Economic Cycles, Theories of

The following article is from The Great Soviet Encyclopedia (1979). It might be outdated or ideologically biased.

Economic Cycles, Theories of


a key component of contemporary bourgeois political economy that analyzes the cyclical instability of the capitalist economy. Prior to the 1930’s, theories of economic cycles developed on the periphery of bourgeois political economy since the dominant position was held by the neoclassical school, with its postulates of general economic equilibrium and the automatic adaptation of the capitalist economy to any disruption of supply and demand. The neoclassical school viewed crises as random and transitory phenomena. The dominance of the neoclassical school also explains why the first bourgeois theories of economic cycles originated as exogenous concepts that attributed cyclical fluctuations to factors external to the economic system. A striking example is W. Jevons’ theory that linked economic cycles to shifting sunspots. According to Jevons, the cycle of solar activity causes fluctuations in crop yield that in turn generate industrial and trade cycles.

The earliest theory of economic cycles was the theory of underconsumption that attributed economic crises to the poverty of the toiling masses. T. R. Malthus, one of the authors of the theory, used it to justify unproductive consumption on the part of parasitic classes and the state. Petit bourgeois critics of capitalism (J. Sismondi, J. Hobson), on the other hand, used the theory to defend the interests of the working class and the peasantry. The differences in emphasis in the interpretation of the problem of underconsumption stem from the varying ideological positions of its protagonists and are presently manifested in the differences between cyclical concepts espoused by orthodox and left Keynesians.

The credit and monetary theories of the economic cycle developed in the late 19th and early 20th centuries. According to these theories, crises are the result of disruptions in monetary supply and demand (R. Hawtrey, I. Fisher). The first endogenous concepts, which—contrary to neoclassical postulates—attributed cyclical fluctuations to the internal instability of the economic system proper, originated in the early 20th century. A number of major economists who laid the foundation for the concept of capital overaccumulation (M. I. Tugan-Baranovskii, A. Spiethoff, G. Cassel) published their works during the period. These economists concentrated primarily on the accumulation of fixed capital, which in their opinion formed the basis of the economic cycle. The specific features of interaction between the production of consumer goods and the accumulation of fixed capital—features stemming from the duration of the period of maturation of fixed capital (that is, the period of its construction and activation) and the duration of its use—were first analyzed by A. Aftalion. Because of these features, in Aftalion’s view, slight changes in consumer demand could cause considerable fluctuation in net investment. This phenomenon has been called the acceleration principle. Another version of overaccumulation was advanced by J. Schumpeter, who associated the phenomenon with technological progress. He considered economic growth to be a cyclical process that stemmed from the discontinuous, stepped nature of the effects produced by the introduction of new technology.

The same period saw the publication of works by K. Wicksell, who analyzed cumulative (that is, spontaneously intensifying) processes that are an important component of the cyclical mechanism. Wicksell examined the processes on the basis of the divergence between the market rate of interest and the rate of profit for investment as it should have been as a result of technological and other changes in production conditions.

Keynesian cyclical theory developed in the 1930’s with the publication of J. M. Keynes’ The General Theory of Employment, Interest, and Money (1936; Russian translation, 1948). Keynes not only made use of a number of existing concepts but also proposed a new macroeconomic theory that was designed to explain the mechanism of a capitalist economy in general and the reasons for deviations from a state of equilibrium; in addition, Keynes sought to provide a prescription for government intervention in the reproductive process. The development of the Keynesian theory of cycles is associated with the names of R. Harrod, P. Samuelson, J. R. Hicks, and A. Hansen.

The Keynesian theory views the cycle as the result of the interaction between the movement of national income, consumption, and accumulation. According to the theory the cyclical process is shaped by the dynamics of effective demand, which in turn is determined by the functions of consumption and capital investment. It views the interaction between consumption, accumulation, and the level of national income as stable relationships that are characterized by the coefficients of the multiplier (the dependence of the growth of national income on increased capital investment) and the accelerator (the dependence of capital investment on the growth of national income). The Keynesian theory provided the impetus for the construction of a number of mathematical models of the cycle that helped to define its individual categories more precisely and ultimately to expose many weak points in the theory.

Keynesian cyclical theory is the basis of state-monopoly anticyclical policy aimed at the expansion of aggregate demand during recessions and the contraction of aggregate demand during periods of rising prices. The theory holds that budgetary, credit, and monetary policies constitute the principal regulatory instrument. Keynesian anticyclical regulation, which in practice resulted in the unrestrained growth of budget deficits, did not eliminate the internal causes of cyclical development of the capitalist economy. At the same time that it attenuated the critical decline in production to a certain degree, it proved to be fraught with serious inflationary consequences in that it stimulated the excessive increase in the money supply.

In the late 1960’s and especially in the 1970’s there was a sharp increase in the intensity of bourgeois political economy’s criticism of Keynesian cyclical theory and the cyclical regulatory policy based on it as a result of the rapid rise in the rate of inflation and the failure of conventional methods of regulating crises when economic recessions and price increases occurred simultaneously

Monetary cyclical theory (M. Friedman) is counterposed to Keynesian theory. Monetary cyclical theory holds that the instability of the money supply plays the main role in the dynamics of national income and the cycle and that the state itself is to blame for this instability. It also holds that the volume of the money supply is the principal parameter of a stabilization policy. The monetarists propose that economic policy be reoriented away from the Keynesian prescriptions for anticyclical regulation accompanied by sharp fluctuations in the money supply; instead, they recommend the regulation of the circulation of money in such a way that it would increase only 3–4 percent a year.

Keynesian cyclical theory is simultaneously undergoing modernization. A number of Keynesians have sharply criticized the orthodox Keynesian concept and have proposed a slightly updated version of it. The objective of this interpretation is to focus attention on the monetary aspects of the capitalist economy and on the factors of indeterminacy and imperfect information that determine its anarchistic nature.

Despite the diversity of bourgeois theories of economic cycles, they share one feature in common in that they investigate the superficial aspects of capitalist reproduction and ignore the principal cause of the economic cycle: the contradiction between the social character of production and the private expropriation of its results, as well as the spontaneous character of development of the capitalist economy.


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The Great Soviet Encyclopedia, 3rd Edition (1970-1979). © 2010 The Gale Group, Inc. All rights reserved.