, in terms of sustained periods of inflation (and its effects on the distribution of wealth and income); then, as a result of events in the immediate period after WWI, with reference to hyperinflation; finally, the ‘great depression’ was decisive in adding persistent unemployment of both produced and unproduced resources – labour & ‘capital’, in particular – to the list of pathologies of macroeconomics.
In this ‘Seminar Series’ an attempt will be made to trace the story of the way business cycle theory – once known as trade cycle theory – came to be a defining element of macroeconomic theory. It is not only for convenience that the seemingly arbitrary date of the ‘early’ 1930s is chosen as the starting point for this story; of course, there can be no terminating point – the subject keeps on evolving, as do the contours of the ‘material’ on which it is based. It is, however, decisively, not a ‘Whig’ history!