Classical theory of the cycle

I’m in New Zealand doing some work that has brought me this way. But I thought I’d share this posting on the History of Economics website I put up yesterday. The query had been a follow up to my previous posting on Macro Follies but the fellow who put it up specifically said he didn’t want to reopen these issues but would like to know where he can get some information on the classical theory of the cycle. I was a couple of days late in getting to this reply, but this is what I have finally contributed. Interestingly, no one has posted since and there had only been six contributions before mine. It cannot be that across the world of historians of economics no one any longer even knows where to find a discussion of the theory of the cycle prior to Keynes although you never do know. You really never do know.

If you interested in the classical theory of the cycle and where to read it from the perspective of someone who actually thought it was valid, then the best place to go is to the first edition of Haberler’s Prosperity and Depression published by the League of Nations in 1937. Some tinge of a Keynesian influence but minimal. A second alternative, if you will allow me to say this, is from my Free Market Economics: an Introduction for the General Reader (Elgar 2011) where in Chapters 14 and 15 I discuss and explain the classical theory of the cycle with much of it based on Haberler and give lots of examples.

But it is possible to pick up just about any text published in the nineteenth and early twentieth centuries and find a discussion of the business cycle which was an integral part of the study of any student of economics, in spite of what Keynes might have said. As it happens, I am in New Zealand at the moment and have been scouting the second hand book shops and picked up a copy of Political Economy for Use in Schools and Private Instruction published in London in 1873 by William and Robert Chambers who also seem to have written it although no author is named.

It’s a short book, only 154 pages, but has a section that runs from page 137 to 143 on “Commercial Convulsions”. The discussion is part theory but also focuses on the railroad mania of 1846 which, as described, was in almost every respect identical to the GFC other than that in 1846 the problem was with the capital that poured into building new railroad lines and we were dealing with housing; and they discussed the problems as they affected bond holders while in 2008-09 it was the CDO’s and other credit instruments. If you read it, it may be quite a revelation how much they understood then.

But in the next chapter on “Accumulation and Expenditure” it explains more than half a century before the publication of The General Theory the problem with taking a Keynesian approach to induce recovery. This is from page 146:

If we compare productive and unproductive expenditure, it will be found that the unproductive is most agreeable at the time, to all parties concerned in it. In fact, it is the spending in enjoyment of what other people have made by industry and frugality; hence arises the popularity of the man who is spending money rapidly and thoughtlessly; all around him derive immediate advantage from it. If they are working, and making their daily bread at the same time that they are receiving money thoughtlessly spent, it is so much enjoyed by them in addition to what they can otherwise obtain. If they are idle, which is the far more common case, then they have the satisfaction of enjoying themselves in idleness. Their fate in doing so may not be a happy one, but it is their choice, and they praise the spendthrift who gives it them.

What can I say? The book reminds me once again that a high school student in 1873 might have had a better grasp of the nature of the cycle and the problem with public spending than does our learned profession today. If you are interested in a simple explanation of the classical theory of the cycle, just get a copy of this book which was doing no more than stating the common view of the time which was the common view right through to 1936.

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10 Responses to Classical theory of the cycle

  1. Skuter

    Haberler’s Prosperity and Depression (1st ed) is really the best reference in my view. It certainly opened my eyes. I like the taxonomy Haberler develops in order to characterise both the phases of business cycles (upswing, downward turning point, downswing and upward turning point), and the various theories (purely monetary, monetary overinvestment, non-monetary overinvestment, underconsumption, psychological theories, agricultural/’harvest’ theories) used to explain the business cycle.
    He discusses the commonalities and differences between theories and where their strengths and weaknesses are in explaining the various phases. What struck me was the sense that no one particular theory explained each and every business cycle. Some might see that as a weakness in classical business cycle theory, but I see it as a virtue. What they mostly had in common was that there were structural issues at play and so it would be reasonable to think that structural disturbances could arise from different causes.
    Contrast that with what we have today. Downturns in nominal and real GDP, rises in unemployment, etc. are all seen as being symptomatic of the one problem that for each group of theorists is fixed by following their own, one-size fits all prescriptions. Monetarists of all stripes say we need more money, while Keynesians say we need to G to replace flagging I. There is never any discussion about the effects of increasing M on capital structure, etc. and no-one ever talks about the composition of G versus the composition of lost I. It is all about aggregates. That to me, sums up what we lost when classical theories were essentially discarded…

  2. Helen Armstrong

    Following on from p 146, would I be right in thinking that Keynes gave governments the excuse in a foil of economic legitimacy to do what is inherent in many natures anyway – spend and spend more and then borrow to spend more. To hell with tomorrow.

  3. sdfc

    Ignoring debt backed money is a major failing of almost all branches of macro. Classical economics is no different. I’m guessing Haberler did too.

  4. Skuter

    Serf, I think you’d be surprised. Don’t guess. Have a read. You won’t be wasting your time…

  5. sdfc

    I’ve got about 9 million books on the reading list at the moment and you’ve added another one. Thanks for that.

  6. Skuter

    Sorry, that should read sdfc, not serf. Damn auto correct!

  7. sdfc

    I thought that might be the case.

  8. Skuter

    If I were you, I’d bump P&D up the reading list. If you, can, get hold of both 1st and 3rd editions and compare them. The changes (keep in mind the time period) sparked a vast literature in the history of economic thought…

  9. sdfc

    Okay I will. It doesn’t take much to get me to buy a book. You are interrupting my plan of re-reading my suite of Greek history starting with Herodotus.

    I’m reading Why Australia Prospered but after that I reckon I need to take a break from economics for a while.

    I read Rothbard’s America’s Great Depression recently. Not a patch on the Mystery of Banking.

  10. Sinclair Davidson

    Make sure you get the first edition and not one of the later editions. You can download a later edition from the Mises Institute at zero-price.

    I managed to get a reprint of the first edition published by University Press of the Pacific (in 2001) a couple of years ago, but I can’t remember where I got it from. It was an online source.

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