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

0:00The whole phenomenon of the business cycle really began approximately in the mid-18th century. Before that, there was no real business cycle. Businesses, business would be going along at a certain sort of even pace, and then something would happen. Usually the government would mess things up, as of course they are accustomed to do. The king would confiscate, or he would decide to raise money fast by confiscating all the gold of the merchants. And this of course would cause a severe depression. It wasn't a business cycle sort of thing, it wasn't any kind of mysterious boom-bust phenomenon. It was simply that the king suddenly confiscated everybody's money and depression set in. So that was the sort of thing that would happen until about the mid-18th century, when we began to have this peculiar phenomenon of boom-bust cycles, which appear not periodically, but recurrently.

0:52In other words, the phenomenon of inflation and prosperity and so forth, and Rising Prices usually, followed by a bank collapse and depression and unemployment, and then followed again by a recovery and then a boom and so forth. And this is kind of a puzzling phenomenon because it didn't fit into the general economic theory. And so shortly after this phenomenon appeared, economists began to try to explain what was going on here. Why was there this recurring phenomenon, not directly, well, clearly related to the king Confiscating some of these money. In other words, something else seemed to be going on here. You couldn't clearly pinpoint the cause. Now, as time went on, two groups of theories began to develop. Of course, there are a lot of different kinds of theories, but essentially they could be classified into two groups. One group, which has been dominant generally, and certainly dominant up to, well, right now, up until the Austrian School revival. Generally, the dominance grew in hell 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,

2:00at about that time also came the Industrial Revolution. Industrialization in the modern capitalist economy first comes in really at that point. 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. In other words, the blame, because usually it's considered blameworthy, a boom-bust cycle, the blame rests with the free market capitalism. Karl Marx is one of the first economists to propound this theory, and John Maynard Keynes in his famous work in 1936, not only also has a similar view in establishing Keynesian and Orthodoxy, but also said very explicitly that before him, before Keynes wrote, a classical or a free market economist had no theory of the business cycle, they had no explanation for the business cycle or for unemployment or depression.

2:57They hadn't thought about it, they hadn't really given their attention to it, he was the first one to really do it, and he therefore understood that depression was caused by some One virus of underspending in the private market economy, which was supposed to be made up by government spending. In other words, if the cause of depression, say, is the efficiency of spending, obviously the government is the Deus ex machina, a god out of the machine, but the government can magically come out of the system and spend more. Obviously, if you can print money, he didn't quite say that, but that's clearly the implication. If you can print money, you're in a good position to engage in deficit-stending. At any rate, the Keynesian vision of the economy was, which has been dominant up until the present, so this is not just an antiquarian kind of exercise, the picture was essentially this.

3:50Well, a free market economy can do very well when it handles so-called microeconomic problems. In other words, it can clear the market, it can solve the problem of how much wheat to produce In the macro and so-called macroeconomy, the free market doesn't work.