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NOTE What are the origins of the predominant theory of the business cycle?

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The whole phenomenon of the business cycle really began approximately in the mid-18th century.

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Before that, there was no real business cycle.

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Businesses, business would be going along at a certain sort of even pace, and then something would happen.

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Usually the government would mess things up, as of course they are accustomed to do.

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The king would confiscate, or he would decide to raise money fast by confiscating all the gold of the merchants.

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And this of course would cause a severe depression.

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It wasn't a business cycle sort of thing, it wasn't any kind of mysterious boom-bust phenomenon.

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It was simply that the king suddenly confiscated everybody's money and depression set in.

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So that was the sort of thing that would happen until about the mid-18th century,

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when we began to have this peculiar phenomenon of boom-bust cycles, which appear not periodically, but recurrently.

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In other words, the phenomenon of inflation and prosperity and so forth,

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and Rising Prices usually, followed by a bank collapse and depression and unemployment,

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and then followed again by a recovery and then a boom and so forth.

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And this is kind of a puzzling phenomenon because it didn't fit into the general economic theory.

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And so shortly after this phenomenon appeared, economists began to try to explain what was

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going on here.

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Why was there this recurring phenomenon, not directly, well, clearly related to the king

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Confiscating some of these money. In other words, something else seemed to be going on here.

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You couldn't clearly pinpoint the cause. Now, as time went on, two groups of theories began to develop.

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Of course, there are a lot of different kinds of theories, but essentially they could be classified

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into two groups. One group, which has been dominant generally, and certainly dominant up to,

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well, right now, up until the Austrian School revival. Generally, the dominance grew in hell

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The root cause must be, since around the middle of the 18th century, at about the time, business cycles first of all, the Boehm-Bawerk cycle,

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at about that time also came the Industrial Revolution. Industrialization in the modern capitalist economy first comes in really at that point.

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So therefore, these various economists concluded that the cause of the business cycle must somehow lie deeply rooted within the free market industrial capitalist system.

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In other words, the blame, because usually it's considered blameworthy, a boom-bust cycle,

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the blame rests with the free market capitalism.

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Karl Marx is one of the first economists to propound this theory, and John Maynard Keynes

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in his famous work in 1936, not only also has a similar view in establishing Keynesian

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and Orthodoxy, but also said very explicitly that before him, before Keynes wrote, a classical

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or a free market economist had no theory of the business cycle, they had no explanation

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for the business cycle or for unemployment or depression.

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They hadn't thought about it, they hadn't really given their attention to it, he was

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the first one to really do it, and he therefore understood that depression was caused by some

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One virus of underspending in the private market economy, which was supposed to be made

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up by government spending.

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In other words, if the cause of depression, say, is the efficiency of spending, obviously

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the government is the Deus ex machina, a god out of the machine, but the government can

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magically come out of the system and spend more.

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Obviously, if you can print money, he didn't quite say that, but that's clearly the implication.

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If you can print money, you're in a good position to engage in deficit-stending.

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At any rate, the Keynesian vision of the economy was, which has been dominant up until the present,

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so this is not just an antiquarian kind of exercise, the picture was essentially this.

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Well, a free market economy can do very well when it handles so-called microeconomic problems.

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In other words, it can clear the market, it can solve the problem of how much wheat to produce

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In the macro and so-called macroeconomy, the free market doesn't work.