Understanding Business Cycles

Abstract

Why is it that, in capitalist economies, aggregate variables undergo repeated fluctuations about trend, all of essentially the same character? Prior to Keynes’ General Theory, the resolution of this question was regarded as one of the main outstanding challenges to economic research, and attempts to meet this challenge were called business cycle theory. Moreover, among the interwar business cycle theorists, there was wide agreement as to what it would mean to solve this problem. To cite Hayek, as a leading example: [T]he incorporation of cyclical phenomena into the system of economic equilibrium theory, with which they are in apparent contradiction, remains the crucial problem of Trade Cycle Theory; By ‘equilibrium theory’ we here primarily understand the modern theory of the general interdependence of all economic quantities, which has been most perfectly expressed by the Lausanne School of theoretical economics.

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