An essay on the theory of the business cycle

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An essay on the theory of the business cycle

Foldvary Conventional macroeconomics lacks a warranted explanation of the major business cycle, while the Austrian and geo-economic Georgist schools have incomplete theories. A geo-Austrian synthesis, in contrast, provides a potent theory consistent with historical cycles and with explanations about the root causes.

The geo-economic and Austrian schools have had little interaction in the past, despite many similarities Yeager, and Though the theories of the schools are largely complementary, each providing content the other lacks, so far a synthesis has not been forthcoming, although some geo-economists have incorporated elements of Austrian capital theory e.

The case for a geo-Austrian cycle theory would be less compelling if conventional new-classical, real, new-Keynesian, and other such theories offered satisfactory explanations. But such has not been forthcoming Sinha, Conventional theory centers on supply and demand shocks, with little explanatory power as to why such shocks should generate recurrent fluctuations with common characteristics and duration.

As Peter Hammondp. New-Keynesian models of menu costs, efficiency wages, hysteresis, and insider-outsider labor may offer explanations of rigidities, but hardly explain the regularity of cycles. Satya Das notes that there was no evident external shock for the downturn. Real business cycle models have attempted to fill the gap, arguing that clusters of technological innovations can create cycles.

But these models are found to be problematic when applied to international data Hartley et al,while Barsky and Mironp. Jonathan Goldstein observes that the cyclical profit squeeze caused by labor costs has been weak or inoperative since As there is still no consensus, the geo-Austrian synthesis as a testable hypothesis may provide some significant elements.

The Austrian theory explains the financial side of the cycle and the role of capital goods. The geo-economic theory explains the real side, "real" in this case having a double meaning, since the emphasis is on the real-estate market and the role of speculation, which is tied to the financial side via the banking system.

The synthesis thus not only brings together the Austrian and geo-economic theories, but also the real and financial sides of the cycle, to provide a more comprehensive explanation.

While the Austrian and geo-economic theories have existed for decades, they have not heretofore been synthesized. Conventional macroeconomic theory has not assimilated either theory; perhaps the synthesis will provide a more convincing and less disregardable theory, particularly one with predictive power.

A generic theory of business cycles The geo-Austrian theory of business cycles can be better understood by first postulating a general theory of cycles.

A basic question is whether macroeconomic fluctuations are cyclical to begin with. Alvin Hansenp. Each phase of a cycle is related to preceding phases. This proposition has been disputed, but the case for cycles is buttressed by the realization that there is more than one type of cycle, and that the various cycles have different durations.

When one examines the major depressions and panics of the 19th century in the United States, one unavoidably sees a pattern of about 20 years, with major depressions in the s, s, s, s.

An essay on the theory of the business cycle

The proposition that fluctuations are indeed cyclical implies that there are general theoretical propositions which can be made about cycles. Gottfried Harberlerp. Internationally, John Baenp. Indeed, a puzzle exists when the economy fails to recover from a slump.

From the viewpoint of an individual enterprise, it will reduce output, possibly to zero, when it can no longer expect to make a profit. Irving Fisherp. Cycles have duration because market responses to such changes take time Garrison,due to uncertainty as well as contractual, legal and social rigidities.

A major change in the economic environment can cause a rapid loss of profits, leading to business decline, unemployment, and a depression before the market can adjust to them. As noted by Friedrich Hayekp. More definite theories of cycles must therefore focus on particular reasons why there have been or must be significant and rapid changes in costs or demand.

Examples of economy-wide costs which could rise to choke off profits include labor, interest rates, raw materials such as oil, natural occurrences such as droughts, and taxation. Henry George's theory points to land and rent costs; the Austrian school focuses on interest rates.

Theories of Business Cycle

Examples of economy-wide reduction in demand include the exhaustion of gains from clusters of innovations, malinvested capital goods, general overproduction or underconsumption possibly due to inequality of incomeand shifts in expectations.The best place to buy custom essays online, and how to order your own for colleges and universities.

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The Austrian theory of the business cycle deals with the particular situation where banks grant credit to businesses via the loan market (Mises, , p.

) and in this way inflate the money supply. Sample Business School admissions essays for Wharton, Tuck and Columbia undergraduate, graduate and professional programs.

Erratic Impact, in association with EssayEdge has gathered sample admission essays to help getting into school. The business cycle is the result of two separate forces. On the one hand, there is Harrodian instability. On the other hand, this instability is contained by the inherent contradictions of capitalism.

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Business Cycle - Essay