Abstract
A survey of the literature reveals that the burial and exhumation of the business cycle are themselves cyclical events. The most recent advance in business cycle theory is the "Rational Expectations" school; however, this research area contains relatively little explicit discussion of the historical development of business cycle theory. This dissertation is a critical examination of business cycle theory from the "classical" economists through Keynes' General Theory. The earliest macro theories which retain interest are the works of Henry Thornton and Davido Ricardo, which were of the debate over the Bank Restriction of 1797. It can be shown that Thornton and Ricardo were implicitly using fundamentally different models; Ricardo used a long-run comparative static approach to explain the determinants of the price level, while in Thornton's model the relevant variable was the rate of inflation. Further, in Thornton's model, money was not neutral, especially in the short run. Thornton has recognized the crucial role of interest rates in monetary policy, but did not integrate this role into a complete model; this is left for Knut Wicksell. Wicksell's distinction of the "market" and "natural" rates is well known; in this dissertation the "Austrian" theory of Ludwig von Mises and Friedrich A. von Hayek, and Keynes' theory in the Treatise on Money are each analyzed as "special cases" of Wicksell. Specifically, it is shown that the "Austrian" theory is implicit in Chapter 8 of Interest and Prices; according to the Austrian view, a purely nominal disturbance, a change in the "market" rate, has real effects. In Keynes' Treatise on Money, it is the natural rate which autonomously shifts, and the central bank which fails to match the market rate to the natural rate. Keynes' theory however, is a theory of price level adjustments; apposite fluctuations in output and employment are given minor emphasis. The final business cycle theory to be critically examined is Keynes, in the General Theory. This dissertation emphasizes the role of two important but neglected factors in Keynes' thought: wealth effects and uncertainty. Keynes explicitly introduces uncertainty and not risk; nevertheless, in the development of the marginal efficiency of investment, Keynes' investors are implicitly risk neutral. It is also shown that the wealth effect in the General Theory is not the real balance, or "Pigou" effect; rather, it is an expectations induced wealth effect.
Karafiath, Imr (1983). An analytic survey of the development of business cycle theory. Texas A&M University. Texas A&M University. Libraries. Available electronically from
https : / /hdl .handle .net /1969 .1 /DISSERTATIONS -400274.