The Theory of the Business Cycle in Hayek, Keynes and Schumpeter

The paper below is a preliminary version of a chapter in my forthcoming book. I first presented this at a conference of Heterodox Economics in London ,  U.K. in 2001. The tech crash was in the air and unemployment had risen sharply so it seemed a sensible time to re-explore business cycle theory in order to glean applicable insights to the then current predicament. The recent 2008 crash and subsequent long recession obviously has refocused our attention on these issues again. So it seems a good time to revisit my paper. Thanks to Andy Denis, City University , London for the original invitation and his helpful comments. Thanks also to those who have made kind comments about the paper on twitter and on my blog. Yes indeed I wrote this a decade ago !


 The theory of the business cycle in the work of Keynes, Hayek and Schumpeter: What do we know in the age of globalization?


                        A Paper presented to the Association of Heterodox Economics

London UK

July 7, 2001

by Harold R. Chorney


Public Policy

Concordia University

1455 De Maisonneuve Blvd. West

Montreal, Quebec

Canada H3G 1M8




The age of globalization has raised the vision (or spectre) of an almost seamless world of international trade, freely flowing instantaneous financial transactions and the dynamic energy that untrammelled laissez-faire is supposed to release.  Accompanied by some of the most conservative economic policy promulgated since the early 1930s, the conventional wisdom about the business cycle is that the cycle is now passé, banished by judicious and wise monetary policy, prudent fiscal budgeting and clear anti-inflationary policies.  In Canada, the United States and I suspect in Great Britain the pundits only a year ago were still predicting clear sailing ahead for their respective economies.  The era of the soft landing, the careful pause and the sustainable expansion was on all but the most churlish commentator’s lips.

But the bursting of the stock market boom that occurred in the spring of 2000 and the panic stricken plunge in values that accompanied it has been followed by a sharp rise in layoffs, a dramatic slowdown in growth rates and a substantial increase in the number of those seeking unemployment benefits in the United States.  In Canada, thus far the slowdown is less dramatic influenced as always by the lag between events in American markets and their impact upon the much smaller but still largely integrated Canadian economy.

The cycle in Canada is typically 70% explainable by that in the United States despite the existence of a separate currency and central bank and somewhat different set of governmental and financial institutions.  The degree of integration that has occurred under NAFTA has increased the dependence of the Canadian business upon US export markets and the degree of integration of financial markets has also increased significantly.  Exports to the US now constitute about 80% of all Canadian exports.  Canadian interest rates closely follow American settings although Canada has usually pursued a tighter monetary policy to ensure slightly higher interest rates in a vain effort to protect the exchange value of the Canadian currency.  It currently trades (June 4, 2001) at 65 cents US.  Intriguingly, the Euro is now about 85 cents US while the pound is $1.42 US. (note the huge rise in the Euro dollar exchange rate since then. 85 cents for a euro may reappear in the not too distant future. The other huge change is the current parity exchange rate between the U.S. and Canadian dollars.)

Great Britain once the world leader in financial markets is now increasingly integrated into Europe.  With its likely entry in the European currency union after a post election referendum the strongly monetarist bent of the European central bank will become the dominant influence in Britain’s financial markets. (Here I was thankfully wrong and Britain did not enter the euro which is a decision it must be very pleased about. ) The City is clearly far more powerful than Bay Street in Toronto but over time Frankfurt and Paris will weaken its influence.

These sorts of changes raise important questions about the future of the nation state as a policy setting locus of power.  They also raise questions about the nature of economic policy making and the necessity for a refurbished theory of national and international economic behaviour.  In this kind of policy environment what can we expect of the economy and in particular the pace of growth? The long American boom that began in the early 1990s has slowed dramatically.  Once again there is evidence that despite the optimistic talk of the banishing of the cycle that business cycles are still part of the American landscape.

The prolonged slowdown in Japan, the uncertainty in Europe and the spillover of the American slowdown into Canada and Mexico, the turbulence in Argentina confirm that the world economy is, as always, connected.  Ought we to be guided by the new classical position that the best policy is as little intervention as possible, other than bank rate changes to control inflation? Can real business cycle theory based on stochastic models of the impact of shocks on the neoclassical Walrasian equilibrium and individual agency account for all business cycle behaviour?  Or do rigidities, uncertainties and failures of the exchange mechanism explain as much as technological shocks? (Edward Prescott, 1997; Charles Plosser, 1997; G.Mankiw, 1997; Larry Summers, 1997 all in Dean Baker et al, 1997.)  What can we learn from some of the classic theories of the cycle developed over the past century? What is the role of overinvestment, waves of innovation, technology shocks and sharp changes in expectations? What do we know in the age of globalization?

This paper will only seek to begin to answer some of these questions.  But in the process of doing so I hope to show that there is much to be learned from some of the now classic theories of the cycle.

The question of globalization

The era of globalization and the construction of trade blocs like NAFTA has altered behaviour of labour markets.  Trade unions, anti-free traders and other critics in the Americas argue that real wages have been depressed in comparison with previous standards.  In all three countries that are members of NAFTA, the US, Mexico and Canadian partisans of the trade union movement, community activists ecologists, students and anti-free trade researchers have written extensively on the negative impact of the trade pact upon workers’ rights, wages and life chances.  Lower unemployment has been accomplished in Canada and the US but not in Mexico.(M.Larudee in Dean Baker et al, 1998)  But it is alleged at a considerable cost in terms of living standards and the rights of working people.  Furthermore, there is no evidence, at least in the case of Canada ,that NAFTA has been responsible for the decline in unemployment as opposed to a normal cyclical recovery brought about by monetary and fiscal policy.  Indeed, the recovery phase in the cycle has been significantly retarded in comparison to previous cycles.  Whether trade liberalization or excessively monetarist policy is responsible is a very debatable and still unresolved argument.

For an extensive discussion of these issues from a labour point of view see the publications of groups like the Canadian Centre for Policy Alternatives and the Council of Canadians; in the US the Economic Policy Institute, The Jerome Levy Institute of Bard College, and the trade unions; for Mexico see the work of the Latina American  Newsletter: regional reports Mexico and Nafta and The Mexico project, a joint initiative involving researchers from the Instituto Tecnologico Autonomo de Mexico, Georgetown University and the Norman Patterson School of Carleton University.


Most of these publications document workers’ rights abuse, plant closures, falling rates of unionization (with respect to the US but not Canada), increased anti-labour legislation, for example, in Ontario Canada’s largest and most industrialized province, and the general assault on social welfare programs, health care and educational entitlements.  Many analysts are very aware of the job search models and the policy mix associated with these models but prefer to regard these approaches as ideologically inspired covers for anti-labour policies.

Some of these policy changes took place under the auspices of the Reagan and Bush (the elder) administrations.  But some of it under the Clinton administration.  (The Nation, Atlantic Monthly, Feb.2001; James Galbraith, Created Unequal; Thomas Palley, Structural Keynesianism)

An early example of this sort of critical assessment is Frances Fox Piven and Richard Cloward, The New Class War: Reagan’s Attack on the Welfare State and its Consequences. published in 1982.  Clinton’s welfare reforms which were very much in the spirit of efficient job search labour market clearing models inspired widespread anger and criticism among traditional Democratic supporters.  President George W. Bush’s program of increasing the role of charitable and religious organizations in helping the poor is simply the logical progression it is alleged of what has gone on over the past twenty years under 3 presidents Republican and Democratic.  Its intent is to soften the edges of the efficient market approach and it also appears to reflect the genuine spiritual side of Mr. Bush.  Whatever its intent it shares a common perspective that unemployment and poverty is a personal or supply side rather than systemic or demand side problem.

In Canada, in particular, there has been an explosive growth in anti-globalization publications and research.  Recent Canadian publication in this tradition include Andrew Jackson et al Falling Behind: The State of Working Canada, 2000, Mel Hurtig, Pay the Rent or Feed the Kids: The Tragedy or Disgrace of Poverty in Canada; John Shields, Dismantling the Nations; Steven Shrybman, The World Trade Organization: A Citizen’s Guide; Christopher Merrett; Free Trade: Neither Free nor About Trade; Maude Barlow and Bruce Campbell, Straight Through the Heart: How the Liberals Abandoned the Just Society and John Warnock, The Other Mexico; Trevor Harrison and Gordon Laxer, The Trojan Horse: Alberta and the Future of Canada. and Jim Standford’s Paper Boom. (See also Stanford’s article in Dean Baker, G.Epstein and R.Pollin, Globalization and Progressive Economic Policy in which Stanford effectively undermines the argument that it is freer trade per se, as opposed to monetary and fiscal policy and exchange rate policy that has led to most of the negative effects experienced by Canada since entering into the FTA and NAFTA.

In the United States the Economic Policy Institute publishes a biennial report The State of Working America.  Publications like David Gordon, Fat and Mean: The Corporate Squeeze of Working Americans and the Myth of Managerial Downsizing, James Galbraith, Created Unequal: The Crisis in American Pay; Ethan Kapstein, Sharing the Wealth: Workers and the World Economy; Thomas Palley, Structural Keynesianism and others have made very similar sorts of arguments.  Much of this research has contributed a great deal to our understanding of the changes that have been taking place in North American society and how they are perceived by a significant group in society.  In Europe there has also been a number of important works by writers like Robert Boyer, John Grieve-Smith, John Eatwell, Megnad Desai, Jonathan Michie, Ricardo Petrella, Hans Peter Martin and Harald Shumann, which have explored similar themes but from a European perspective. (Jonathon Michie&John Boyer&D.Drace, States Against Markets: The limits of Globalization, 1996; Ricardo Petrella, Ecueils de la mondialization, 1997; Dean Baker et al, Globalization and progressive economic policy, 1998.)

The Debate over Globalization


The debate is clearly about the clash of ideologies and discourses.  Without doubt there is some truth to the critics’ claims.  But there is also without doubt truth to the argument that trade liberalization when properly regulated, and perhaps even when not, produces enormous wealth as well as turbulence.  The distribution of this wealth is another matter.

Furthermore, the debates that have been taking place far too often take place without careful analysis of the actual real, longer term, as opposed to short term nominal impact of the changes unleashed by globalization.  They rely on no easily comparable models of economic behaviour.  Instead, there is a panoply of models, debates and assertions many of which contradict one another.

Compare for example, the 1998 Dean Baker, Gerald Epstein and Robert Pollin edited work on Globalization and Progressive Economic Policy with the 1999 Martin Feldstein NBER collection on International Captial Flows.  Both works address some of the same policy issues.  Feldstein’s 484 page collection does not even mention the word globalization in the subject index.  Instead, the group of neo-classical mainstream economists address the explosive growth in equity markets, capital flows and the changes that modern technology has wrought in the management of financial transactions on an international level with fairly traditional descriptive, historical, institutional and analytical techniques.  One is reminded of the debate that took place some thirty plus years ago between the advocates of regarding international investment as the simple outgrowth of trade and therefore best analysed through international trade theory and the excitement generated by writers like Yale’s Stephen Hymer who believed that the political economy of the multinational corporation was a far more relevant vector of analysis.

Of course, the very term globalization is much disputed in the literature.

On the one hand, those who consider it to be a real phenomenon point out statistics like the following: the average cost per short ton in ocean freight charges has dropped from $95 in 1920 to $29 in 1990; average air transport revenue per passenger mile has fallen from 68 cents in 1930 to 11 cents in 1990; the cost of a 3 minute telephone call from New York to London has fallen from $224.65 in 1930 to $3.32 in 1990 to 50 cents in 2001;

World trade has risen from 629 billion dollars in 1960 to 5.2 trillion in 1995 dollars; foreign direct investment flows have increased fourfold in the 1990s from 629 billion U.S. dollars Financing activities associated in the international capital markets in the form of bonds, equities and debt has increased from 610 billion in 1982 to 1572 billion in 1996.  Foreign direct investment in the US has increased at the rate of 27% per year.  The daily volume of foreign exchange has risen from 718 billion dollars in 1989 to 1579 billion dollars in 1995 or at a rate of 14% annually.





UNEMPLOYMENT 1930s, 1980s & 1990s




United States






























































































































SOURCE: US Bureau of Labour Statistics; Statistics Canada; National Statistics UK

Note: 1995+ is for the month of February for Britain and the US.   The figure for Canada is the average for the whole year.  *2001 is the latest figure available, May 2001.

Large multi-national corporations like Mobil Oil, Dow, Coca Cola, and American Express earn over half their operating profits in international business.  Leading companies like BP, GM, Sony and Microsoft do business in more than 100 countries around the world.  A company like Nestle has over 203,000 employees world wide while employing only 6700 in Switzerland.  (See Suk H.Kim and Seungh Kim Global Corporate Finance, Oxford, 1999, Blackwell, ch. one See also the work of Kenichi Ohmai.)  The world has become a true global village interconnected in a 100 different ways on any given day.  One can enter the internet in Montreal and within a few minutes one is in touch with London, Paris, Tokyo, Sydney, New Delhi and the Middle East at a very nominal cost.

Globalization: An Exaggeration


Many analysts point out however that this global village notion is much overblown particularly with respect to the United States economy where dependence upon external trade with respect to exports is still only about 10% of the GDP.  In Canada the percentage is much higher, around 40%.  But once we net out double counting on goods that are first imported than re-exported with some value added on, actual dependence is of the order of 25%.

In the case of the US the percentage of the total GDP accounted for by merchandise exports and imports is about 19%.  If we use the broader measure of goods and services the figure rises to 24%.  However the comparable figures in 1880 were 16.4 and 19.7% respectively.  What is noticeable is that from this peak in the nineteenth century the proportion declined through most of the twentieth century, particularly from 1930 to 1960 and then began to rise.






Goods & Services




($ in millions)






















































































Note: G&S refers to goods and services

*GDP for 1999 X+M+ exports plus imports

Sources: Historical Statistics of the United States: Colonial Times to 1957, U.S. Dept. of Commerce, 1960; Economic Report of the President, U.S. Government Printing Office, various issues; Survey of Current Business, April 2000 From Robert Dunn, “Has the US Economy Really Been Globalized?” (The Washington Post, Winter 2001)

Dunn argues that in terms of capital markets, real interest rates, volume of trade and synchronization of business cycles there is little evidence of a truly global economy.  As he puts it “Evidence of a fully globalized U.S. economy is sparse.” He further argues that the collapse of the Bretton Woods system of exchange rates represents a “shift away from globalization” loosening the linkages that once constrained macroeconomic policies.   “Because the U.S. economy is not globalized economic policy should not be based on the fear of its effect.” (P.64)

On the other hand, in contrast to Dunn, a number of analysts from neo-classical institutional and post Keynesian perspectives offer analysis and data  to suggest that globalization is a real phenomenon involving increased importance of foreign trade including merchandise exports and financial and other services.  At the same time, most analysts recognize that with respect to historical comparison the period 1870 – 1929 in the case of Latin America, and Africa trade loomed larger during this period than it does now.

Dunn makes clear that his own agenda involves fast tracking expanding free trade, NAFTA and another round of the WTO.  In this respect, although he may well be right about globalization, he might well be wrong about dismissing the critics of globalization and what has been happening so swiftly.  Full steam ahead with trade liberalization may seem very appealing but there are some serious potential roadblocks.  For, at the base of much of the criticism there is a certain malaise that needs to be addressed.

This malaise involves a widespread anxiety among many people that the current economic situation is not stable and has involved an erosion of equity.  Considerable wealth has been created but the distribution of the rewards and externalities has been very one sided.  In a number of countries including Canada, France, Germany and Japan the past decade has involved a long period of economic disruption and erosion of social programs, educational access and other key aspects of the post-war welfare state.  A strong sense of grievance and socio-economic class difference has arisen and once out in the open is not so easily put back in the box.  Furthermore, the solutions to supposed labour market rigidities(Arthur Okun, Prices and Quantities, 1981)  that are usually suggested by economists involving further cuts in income support programs are widely resented by the poor and lower income groups and their intellectual supporters.

It was a similar sort of malaise that John Maynard Keynes dealt with in the 1930s when he argued that cutting money wages would not be a practicable solution to the problem of high unemployment.  In Keynes’ view at the time the extent of money wage reduction required to restore full employment in the middle of the slump was excessive. (J.M.Keynes, Collected Works: The General Theory and After, Vol.13,p.198)

It was also Keynes’ theory about the origins of the business cycle originating in excessive savings and excessively pessimistic expectations about rates of return on capital that led him to be a strong opponent of Freidrich Hayek’s view that the explanation for the cycle lay in overinvestment in the capital goods sector, forced saving to finance it and the reduction of interest rates below their Wicksellian natural rate.

In Hayek’s theory this led directly to a too rapid expansion of the capital goods sector and excessive consumption which resulted in an artificial boom financed by bank credit.  The boom turned to a bust when the excessive liquidity resulted in unsustainable loan expansion and bankruptcy.  The solution from Hayek’s point of view was the restraint of the economy before the inflationary boom could get underway.

Thus he was opposed to Keynes’ efforts to stimulate the economy through cheap credit and the promotion of consumption.  At the same time he linked his policy proposals to a general distrust of intervention and a belief in the virtues of laissez-faire.(Note the Murray Milgate and John Eatwell critique of this linkage in “Competition, prices and market order” in M.Colonna&H.Haggemann, eds. Money and Business Cycles Vol.I The Economics of F.A.Hayek)


At the same time Keynes’ theoretical apparatus led him in the direction of significant intervention in the capitalist economy.   It was this interventionism that put him at odds with both Hayek and somewhat later the writings of Joseph Schumpeter, the great Austrian conservative economist who had moved to Harvard in the 1930s and was the author of the magisterial two volume study of the cycle, Business Cycles, completed in 1939 and his lament for capitalism and entrepreneurship, Capitalism, Socialism and Democracy.  I will consider in some detail in the second part of this paper each of these theorists’ contribution to the cycle and their plausible applicability to the contemporary economy.

The globalization debate: The need for a dialogue


The recent exchange between international financier and speculator George Soros in Davos and leaders of the anti-free trade and anti-globalization movement meeting in Brazil by means of video conferencing and the complete refusal by the protestors to enter into a dialogue captures fairly well the character of what is going on.  Preparations for the summit of the Americas in Quebec City in April include extensive and some would say excessive security arrangements that are likely to promote confrontation rather than dialogue.

Soros’ most recent book Open Society: Reforming Global Capitalism is all about how to reconstruct the international regulatory environment so that while preserving market forms of society, a more progressive and stable framework is put in the place.  As he puts it “the weakening of the sovereign state ought to be matched by the strengthening of international institutions.  This is where the market fundamentalism, which is opposed to international authority just as much as to state authority, stands in the way.” (G.Soros, Open Society: Reforming Global Society, 2000)

A rather different popular account of what has been going on which seems somewhat overly optimistic about the continued likelihood of uninterrupted growth, but pessimistic about what it means for everyday life is Robert Reich’s book The Future of Success.  Reich uses a sociology and political economy approach to build up an image of a drastically altered world in which the symbolic analysts and others capable of branding themselves and extracting economic rents for access to the brand, including former politicians like Bill Clinton and himself, can look forward to high salaries and unlimited cyber and other real opportunities, but at the same time must pay the price of drastically diminished family values and growing over work and rootlessness.

But what is intriguing and relevant in Reich’s analysis is the notion that the internet is a great leveller in terms of pricing and product quality.  Much like the Walrasian auctioneer in the neo-classical labour market clearing model, information about the best products and the cheapest sources is quickly transmitted throughout the cyber-economy.  This is a point of view that was shared by a number of advisors to President Clinton, like for example, Martin Baily.  In this new economy argument the internet, just in time production and information technology play a key role in reducing market frictions, uncertainty and lubricating efficient trading.  It is also not hard to imagine how these new information interconnections and speeded up information sharing can also impact positively on labour markets and job search techniques.  Workers who can access the internet or computer based information systems for distributing their cv and establishing appropriate salary ranges for their skills profile are less likely to stay unemployed for as long, ceteris paribus. Given a widespread access to the new technology, local monopolistic and regional or even national oligopolistic trading practices are not as likely to last in the face of out of region or even international competition.  Only the transport cost gradient and reliability factor can continue to act as a blockage to full market integration.  But over time this is likely to fade as a problem as the learning curve for the new technology flattens and the wrinkles and complications are ironed out.

Furthermore, in business to business e-commerce the sourcing of inputs is considerably more competitive than in the past.  It is also no longer necessary for firms to stockpile large inventories or hang on to employees.  In the case of a downturn in the economy the reaction is swift and ruthless.  Alan Greenspan, himself has observed this in some of his latest pronouncements on the state of the American economy and the current slowdown.  Just as cyber information technology has greatly increased the speed of information and capital transfer thereby facilitating very rapid and relatively frictionless expansions it works equally well (or badly) in reverse.  Cutbacks and slowdowns spread at lightning speed and the average consumer is quickly alerted to the changes.  The economy, in effect, turns on a proverbial dime or perhaps we should say at the speed of a click of a mouse.

The business cycle and the rise of unemployment


The turning of the cycle from the apogee of expansion to the trough of decline is always marked by a sharp rise in unemployment.  It is this catastrophic rise in unemployment for so many working people that unleashes social strains and pressures that obliges governments to find ways of taming the cycle.  The classical response to unemployment on the part of those who believed in the operation of the Walrasian labour market was to argue that unemployment was the result of workers inadvertently pricing their labour too high.  Such temporary gluts of unsold labour could be cured by a downward adjustment in wages, if only governments would permit labour markets to operate in an unimpeded way.

Hence, layoffs and the accompanying decline in money wages was the way which the market cured itself of its past excesses and restored health to an economy in crisis.  For many on the “left of celestial space” (See Keynes’ self-description in Essays in Persuasion “Am I a Liberal?”) the promise of eventual salvation through market forces was simply asking too much of the poor and the unemployed.

During the past twenty-five years there has been an unmistakable deterioration in employment circumstances for many of the leading capitalist economies in comparison to the immediate post war world.  Only in the United States and perhaps Britain in recent years and for the last two years in Canada have unemployment rates dropped to near reasonable levels over the past decade.

The prolonged period of higher unemployment in France and Germany, the long economic slump in Japan, the two very deep business cycle recessions in Canada, the slump in the US in the 1980s and the early 1990s and the sharp rise in unemployment in the UK in the early 1980s and again in the early 1990s contributed to a resurgence of interest in business cycle notions despite the temporary triumph of the new classical macroeconomics.(see table 8 in H.Chorney Unemployment in Canada: 1974-1979: A Case Study of Monetarism in Action reproduced in appendix one above)

John Maynard Keynes in the 1930s argued that cutting away money wages would not be a workable solution to the problem of high unemployment despite all the elegance of classical theory.  In Keynes’ view at the time the extent of money wage reduction required to restore full employment in the middle of the slump was beyond 20% and therefore was well beyond what could be accomplished in a democratic society without provoking extraordinary turmoil.

In fact Keynes doubted “if any reasonably conceivable reduction would be sufficient” . In addition, of course, he believed that because of the uncertain or non ergodic nature of the investment process it was unwise to expect that a totally unregulated market apparatus left to its own devices could avoid periodic and long lasting slumps, no matter how flexible wages were.  Furthermore, even if workers wanted to reduce their real wages they were powerless to do so as the real wage was the outcome of nominal wages and the overall price level.  Workers might cut their money wages but prices might fall faster leaving real wages higher than before.

Even if the new information technology has reduced uncertainty in some respects, considerable uncertainty and herd like behavior in response to shallow information remains a destabilizing factor on world financial and stock markets.  The current fear about the re-emergence of an economic slump in the powerful US economy and widespread impact of this slowdown upon Canada, Western Europe and Japan once again obliges us to return to the formal study of the business cycle.


Given the current climate and what we know about the past quarter century then how can we make sense out of the impact of the globalization process and the complex way in which it has interacted with the policy process and the state of economic theory.  Clearly there has been an erosion in the level of confidence displayed by policy makers as to the efficacy of economic policy undertaken by nation states.  The new classical macroeconomics orthodoxy conforms well to the conventional wisdom with respect to globalization insofar as it calls for policy impotence with respect to intervention and laissez-faire with respect to capital flows.  But as I have explained above there is now ample evidence that such a positioning fails the test of producing good outcomes.

One place to begin is to reconsider some of the highly original contributions to business cycle theory that were made over the past century.  The degree of international contagion and integration that we witness today is not that different from what was the case during the first part of the last century before the great depression and the Second World War ripped apart the world economy.  Of course, the speed of transmission of information and transfers of capital has increased enormously but the actual volume of trade as a production of entire world economy has not actually increased beyond the levels it once reached in the early part of the twentieth century.  As such, much of the rational expectations inspired new classical macroeconomic assumptions about unemployment, market failure and the limited role for stabilization policy need to be reassessed.  To help us with the reassessment it seems wise to return to work of three of the most interesting and creative theorists of the cycle, John Maynard Keynes, Freidrich Hayek and Joseph Schumpeter.

When I write about their work it must be understood that I accept, as did they ,that the idea that cycles are precise cycles marked by exact regularity is misleading since the ups and downs of economic performance need not be completely regular for one to construct a plausible theory of change under the rubric of cycle theory.  Rather there is, as Keynes puts it, ‘some recognizable degree of regularity in the time sequence and duration of the upward and downward movements.” ( GT, The General Theory, p.314)

Furthermore, in the clash between Hayek and Keynes and the reception of Keynes by Schumpeter and his own very different brand of market oriented conservatism there lies a fruitful terrain of debate and intellectual inquiry that can still be of considerable service more than half a century later whatever ones preferred theory of beliefs.



Friedrich Hayek’s theory of the trade cycle emerged out of the work he did in the 1920s and 1930s in response to the European economic crisis that followed World War I.  He was heavily influenced by his mentor Ludwig von Mises whose classic work The Theory of Money and Credit borrows from Knut Wicksell’s distinction between the natural and monetary rate of interest and Bohn-Bawerk’s work on the roundabout production of capital. (Prices and Production; Monetary Theory and The Trade Cycle) In both of these works he cites Mises extensively as a pioneer in the Mises-Wicksell theory of the trade cycle and its origins in divergences in the natural or equilibrium rate of interest from the market rate. (See for example, pp116 in Monetary Theory and the Trade Cycle)

Schumpeter, whose cycle theory we consider below argues in his History of Economic Analysis that Wicksell had no monetary theory of the cycle.  But “he opened the road for one”.  Knut Wicksell was a student of Eugene Bohm Bawerk and it is quite logical that the Austrian School should have been influenced by his work. (Laidler, citing Business Cycles also briefly mentions the work of Wicksell and the role of the rate of interest in the pace of capital investment, particularly in the area of railway construction.(p.127 & 604)

Wicksell’s cumulative process itself was built upon David Ricardo’s explanation of how new money inserted itself into circulation.  Ricardo’s theory, according to Schumpeter had been ignored until Wicksell revived it in his discussion of the cumulative process.

Wicksell pointed out that if banks keep their loan rate below the real rate –which as we know he explained on the line of Bohm Bawerk’s theory – they will put a premium on expansion of production and especially on investment in durable plant and equipment; prices will eventually rise; and if banks refuse to raise their loan rate even then, prices will go on rising without any assignable limit even though all other cost times rise proportionately. (p.1118)(See Hollander, 1992pp289ff&Ricardo, Principles of Political Economy, pp511)

For Schumpeter, the Wicksellian emphasis upon a possible divergence between the real rate and the monetary rate of interest doesn’t alter the fact that interest is a net return to physical goods but permits one to regard the money rate “as a distinct variable in its own right that depends, partly at least upon factors other than those that govern the net return to physical capital (natural or real rate).”  In equilibrium they are equal but they are no longer fundamentally the same thing.

This distinction would later show up in the work of Keynes who uses the term own rate of interest to correspond to the natural rate and develops along with Irving Fisher the related, but not identical, notion of the marginal efficiency of capital i.e the marginal rate of return over cost.(p.1119 & Keynes, GT, pp.191ff, p.356, pp135ff).

According to Schumpeter Wicksell’s Cumulative process need only be adjusted to yield a theory of the cycle.

Suppose that banks emerge from a period of recovery or quiescence in a liquid state.

Their interest will prompt them to expand their loans.  In order to do so they will, in general, have to stimulate the demand for loans, by lowering their rate until these are below the Wicksellian real rate.  In consequence firms will invest – especially in durable equipment with respect to which the rate of interest counts heavily(at least in the long run capital intensive investment) – beyond the point at which they would have to stop with the higher money rate that is equal to the real rate.”

The process is self-limiting however as the boom in investment inevitably leads to overinvestment and excessive inventories of capital goods which in turn leads to widespread losses, liquidation of loans and eventual depression.  Von Mises took up Wicksell’s and Bohm Bawerk’s notions and sketched out a theory of the cycle that was further elaborated by Hayek.

During the great depression particularly in the early years following the crash of 1929 Hayek’s theory which is clearly derived from the Austrian tradition and in turn from Wicksell and traceable back in certain respects to Ricardo attracted a number of important adherents, including many younger economists like Abba Lerner, Nicky Kaldor, Lionel Robbins and J.C. Gilbert.  Many of these soon gravitated away from Hayek to Keynes at Cambridge.  Robbins stuck with Hayek but later admitted he had erred in promoting the Hayekian view as a corrective to the deep depression of the 1930s.(See the discussion of the in J.C. Gilbert, 1982 p.91) and in Robbins’ autobiography, 1971.

Indeed while the Hayek version of the cycle has a number of fascinating aspects to it and can be quite useful in certain circumstances its policy prescription while comforting to the laissez-faire orientation of the Austrian school was politically inopportune during the great depression and economically also flawed.  This lack of political realism, however, was of no concern to Hayek.  In his preface to the second edition of the Denationalization of Money Hayek insisted upon the importance of asserting what he believed to be correct regardless of the practical implications.

“I strongly feel that the chief task of the economic theorist or political philosopher should be to operate on public opinion to make politically possible what today may be politically impossible, and that in consequence the objection that my proposals are at present impracticable does not in the least deter me from developing them.” (quoted in Daniel B. Klein, What do Economists Contribute? p.148, 1999)

In the long run, of course, the debate turns on the price and inflation consequences of prolonged low rates of interest and substantial deficit financed stimulation of investment.  But Keynes himself, as opposed to many of his followers harboured similar doubts about the long run sustainability of low unemployment without the return of inflationary pressures.  Notwithstanding his famous remark about “in the long we are all dead” Keynes understood the dangers of excessive inflation.  But during the depths of the great depression he was convinced that the short and medium run counted for more in terms of the priority of relieving the suffering of the unemployed.  As the economy recovered and the increase in aggregate demand played itself out partly in increased employment and partly in rising prices, he was prepared to take action once unemployment had fallen to reasonable levels.(See his discussion in The General Theory, the chapter on prices and his fundamental equations in Vol.1 of The Treatise on Money)

J.C. Gilbert has argued as long ago as 1953 that there ought to be a way to reconcile Hayek’s trade cycle theory, cleared of whatever errors it contains with the seminal arguments of Keynes, similarly cleansed of error.  “It seems clear that a synthesis of Austrian and Keynesian theory would be a step in the right direction…Hayek’s particular emphasis upon the immobility of labour and the heterogeneity of capital goods (can be) of vital importance in certain contexts.  There is a danger of thinking too much in terms of aggregates.” (Gilbert, p.92)  There may well be slumps that grow from the inflation process and the attempt to eliminate them that match rather well Hayek’s theories.

But as I shall argue below there is also a major Keynesian component even to these sorts of slumps that ought to be considered when searching for appropriate policy responses.  The re-emergence of rational expectations monetarism which has blindly asserted that inflation causes unemployment in all circumstances contains an arrogant positivistic certainty that I suspect that Hayek himself would have found unattractive.

D.H.Robertson’s conception of forced saving and Keynes’ response

In my view, it is possible to begin to construct the very synthesis that Gilbert wrote about almost a half century ago.  One place to begin is to return to the debate with Robertson over the question of savings and to rework the theory that Keynes in the best Marshallian sense arrived at in order to accommodate some of Robertson’s more dynamic notions about disproportionalities between savings and investment.

Robertson, of course, also wrote a work on industrial fluctuations which was devoted to cyclical changes in output derived from real rather than monetary factors.(D.Robertson, A Study of Industrial Fluctuations, 1915&J.C. Gilbert, Keynes’ Impact on Monetary Economics,1982, pp.60ff)  His conception of the savings – investment process was of a period nature that analysed changes over time, whereas Keynes focused on the short period.  Robertson’s defenders thus argue that his approach permitted a more dynamic development then that of Keynes.  Once again Hayek enters the picture because of his quite Robertsonian and Wicksellian notion of forced saving. (See Hayek’s discussion of the origins of the concept in the work of Bentham, Malthus, Mill and Walras and its path to Wicksell in Prices and Production. P.18ff)

Robertson called forced saving the outcome of “lacking”. Lacking occurs whenever consumption on any day falls short of the value of the income that the person has available on that day.  As Robertson puts it “A person performs Lacking on any day if his consumption is less than his expected real income.”(Vol.xiii, CW Keynes, letter from Robertson, Sept.2, 1932)  Typically this income is the income which he received the day before.  “Spontaneous saving and total saving or lacking may not be equal.”(Presley, p99)

The difference is attributable to the existence of automatic lacking or dislacking.  Voluntary saving can occur without automatic lacking; automatic lacking can occur without voluntary saving.  “If a person receives $X and spends $Y then voluntary saving and lacking both equal X-Y$.  But if other individuals increase their consumption and higher prices result the original person receives fewer goods for his money and therefore is forced to save more to the extent of the consumer goods that he loses through the rise of prices.”  This is lacking beyond which is voluntary.  “Total lacking now exceeds voluntary saving. “

Robertson put it succinctly in his correspondence with Keynes: “his Lacking is automatic if it is the result of Stinting i.e. of an increase in the stream of money spent in competition with him depriving him of consumption which he otherwise would have enjoyed…All Lacking other than Automatic is Voluntary and may be called  Saving.(p302, CW, Volxiii)

The process in reverse where other consumers reduce their spending and increase voluntary saving leads to a fall in prices and an increase in goods purchased.  Robertson refers to this as dislacking.  It was this conception of forced saving which Robertson also explored that Hayek derived from Wicksell.

What is fascinating about this debate is the extent to which Keynes originally embraced the notion in Robertson’s work but then rejected in The General Theory.  It is understandable when we consider the policy consequences of holding the theory, at least in Hayek’s much more Walrasian version of markets and the virtues of laissez-faire.

In The Treatise on Money Keynes was focused on longer term equilibrium, unlike in the General Theory where he focused on the Marshallian short term.  He defined savings as “the act of an individual consumer and consists in the negative act of refraining from spending the whole of his current income on consumption.  Investment and saving could differ because Keynes “excluded from income and from saving…the windfall profits and losses of entrepreneurs.”(The Treatise Vol.1, pp172ff)  Thus in The Treatise his position was very close to that Robertson.

On the other hand, even in The Treatise Keynes was convinced that it was investment that determined capital and thus output and not saving.  Furthermore, “The performance of the act of saving (was) in itself no guarantee that the stock of capital goods would be correspondingly increased.”  Savings and investment are undertaken by different economic actors.  An act of individual saving “may result in increased investment or in increased consumption by the individuals who represent the rest of the circumstances an act of savings could actually result in less consumption or investment.  (Treatise, p.175)(See also A. Asimakopulos’ discussion of these issues in Keynes’ general theory and accumulation.pp14-16)  In the General Theory however and the discussion leading up to its publication, Keynes maintained his theory of the key role of investment but explicitly rejected Robertson’s conception of the relationship between savings and investment.

Robertson, on the other hand, accepted that Keynes’ great insight about aggregate demand was path breaking and in the context of the great depression absolutely necessary but he correctly, I think, upheld his notion of saving despite Keynes’ rejection of it.

In a way the dispute is partly about viewing the same phenomenon through different panes of glass from opposite positions in time.  Robertson looks at the question from the perspective of yesterday, today and tomorrow whereas Keynes, in effect, looks back from a point frozen in time.  The income system has temporarily adjusted the earlier disproportionate flows to bring them into equilibrium in Keynes.  In Robertson the system is in a state of flux moving under the influence of yesterdays’ decisions and leading to the outcome that Keynes has described.

Furthermore, both Hayek and Robertson are certain that forced saving occurs because of the inevitable rise in prices associated with expansion of demand.(See also Robertson’s discussion of forced saving in Money, 1928, pp90ff) But in order to argue this they must implicitly be assuming that the system is already at the point of close to full employment or if not, at least close to full capacity in the sectors under examination.  Or if not at close to capacity, close enough in sectors where either unions of oligopolistic firms had a dominant position.

But during the great depression this was precisely contrary to what Keynes was seeking to demonstrate, namely that the system was far from full employment and that there was a shortfall of aggregate demand that could not be rectified through wage cutting.

Hayek and Keynes

Hayek, of course, goes much further than Robertson in warning against artificially stimulating demand through the expansion of bank credit.  But Robertson also was worried about the eventual inflationary consequences of excessively expanded credit financed demand.  But then even, Keynes in his writing and in conversation with fellow economists was concerned that artificially lowered unemployment would entail price rise.  It was just that he appreciated how far they were away from that point during the deflationary era of the early 1930s.  (See Presley’s excellent discussion of Robertson’s work.  On Keynes’ debate with Robertson see CW, Vol.xiii part one preparation; see also Robertson’s definition of lacking, automatic lacking, dislacking, dissaving and hoarding and dishoarding, same vol. p302ff from a letter to Keynes, Sept.2, 1932)

Hayek has related the story of how he encountered Keynes not long before his tragic premature death and warned him about the dangers of inflation.  Keynes responded that he knew there might well be problems, particularly if some of his more dogmatic Keynesian followers dominated policy.  But he was confident, he told Hayek, that when the time would come he could easily use his command of verbal discourse to shift public opinion in the necessary direction.(A Tiger by the Tail, p.103, 1972)

In addition to these intellectual influences of Wicksell, Mises and Bohm-Bawerk, Hayek was profoundly affected by the peculiar circumstances of Vienna during his youth.  The Austrian socialists had come to power in 1919.  As in Germany under Weimar the problem of post war hyper inflation reared its ugly head.  Many of the wealthy classes including Hayek’s own family suffered a dramatic erosion of their life savings and wealth.  As Dostaler puts it “He live through the insecurity, the political crisis and the fear of an uprising from the extreme left.”

The Viennese social democratic municipal administration had resorted to heavy taxation to finance worthwhile housing projects.  But in the polarized circumstances of the 1920s these projects aroused resentment among the more affluent classes.  Hayek was deeply affected by these events and the construction of his theory of cycles based on the erosion of savings through excessive monetary expansion easily took root.  It was perhaps for this reason that Hayek so vehemently disagreed with Keynes about the role of saving in the economy.(Dostaler, p.149) Hayek also spent more than a year in the United States in 1923 and 1924 studying in New York attempts by the Federal Reserve to control US business cycles.

Hayek shared with Schumpeter a certain skepticism about the excessive cost of eliminating cycles.  Like Schumpeter he preferred to see cycles as an inevitable aspect of economic growth and development.  In the case of Schumpeter whose own theory of the cycle is heavily imbued with notion of waves of technological innovation and gales of creative destruction he eventually came to believe that Keynesian style regulation of the cycle would lead to excessive regulation and the destruction of the creative entrepreneurial spirit. (See his class Classic, Socialism and Democracy & his own work Business Cycles.)


In Hayek’s further development of the theory of the cycle he deepened the understanding that Wicksell, Bohm Bawerk and Mises had provided of the inflationary process.  Unlike the quantity theory with which his own theory is sometime wrongly conflated Hayek had a conception of relative prices that differs markedly from broad quantity theory aggregate conceptions.

Like Keynes but unlike Milton Friedman, Hayek believed in the non-neutrality of money.(Laidler in Collona&Hagermann)  Unlike Keynes, however, Hayek’s conception of the non-neutrality of money does not lead him away from laissez-faire.  For Keynes the non-neutrality of money is an important reason for rejection of Say’s law and all that it implies.  In Hayek it leads him to rather different conclusions.

In the Bohm Bawerk scheme of things round about production involved the key element of time and therefore, as in Keynes, elements of risk and uncertainty. (See the William Greer’s work that compares Frank H. Knight and Maynard Keynes’ notions of risk and uncertainty, Ethics and Uncertainty)

As Laidler effectively describes it “A decision to save was simultaneously a decision to consume at some time in the future, and simultaneously a decision to invest was a decision to devote currently available resources to the production of goods of a higher order which would then be used to produce goods of the first order at some future time.”(p.5)

Interestingly in Keynes a decision to save was a decision not to consume currently and a decision to invest was a decision usually made by a different actor from the one who decided to save thereby complicating the equalization of savings and investment over time except through the process of income adjustment.  In both the uncertainty was born of the introduction of temporality into the process.(See Shackle, Keynes and Fitzgibbons)

In the Bohm Bawerk schema the rate of interest would bring into equilibrium the savings and investment decisions inter-temporally (See Laidler p.5)  In the Keynes schema it was income aggregation that adjusted to ensure equilibrium of the savings and investment.  Because of Keynes’ Marshallian roots such an equilibrium process was presented as instantaneous but in actual fact Keynes’ argument could lend itself to a more complex adjustment process.

In the Austrian school the Wicksellian notion of divergence between the real rate and the money rate became the basis for a theory of the cycle.  The inter-temporal adjustment process could get out of wack as overinvestment as part of a boom driven by excessive monetary expansion resulted in a later bust and a liquidation of unhealthy capital.

Hayek explored this process in some detail in Prices and Production. His famous triangle diagrams in which he broke down the production process into its intermediate and final phases were intended to show the detailed process by which the expanded length of production attributable to the reduction in interest rates and the rise in the capital intensity of manufacture led to an overproduction of intermediate producer goods.  This overproduction entailed forced savings, a rise in prices,followed by a crisis due to overproduction..(Prices and Production pp.38ff; see also Desai & Redfern in Collona)

There would appear to be some relevance to this theory with respect to the sort of boom that occurred in the dot-come industries and the over-expansion of the hardware components sectors of the high tech sector.  The case of Nortel industries, a Canadian company in origin, is a revealing case in point.  The expansion of Nortel and the resulting bubble in its share values during 1999 and 2000 was followed by a resounding crash.  Share values fell from $120 plus per share to just over 15$ Canadian a share by late June 2001.  Major layoffs have also occurred in the sector.  But the collapse having occurred the question is what is the best policy response to it.  Hayekians, would argue in favor of higher interest rates whereas Keynesians would argue in favour of low rates to restore confidence and stimulate demand.

From a contemporary “Keynes” point of view that I myself tend to, what undoes the former boom is the maladjustment between the distribution of wealth and income between savers and the average consumer.  As the boom intensifies it is accompanied by the contradictory monetary policy of the central bank and the excessive expansion of private credit renders the average consumer highly vulnerable to the ensuring contraction.  Additionally the pressure of the central bank to prevent undue monetary expansion also leads to excessive surpluses in public finance that while comforting to financial interests unduly constrains aggregate demand and simultaneously push investors toward riskier private issues.

The following crash in values and waves of bankruptcy reinforce consumer pessimism and depress animal spirits among investors.  The contractionary phase of the cycle is unleashed.  Relying upon the Hayekian policy prescription of higher interest rates after the crash has occurred will have a perverse effect of strengthening the downturn.

On the other hand, if the bankrate is raised sufficiently prior to the long boom getting out of hand but careful attention is paid to the impact of rises in the rate so that the rate rises are not excessive the boom may be managed to sustain the growth in employment and economic wealth.  This, however, assumes that excessive fiscal prudence doesn’t tip the economy into a slowdown despite the careful management of the bank rate.  Repaying the bondholders, as usually occurs under surplus budget regimes usually will complicate the problem of sustaining a boom.  The money will return to savers who will then more likely seek new investment rather than new expenditures.  Since no new net issues of debt occur in a surplus these would be investors are pushed toward riskier investments and quasi-hoarding.  This too undermines the boom.

As well, the overall inflationary environment must be accounted for.  If inflation is very low, say 1 to 3% there is a strong likelihood that debtors will be feeling the pressure of a rising private debt burden.  To the extent that debtors exceed savers their reaction in their purchasing behaviour will help influence the outcome in a contractionary fashion.

Some critics of Hayek argue that interest plays too small of a role in the overall scheme of investment to play such a critical role in cycle theory.  But here I believe Hayek is on stronger ground than his critics.  Despite the evidence of considerable internal financing most of my discussions with business people including those who manage huge funds exceeding 100s of millions of dollars reveal that interest rates still play a very important role, both in determining investments and equally importantly in affecting consumer behavior.  The initial Radcliffe view that tended to downplay monetary policy was clearly mistaken.

On the other hand, the currently fashionable view that dismisses fiscal policy I believe to be similarly mistaken.  Fiscal policy, particularly since it is bound up with debt management is very important.  One can best view the two as blades of a scissors that works best when co-ordinated to achieve the same objective.



Keynes had a theory of cycles that he elaborated in some detail in The Treatise of Money vol.2, chs27&28.  He later compressed it and focused on the marginal efficiency of capital and the role of changing expectations in The General Theory. His theory which in the Treatise he called “Fluctuations in the rate of investment” initially drew upon the world of cycle theoriess like Wesley C. Mitchell, Arthur Spietoff, Joseph Schumpeter and Tugan-Baranovski.  It is curious that Keynes was persuaded to abandon his theory of disequilibrium between savings and investment as is evident in his General Theory because in the Treatise he develops this theme of overshooting savings or overshooting investment of capital goods at some length as an explanation for the cycle.

As Keynes put it

“the fact of fluctuations in the volume of fixed investment and their correlation with then credit cycle has long been familiar, and has been made by numerous writers of the basis of a solution of the credit cycle problem…if my theory is right- these solutions have been incomplete, particularly through their neglect of fluctuations in working capital, most of them, even when they have appear to reach opposite results, seem to have hold of some part of the truth.  Some have attributed the cycle to under-saving and some have attributed it to over-investment.  Take for example the following contrast made by Professor Wesley Mitchell: ‘Professor Tugan-Baranowski contends that crises come because people do not save enough money to meet the huge capital requirements of prosperity.  Professor Spietoff holds that crises come because people put their savings into too much industrial equipment and not enough consumption goods.’”

Keynes responds to this quotation from Mitchell in a very clear fashion that indicates how much his own position was changed in The General Theory where he argued that the national income adjusted to bring savings and investment into equilibrium, albeit at a lower level of activity were initially savings intentions exceeded investment plans and vice versa where investment plans exceeded savings intentions.   This instantaneous adjustment process is frankly difficult to justify and led to the lengthy debate with D.H.Robertson described above which ended badly.

It clearly was the result of the Marshallian short period that Keynes operated with and I suspect the influence of the younger Keynesians in the circus who lacked Keynes’ intimate knowledge of the financial and commodity markets.(see pp.128ff for evidence of Keynes’ intimate knowledge; also his collected works vol.13,14&29)

Keynes’ response to the above question is as follows (Forgive the lengthy quotation but it is important I believe to note the extent to which Keynes’ ideas changed in the GT.)

If we interpret the first of these statements to mean that savings fall short of investment and the second to mean that investment runs ahead of saving, we can see that the two authorities mean essentially the same thing-and also the same thing that I mean.

Accordingly, I find  myself in strong sympathy with the school of writers-Tugan Baranowski, Hull Spiethoff and Schumpeter- of which Tugan Baranowski was the first and the most original, and especially with the form which the theory takes in the works of Tugan Baranowski himself, and of two American amateur economists(cranks, some might say) Rorty and Johannsen.”  The Treatise p.90

Keynes in two footnotes then elaborates on Rorty and Johannsen’s theory of “overcommitments where the working capital grows at a rate in excess of savings and the lag between rises in income and the duration of the productive process(shades of Bohm Bawerk) or as Johannsen puts it with Keynes warmly approving impaired savings.” Johannsen’s doctrine of ‘Impair Savings’, i.e. of savings withheld from consumption expenditure but not embodied in capital expenditure and so causing entrepreneurs who have produced goods for consumption to sell them at a loss, seems to me very near the truth.

Unlike Johannsen, Keynes sees the problem as a temporary but recurrent aspect of the banking system which fails to pass on the full amount of the savings to entrepreneurs.  He also argues that Johannsen overlooks that the solution to his version of the problem –a chronic condition of disproportionality of savings and investment to be remediable through a fall in the rate of interest. (see notes 1&2 p.90 The Treatise, vol.2)

Keynes cites Robertson’s work Banking Policy and the Price System and Schumpeter’s work on cycles and the key role of entrepreneurial innovation as central to his own view of cycles.  Finally he sharply distinguishes working capital from fixed capital as being at the root of the problem of cycles.

Keynes’ discussion of the cycle in The Treatise continues with an in depth investigation of the cycle in working capital.  His orientation here is somewhat different from his thrust in the GT.  One can get a clear idea of how his ideas evolved from a close study of his debate with Robertson over the concept of savings and from his correspondence in the years leading up to and immediately after the publication of the GT.  For example, in his correspondence with Calvin Bullock of the US and in his paper Is There Inflation in the United States written in 1928, Keynes explained how he distinguished between theories of over investment in the sense of excessive liquidity created by the banking system driving up prices when liquid commodities are in short supply and the bull market in stocks which can arrive because of waves of excessive optimism among stock players. (Is There Inflation in the United States? P.54 vol.xiii part 1 CW)

Here Keynes points out that given the enormous rates of saving in the US the problem is more likely to be the difficulty in absorbing “the vast investment funds coming forward-particularly if the central banks resist the tendency of the rate of interest to fall.” (ibid p.55) Whether there is actual overinvestment can only be revealed by the behaviour of the price system.

If prices rise sharply then there is, in Keynes’ sense of the term, overinvestment.  If it does not, then inflation is not a problem.

Keynes examines this scenario by assuming that initially a stock holder sells his stock for a capital gain and then deposits this in the bank and the bank then loans out the money to a different investor who is still bullish on the market.  Clearly there is now no new savings nor new net investment.  Does this constitute inflation Keynes asks as both time deposits and loans to the exchange have increased.  His answer is unequivocally no.  Rather the transaction involves a simple bet and eventual transfer between A and B.

So for starters Keynes does not accept the Hayek notion that investment financed by bank credit as opposed to savings is automatically inflationary.

He develops this then further in correspondence to various individuals including C.Snyder, C.Bullock and Dennis Robertson.

“Over-investment in particular directions is quite a different thing from general over-investment which is associated with inflation.  It is dangerous therefore to conclude that inflation is in the air because investment seems to be in danger of being overdone in particular directions (such a motor car production or house building. If these had) run ahead of demand this will very rapidly produce a falling off in production in those particular direction and it would be a matter of urgent public importance to find alternative outlets for current savings.  These manifestations…would make it important that money be as cheap as possible. (p.64 ibid letter to C.Snyder, p.68)

So Keynes, even though his position in the Treatise was closer to Robertson and therefore to Hayek on disproportionalities between savings and investment, nevertheless already had staked out quite a different theory of the origins of a crisis.  In The General Theory he moved even further away, although in some respects in a less convincing fashion.  In his chapter in the GT “Notes on the Trade Cycle” he cites the role of fluctuations in the propensity to consume, in the state of liquidity preference, and in the marginal efficiency of capital.  But he concludes that the principal explanation lies in variations in the marginal effiency of capital, “although complicated and often aggravated by associated changes in the other significant short term variables of the economic system.” (GT p.313)

Keynes, also, correctly argues that downward movements in the cycle are often accompanied by a “sharp turning point” in the upward cycle and a violent beginning to the downturn such as we have witnessed in the recent collapse of the stock market boom.  The sudden and even violent turning away from bullish sentiment is driven in Keynes’s view by changes in current expectations as to the future yield of capital goods.  Because the knowledge base upon which such judgments are made is often highly precarious, based on shifting and unreliable evidence, the expectations “are subject to sudden and violent change.”  The recent high tech boom and subsequent bust is an excellent illustration of what Keynes is driving at. (See also the work of Hyman Minsky, John Maynard Keynes, & Can it Happen Again for a well developed application and elaboration of Keynes’ model) As Keynes further explains and very contrary to the contemporary perfectly rational market hypothesis

It is of the nature of organized investment markets, under the influence of purchasers largely ignorant of what they are buying and of speculators who are more concerned with forecasting the next shift of market sentiment than with a reasonable estimate of the future yield of capital assets, that, when disillusion falls upon an over-optimistic and over-bought market, it should fall with sudden and even catastrophic force.(GT, p.316)

In the era of day trading and the dot-com debacle this seems like a very modern and prescient view.  So great might be the collapse in the marginal efficiency of capital and confidence in the future value of investments that not even a reduction in interest rates would be enough to restore confidence and investment growth.  Again, the contemporary epoch may offer us another test of this hypothesis.  Keynes goes on to discuss the role of time duration in the arrival of recovery.  Because of what he sees as the normal time for the life of durable assets and the cost of carrying unsold stocks of commodities Keynes argues that the duration of  these cycles should be somewhere between 3 and 5 years.

Keynes also explores the relationship between investors who suffer losses on the stock market because of falling prices and margin calls.  He traces the relationship between bearish investors and general consumption behaviour which in his era like today was most developed in the US.  This American model has become rather generalized during the era of globalization where common stock holding was greatly expanded in a number of countries.  Again Keynes appears to have a very usable theory of the trade cycle in the era of globalization.  Quite contrary to Hayek and Schumpeter, Keynes concludes that this sort of depressing influence of the bear market upon investment and consumption may require substantial intervention with respect to regulating the volume of investment.(GT,p.320)  Hear again, despite some similarities in their core values and initially close theories of the cycle Keynes dramatically parted company with the Austrians with respect to the role of the state during a crisis.

At the same time, Keynes’ very favourable later review of Hayek’s Road to Serfdom shows that Keynes was well aware of the dangers of moving too far in the direction of excessive state control of the main levers of the capitalist system.  Being the good Liberal Socialist that he was Keynes strove for balance between the two extremes of excessive laissez-faire and excessive state involvement. (See his essay Am I a Liberal? In Essays in  Persuasion)

Keynes was careful in the GT to argue against the position adopted by Hayek and others that the problem lay in over-investment and the solution in higher interest rates.  As he puts it “To infer these conclusions…would, however, misinterpret my analysis and would according to my analysis involve serious error.  Higher interest rates may be the equivalent to prescribing a medicine that will kill the patient (GT, p.323) He rejects the term over-investment as “ambiguous”, except in circumstances where it refers to no new investment expected to earn above its replacement cost.  In which case the remedy does not lie in higher interest rates but in lower ones or other measures to stimulate consumption.  Misdirected investment as opposed to over-investment becomes a plausible problem during a steep downturn.  People may need houses built but no one is prepared to invest in them because animal spirits are too depressed.  The existing stock may stand partially vacant because the unemployed cannot afford to buy them.

According to Keynes, “the right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us in a state of semi-permanent slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.”(GT, p.322)  This makes for wonderful polemic but its theoretical base is somewhat shaky, for as Keynes himself later admitted a prolonged quasi-boom would undoubtedly eventually encounter the thorny problem of inflation and quarrels over income shares.  But, at least at this point Keynes was determined to move as far as possible away from Hayek and Robertson and to a certain extent from his earlier position articulated in the The Treatise.

Hence his description of a “boom that ends in a slump” being caused by a combination of a rate of interest that in normal circumstances would be too high to sustain full employment in “correct expectations” but which in the overheated expectations of the moment is not enough of a deterrent to prevent over optismism “triumph(ing).”  Keynes was at pains to construct this sort of odd theory in order to avoid moving closer to the Hayek position that in policy terms led to the prescription of higher rates as a cure to depression.  With respect to the crash of 1929 and the following slump Keynes is, I think, correctly adamant to maintain that overinvestment was not then the problem and that higher rates would have been even more disastrous.(GT, p.323)  As Robbins, Gilbert and others favourably disposed to Hayek during this epoch have subsequently admitted the Hayekian model of the cycle while offering a certain explanatory power in certain circumstances was simply misguided once a deep depression was unleashed.  (For a discussion of how in certain circumstances Hayek’s model might work and be applicable see Desai & Redfern in Colonna)

Keynes absolutely rules out higher interest rates as the solution to any sort of overinvestment or saturation that might occur after a prolonged boom of several decades on the grounds that accepting the reality of overinvestment would entail accepting that under-consumption (the other side of oversaving necessary in the case of overinvestment) was at the root of the problem.  The answer would lie then in promoting a higher propensity to consume.  Keynes, in fact, did believe that the under-consumptionists did have in certain circumstances a correct set of policy prescriptions.  “If it is impracticable materially to increase investment obviously there is no means of securing a higher level of employment except by increasing consumption.” (GT, 325)

But as Keynes point out there are normally two ways to increase output, investment in the stock of capital or increased consumption.  Keynes’ preferred option was push investment in the capital stock to the point where it was longer scarce.  At the same time he accepted that advancing on both fronts simultaneously was a wise policy course of action.  More than half a century later in the light of all we know about ecological problems in the heightened state of material affluence that the middle classes live in our advanced societies perhaps it is time to reconsider this option as a general solution.

Yet I am reminded of what my teacher Harry Johnson used to say about E.J.Mishan proposals for limiting travel in order to achieve ecological balance.  “It’s fine for him to propose this.   He will still holiday on the finest beaches, but what of the poor and the working classes?” The age of abundance has been a cruel disappointment to the hundreds of millions around the globe and to many within the richest countries over the past two decades.  Somehow we must seek to find the right balance between these positions.

Keynes also attacks those who would restrain the boom in its early stages by raising the bank rate.  Here we see the extraordinary contrast between Keynes of The General Theory writing of course during the great depression of the 1930s and the conventional wisdom of today.

He cites Robertson as an advocate of this sort of policy on the grounds that Robertson assumes that “full employment is an impracticable ideal” and that a more moderate and stable outcome would be a smaller reduction in the unemployment rate than what Keynes advocates.  Keynes accepts that nipping a boom in the bud might help “if we rule out major changes of policy affecting either the control of investment of the propensity to consume and assume…a continuance of the existing state of affairs.” (GT, p.327)  But for Keynes such a passive position is unnecessarily defeatist in the context of the great depression.  He furthermore is convinced that the policy of raising rates because of some shortage of savings and overinvestment violates his own decision to equate savings and investment, bringing them into equilibrium through adjustments in overall income.  The rise in prices that Hayek and others complain of Keynes views very differently as being cause by short period supply constraints.  Even if this did not exist the increased savings are the product of increases in output.  “It is the increased output which produces the increased saving; and the rise in prices is merely a by-product…No one has a legitimate vested interest in being able to buy at prices which are only low because output is low.”(GT, p.328)  Keynes addresses Hayek’s notion of excessively low interest rates leading to excessive money creation.  He rejects this argument on the grounds that “there is no special virtue in the pre-existing rate of interest”  Whatever new money is created is created in order to satisfy the increased liquidity preference corresponding to the lower rate of interest.”  Individuals hold the money rather than lend it because interest rates are low.  It is not “forced” on anyone.  He concludes his critique of the Hayek school by arguing that the evidence does not support capital consumption i.e. an excessive propensity to consume as the cause of the boom which led to the 1930s depression.(p.329, GT)

Keynes concludes his short chapter on the Trade Cycle with brief notes on the agricultural cycle model and a short discussion of inventory cycles as “the cause of minor oscillations within the main movement of the Trade Cycle” (GT, p.332).

It seems clear from this reading of the these key texts that Keynes’ operated with quite different theories of the cycle in The Treatise as opposed to The General Theory.  Originally his position was rather close to that of D.H.Robertson and therefore not far, in some senses from that of Hayek.  But even in the Treatise he differed with Hayek about the role of excessive saving.  This difference was then solidified in The General Theory when Keynes quite deliberately moved as far away as possible from Robertson’s position on savings and investment.  It seems clear now why he did if he were to succeed in arguing the policy position he had come to embrace, namely extensive intervention to promote investment and higher consumption to push the economy out of its slump.  But in so doing he may well have lost certain valuable insights derivable from Robertson’s original conception of the savings process.  With respect to Hayek it is also very clear that despite Keynes’ profound disagreement with him over the causes of the cycle and the best way to respond to it Hayek’s thesis was not forgotten by Keynes.  In fact, it served as a powerful stimulus to the shaping of his own position.  In other circumstances both Robertson and Hayek’s conceptions would have their role to play as subsequent economic history has shown.



The final contributor to theories of the cycle we consider is Joseph A. Schumpeter.  Like Hayek he is a fellow member of the Austrian school.  Schumpeter was once briefly Austrian Minister of Finance for seven months in 1919 at the age of 36.  He was forced to resign because he proposed an unpopular anti-inflationary tax on capital.  He was a private banker and then a professor of Economics at Bonn University from 1925 to 1932 when he moved to Havard University where he taught until his death in 1950.(Steven Pressman, p.106) Schumpeter’s theory of business cycles is elaborated in a 1086 page, 2 volume study Business Cycles which was published in 1939.  Obviously summarizing such a work in a few pages is impossible.

Like Hayek and all the economists of their generation his encounter with Keynes and his reception of Keynes’ work is revealing.  Unlike Hayek, Schumpeter did not duel with Keynes over the nature of the cycle and the best prescription for coping with it.  Whatever Schumpeter’s view of Keynes’ faults and failures in the General Theory he respected Keynes’ achievement as the greatest “literary success of our epoch” even if he viewed its impact as ultimately corrosive of the entrepreneurial spirit.  His essay on Keynes in his History of Economic Analysis (HEA) displayed an admiration of Keynes as a “forceful and dauntless leader of public opinion…a man who would have conquered a place in history even he had never done a stroke of specifically scientific work.” (HEA, p.1170) by dint of his courageous Economic Consequences of the Peace.

For Schumpeter, Keynes, had despite his own conservative bent toward the virtues of enterprise and markets provided the intellectual apparatus for the anti-saving view.  Schumpeter admired Keynes’ capacity for drawing on the support of much of the intellectual community as well as “writers and talkers on the fringe of professional economics” who “by learning the use of a few simple concepts, acquired competence to judge all the ins and outs of the highly complex organism of capitalist society”.  Keynes’ was Ricardo’s peer in the highest sense of the phrase.  “But he was also his peer in a more negative sense”.  He committed the Ricardian vice of “piling a heavy load of practical conclusions upon a tenuous groundwork, which was unequal to it yet seemed in its simplicity not only attractive but convincing.”(HEA, p.1171)

Schumpeter thus emerges as a profound early critic of Keynes, at least the equal of Hayek.  He also is at pains to identify Keynes’ younger circle of Joan Robinson, Ralph Hawtrey, Roy Harrod and R.F.Kahn as key contributors to Keynes’ GT.  In the case of Kahn he identifies him as close to a co-author of the work.  He categorizes Keynes as the father of modern stagnationism but acknowledges that Alvin Hansen was the leader of the American school of stagnationism based on his work on the exhaustion of frontiers written during the 1930s.

Schumpeter’s quarrel with Keynes was that he misrepresented the classical school’s argument and its dependence upon Say’s law and Walras’ market clearing mechanism.  He was also convinced that entrepreneurs were key innovators in the capitalist process of creative destruction.  It was this insight that he used as the basis of his powerful theory of innovation that became central to his own theory of the cycle.

Schumpeter first elaborated his theory of the cycle in English in Business Cycles.  In some of his earlier German writings the subject of cycle theory and the role of innovation was also touched upon, for example his 1912 work, The Theory of Economic Development, Theorie der Wirtschaftlichen Entwiicklung.  Finally in Capitalism, Socialism and Democracy published in 1942 Schumpeter elaborated his pessimistic view that the rise of the large bureaucratically dominated corporation and the administrative state, even in democratic societies eventually led to the crushing of the capitalistic motivation because of the growth of regulation and the administrative apparatus.

Since, in Schumpeter’s view creative destruction of previously established but now outmoded capital was central to the process of innovation the growth of the administrative apparatus and the bureaucratic state would conspire to reduce the pace of innovation and creative destruction.  The will to reason, itself central to modern capitalism would lead to the proliferation of forms of regulation and control that could suffocate the creative forces of the market.  Within the corporation as management was divorced from ownership(see A Berle & G Means’ writing on this subject in the 1930s)  the cautious corporate manager who would be averse to risk taking would supplant the older more risk inclined creative entrepreneur.  The result would be an enhanced tendency toward stagnation and exhaustion of the cycle.  In addition the decline of the family would undermine the motivation for saving, itself critical to the survival of capitalism.

The influence of his teacher Max Weber was very clear in his famous work. (See Schumpeter’s reference to the work he did for Weber as a young scholar Epochen derDogma und Methodengeschite, p.819note 16 HEA)  As well, considering the context in which Capitalism, Socialism and Democracy was written, the rise of the corporatist state, the growth of fascism, the New Deal and the huge increase in state expenditures to finance the war effort Schumpeter’s work comes as no surprise.

Business Cycles is such a massive work that it is not possible to do more than sketch some of its detail, (despite Schumpeter’s own warning against trying to do so. (see his introductory remarks in Vol.1) focus on the concept of the cycle that Schumpeter has discussed that continue to be of interest and distill to an extent the essence of Schumpeter’s theory of waves of innovation that are facilitated by the process of creative destruction as a central concept of his theory.  This latter conception seems to have considerable modern applicability particularly when we examine product cycle theory and the recent computer revolution and the cycle of growth it has released.  Here also his reportage of the Kitchin short cycle linked to inventory adjustments- a period of two-three years; the Juglar intermediate cycle- a period of eight to ten years and the Kondratieff long wave -45 to 60 years would seem also to be of lasting value.

In Business Cycles Schumpeter begins by establishing for the reader his intention to use the average business person’s perception as his starting off point.  He then quickly develops a list of likely disturbances that can explain a shift in economic circumstances and business conditions.  The list includes financial crises, agrarian crises, commercial crises.  Each business person assesses changes in the stock markets, booms, slumps and depressions and natural disasters.  Schumpeter then classifies these shocks in terms of external factors, both in and outside the economic sphere.  New discoveries of minerals and resources such as oil and gold, exploration of new territories, migrations of peoples and major inventions converted to innovation are part of these shocks.  Technological progress brought about new innovations are judged to be central to the growth of output.  Finally Schumpeter explores the institutional framework arguing that political decisions about protection, grants to industry and regulation of trade deeply affect the economic structure.  In his view often these subsidized industries are vulnerable to crisis and some measure of an economic slump can be due to their presence.

Schumpeter lists some 41 factors that can affect the pace of economic output.  From his beginning Schumpeter then explores Walrasian equilibrium, his own conception of the stationary circular flow wherein the economy moves from one temporal state to another but reproduces itself; As part of his discussion of equilibrium Schumpeter also explores the notion of rigidities or stickiness.(p.51) He refers to Rigidity as the limiting case of stickiness.  He further denies that Walrasian actors need to display any sort of omniscience for the system to function.  In fact he considers the notion that Walrasian equilibrium involves omniscience as “absurd”.  He introduces the notion of expectations and uncertainty and the possible revision of expectation.  In doing so he shows how in certain circumstances this may lead to disequilibrium outcomes.  Schumpeter is convinced that in a perfectly competitive world even where expectations are present but treated as knowable variables rooted in knowable scenarios there is still a tendency to equilibrium outcomes.  In this respect his conclusions are quite different from those of Keynes but not of Hayek.  He then introduces imperfect competition including oligopoly and monopoly and shows how unemployed resources can result, although an equilibrium outcome is possible.  In a very real sense Schumpeter anticipates some of the insights of the New Keynesians some 50 years later with their emphasis upon rigidities and uncertain expectations being at the root of disequilibria and unemployed resources.(See pp.51ff)

Schumpeter concludes his discussion of equilibrium with the following definition.  An equilibrium exists “only at those discrete point on the time scale at which the system approaches a state which would, if reached, fulfill equilibrium conditions.  In Schumpeter’s world of cycle the real economy is usually in motion with disturbances that push the economy along a certain path typically with a tendency toward an equilibrium that in practice is never reached but only approximated.  As he puts it, we should consider “ranges within which the system as a whole is more nearly in equilibrium than it is outside of them.”(p.71)

Schumpeter explores the distinction between invention and innovation in considerable detail.  Business people and inventors may invent new processes and techniques but until such process are actually introduced into the productive system as actual innovations they have little economic impact.  Innovations, on the other hand, play an enormous role in affecting the economy and thereby the cycle.  According to Schumpeter “innovation is the outstanding fact in the history of capitalist society”. (p.86, BC)  Innovation alters the production function in terms of its form as opposed to simply altering the quantities involved.  In fact at the most general level innovation implies a wholly new production function.  This may involve new commodities, new markets or new forms of organization or new technologies.  These innovations typically reduce cost curves and involve creative destruction of older production processes.  Furthermore, they always involve a change in production functions which are more than trivial. in other words of the first rather than higher order of magnitude.(BC p.94) Schumpeter links his conception of innovation with the birth and death of new firms.  In capitalism as a creative process new firms are born where others die.  The innovation process plays a powerful role in this process.(95BC)

Schumpeter’s discussion of the role of innovations and the way in which he links this to a theory of the medium and long term cycle is central to his work.  The Kondratieff wave is named after the Russian economist N.D.Kondratieff who first observed the appearance of some degree of regularity with respect to long waves of innovation based on major technological innovations like steam power and steel, electricity, chemistry and motors, the automobile, petroleum, the railway, the airplane, and the computer. (Kondratieff, 1926, 1935; Schumpeter, BC vol.1, p.164)

The first Kondratieff covers the industrial revolution from 1780 until 1842.  The second, the age of steam and steel runs between 1842 and 1897.  The third involving electricity, chemistry and motors dates from 1898. (BC, p.170)  Each wave can be roughly divided into two equal parts.  The first part is a period of expansion.  The second part is a downturn.

Schumpeter argues that if innovations are at the root of cyclical fluctuations, not all innovations will be of the long wave character.  “There will be innovations of relatively long span, and along with them others will be undertaken which run their course, on the backs of wave created by the former, in shorter periods…When a wave of long span is in its prosperity phase, it will be easier for smaller waves… to rise” (p167)

The underlying long wave acts as a kind of cushion during its prosperous phase and as a kind of depressive blanket during its regressive phase.  Shorter term cyclical downturns are less severe during a prosperous phase of the Kondratieff and more severe during the downturn phase.  Kondratieff long waves are thus epoch making concentrations of innovations that occur in clusters of sufficient dimension and depth to create a wave of innovation and economic activity.  Such epoch making waves typically take place in several states with neighbourhood effects that initially are difficult to judge but gradually take on their epoch altering character.  Scholars subsequent to Kondratieff and Schumpeter like Ernest Mandel, Chris Freeman and Andrew Tylcote have followed through with his methodology and argued that later long waves of the Kondratieff type are identifiable from 1894 to 1913 expansive and 1913 to 1939 regressive; 1940 to 1966 expansive, 1967 to 1995 regressive; 1995 on expansive. (Mandel, 1972 & 1980; Tylcote, 1991).

Much of the criticism of Kondratieff waves is to question their very existence and quarrel with the data.  In addition there is the problem that the theory has a mechanistic quality to it that is hard to justify.  These kinds of criticisms are difficult to answer if we insist about precise cyclical character.  But if we relax our standards somewhat it is possible to date the third period as coming to an end around the end of the second world war and a new wave beginning its upward phase in 1939-1945 and continuing to the end of the 1960s and then followed by a downward wave until the early 1990s followed by a new wave of expansion.  Thus the theory does display some intriguing explanatory possibilities.

In this context then the current American downturn should be less severe and the recovery stronger than expected, drawing upon the fundamentally positive influence of the new information technology, despite its current short term bust.

If similar cycles apply to the Japanese economy then the current long depression should be coming to an end shortly or at least be less severe on the assumption that the post war boom in Japan lasted until the late 1980s and the downturn phase has only a few more years at most to run.

In addition to these medium and long waves Schumpeter also discusses the short wave or inventory cycle which last about 40 months and he calls Kitchin cycles after their discoverer Joseph Kitchin. (P.165, BC)  These short cycles affect inventories, interest rates and bank clearings.

These short waves, medium and long waves all interact with the underlying environment of innovations and technological change.  Sometimes in a long downward period short waves may move in the opposite direction just as short downward waves can occur during a long wave of expansion.

If we combine Schumpeter’s insights about the process of innovation with his discussion of long waves both of the Juglar and Kondratieff type and his discussion of shorter Kitchin cycles along side his robust inquiry into equilibrium and his exploration of the role of rigidities there is a great deal of contemporary value in his work.  It is possible to synthesize his insights with those of Keynes about expectations and the role of the swing in the investment cycle in a creative way.



Globalization has raised many questions about public policy.  In the global era, part myth part reality it is possible to begin to create a synthetic model of the cycle out of the powerful approaches that these three theorists explored.

Keynes’ encounter with the Austrians and with the tragic circumstances of the great depression produced a brilliant analytic apparatus which stood the test of time for a long time.  Once adjusted for the distortions introduced by some of his followers and with due attention paid to the context of his policy prescriptions it is still an extremely fruitful theory of the behaviour of capitalist society.  His conception of the cycle driven by expectations and uncertainty derived from the General Theory can play a very useful role in understanding the dangers of financial deregulation and ungoverned capital flows.

Hayek’s conception of overinvestment and the dangers of excessive monetary expansion in certain circumstances leading up to a boom and before a deep slump offers an insightful tool for analysing certain cycles that grow from situations of low unemployment to begin with.

Schumpeter’s powerful sense of the long term impact of waves of innovation can clearly be put to use in a contemporary theory of the cycle in the age of globalization driven, as it is, by the computer revolution.  His supple exploration of equilibrium offers a useful corrective to some of the distorted conceptions that Keynes in his enthusiastic rush to jettison classical equilibrium introduced in the General Theory.

Finally what is most striking from this survey of these three theorists is how fertile the terrain is for reconstructing a grand theory of the business cycle.  What ought not to be forgotten in this heterodox age is that economic reality is complex and no single explanation is likely to capture it.  In an age where the conventional wisdom of the past has disintegrated, sometimes for reasons having to do with the distorted narrative of the original theory, it is extremely difficult to reconstruct a grand unified theory that will speak to all the diverse life biographies involved.  Enlightenment teaches us that except for the dark side of human nature, progress is always possible as we penetrate the hitherto unknown.  The world of economic theory is difficult terrain but nonetheless one in which we must persist.  The human consequences of not doing so and allowing inferior theory and second rate policy to rule the roost is simply too large to be acceptable.



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About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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