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The Business Cycle

The Business Cycle: Growth and Crisis under Capitalism

Howard J. Sherman
Copyright Date: 1991
Pages: 478
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  • Book Info
    The Business Cycle
    Book Description:

    Are the recurring recessions of the capitalist world merely short-term adjustments to changing economic circumstances in a system that tends, in general, toward equilibrium? In this accessible study of the business cycle, Howard Sherman makes a powerful case that recessions and painful involuntary unemployment are endogenous to capitalism. Drawing especially on the work of Wesley Clair Mitchell, Karl Marx, and John M. Keynes, Sherman explains why the nature of the business cycle produces serious economic loss and misery during its contraction phase, just as it produces growth in its expansion phase.

    Originally published in 1992.

    ThePrinceton Legacy Libraryuses the latest print-on-demand technology to again make available previously out-of-print books from the distinguished backlist of Princeton University Press. These paperback editions preserve the original texts of these important books while presenting them in durable paperback editions. The goal of the Princeton Legacy Library is to vastly increase access to the rich scholarly heritage found in the thousands of books published by Princeton University Press since its founding in 1905.

    eISBN: 978-1-4008-6204-7
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-xiv)
  3. List of Figures
    (pp. xv-xviii)
  4. List of Tables
    (pp. xix-xx)
  5. Preface
    (pp. xxi-xxi)
  6. Part One: Overview

    • CHAPTER 1 The Waste of the Business Cycle
      (pp. 3-6)

      In the Great Depression of the 1930s, millions of people were involuntarily unemployed. The unemployed did not have enough money to buy the food, clothing, and shelter that they so badly needed. To the degree that this human misery repeats itself—to a much lesser extent—in the contraction phase of every business cycle, there is a major social problem arising from a seemingly irrational economic situation.

      All capitalist economies suffer from business cycles. A business cycle may be defined as an expansion in economic activity (measured by such indicators as output, employment, and profits) followed by a contraction in...

    • CHAPTER 2 Measuring the Business Cycle
      (pp. 7-22)

      The pioneer in empirical description of the business cycle was Wesley Clair Mitchell. Indeed, he helped develop many of our present national income accounts. With the help of Arthur Burns (see Burns and Mitchell 1946), he created a method specifically for measuring the business cycle. The method was used in several cycle studies of the National Bureau of Economic Research (NBER), which he founded. Alas, the NBER no longer follows Mitchell’s method, but it is still usually called the NBER method.

      Mitchell’s NBER method depicts the exact path of a single variable over the average business cycle. Mitchell’s method, the...

    • CHAPTER 3 History of the Business Cycle
      (pp. 23-49)

      Jean B. Say, a French economist writing in the early nineteenth century, declared the “law” that supply calls forth its own demand; that is, after any temporary disequilibrium, demand always adjusts to the level of supply so that the economy reaches equilibrium. Since demand adjusts to supply atanylevel of supply, it follows that if goods are supplied at the full employment level, the economy will adjust to a full employment equilibrium. Say’s law implies that workers are never unemployed for any significant time as a result of lack of demand for labor, so most unemployment can be interpreted...

    • CHAPTER 4 Endogenous and Exogenous Cycle Theories
      (pp. 50-80)

      This chapter provides an introduction to many theories of the business cycle. It does not attempt a rigorous presentation of each one because that is impossible in one chapter. The purpose is, rather, to introduce the reader to the alternative approaches to the cycle, to indicate those that will be considered in detail in later chapters, and to provide a framework of analysis for the rest of the book.

      There is an immense gap between two types of business cycle theorists. As John Maynard Keynes put it, “What is it that makes the cleavage which divides us? On the one...

  7. Part Two: The Basic Model—Demand and Supply over the Cycle

    • CHAPTER 5 Consumption
      (pp. 83-109)

      The behavior of consumer demand is crucial to both the multiplier-accelerator theory and the underconsumptionist theories. Both assume that consumption rises more slowly than income. In addition, the underconsumptionist theories assume that consumption is strongly influenced by the distribution of income. It is, therefore, useful to begin the empirical investigation of the business cycle with the behavior of consumer demand.

      Consumption is, by far, the largest category of aggregate demand. Year after year, consumption absorbs between 60 percent and 65 percent of total GNP. Over 90 percent of personal disposable income is absorbed by consumption. Obviously, the behavior of consumption...

    • CHAPTER 6 Investment: The Profit Hypothesis
      (pp. 110-137)

      Investment, or the accumulation of capital, is the heart of the capitalist economic system. Moreover, investment is the key variable in the business cycle. As will be seen below, investment fluctuates far more violently than does consumption, so it accounts for much of the increase of GNP in an expansion, but it also accounts for much of the decrease of GNP in a contraction. Keynes argued for the crucial importance of investment because a dollar spent on investment would have a multiplied effect on the economy through its respending on consumption. Marglin and Bhaduri (1990) write that in the Keynesian...

    • CHAPTER 7 The Multiplier-Accelerator Model
      (pp. 138-156)

      The multiplier and the accelerator relationships each offer brilliant insights into cyclical behavior, while Samuelson’s (1939) synthesis of these two relationships into one theory was an outstanding achievement. This chapter examines each of these relations, as well as their implications and limitations, because they constitute the best introduction to formal cycle theory. Their limitations are to some extent the limitations of all cycle models. Their original statement is very simple, clear, and forceful—but leaves out many of the complex aspects of economic reality. Each limitation has been overcome in more complex and realistic models, but the end result is...

    • CHAPTER 8 Income Distribution: The Utilization-Unemployment Hypothesis
      (pp. 157-190)

      The distribution of income is of extreme importance to many business cycle theories. “Income distribution” here does not mean the range of individual incomes, but the functional distribution between economic classes. The main distinction used here is between labor income, which goes to wage and salary workers, versus property income, which goes to capitalists, financiers, and landlords.

      In theories stressing lack of effective demand—such as the underconsumption theory—a key claim is that income distribution shifts from workers’ wages to capitalist profit in every business cycle expansion. On the contrary, in theories emphasizing costs of the supply of labor...

    • CHAPTER 9 Demand-Side Theories: The Underconsumption Hypothesis
      (pp. 191-207)

      Many theorists have contended that the main problems of capitalist downturns are caused by the lack of consumer demand. The most famous of these theories are the group called underconsumption theories. These theories have been advocated by both mainstream economists and by socialist or Marxist economists—the two groups approach these theories differently, so those differences must be spelled out. Furthermore, most underconsumption theories have not been business cycle theories at all, but theories of long-run stagnation—these stagnation theories must also be distinguished from business cycle theories.

      All underconsumptionist long-run stagnation theories—whether socialist or nonsocialist—include, by definition...

    • CHAPTER 10 Cost of Plant, Equipment, and Raw Materials
      (pp. 208-214)

      Many theorists, from completely different viewpoints, have argued that a key factor in the business cycle may be that capitalist profits are hurt in the expansion phase by disproportionate rises in the prices of capital goods, that is, plant, equipment, and raw materials. In the contraction phase, on the other hand, profits are helped by disproportionate declines in the price of capital goods. This chapter notes very briefly the theoretical approaches to this subject (which are discussed at length in the next chapter), and then discusses the empirical findings in this area.

      One of the first to discuss the cyclical...

    • CHAPTER 11 Overinvestment and Reserve Army Theories of the Business Cycle: A Walk on the Supply Side
      (pp. 215-231)

      Many different theories of business cycles emphasize supply-side problems, the production process, the cost of production, or excess consumption and overinvestment—rather than the problems of effective demand, underconsumption, and excess saving emphasized in Chapter 9. First, the most popular supply-side theory is the view that too high a rate of taxation will dry up savings and also make people less willing to work. These theories have come to be called supply-side theories in recent decades, but they are only one type of supply-side argument (and they are not mainly cyclical theories). They were presented among the exogenous theories considered...

    • CHAPTER 12 Profits and Profit Rates
      (pp. 232-247)

      This chapter explores the behavior of total profits and profit rates over the business cycle, establishing the empirical base for a cycle theory centered on profits in the next chapter. Profits are important to cycle theory because of their close relationship to investment, which is the immediate cause of recessions or recoveries.

      The main hypothesis of this chapter is that the profit rate is strongly procyclical, contrary to some popular misconceptions. One subsidiary hypothesis is that there is no significant long-run trend to the profit rate, contrary to some theories. Another subsidiary hypothesis is that the profit rate leads at...

    • CHAPTER 13 Profit Squeeze (or Nutcracker) Theory of the Cycle: A Production-Realization Hypothesis
      (pp. 248-266)

      The review of demand-side theories in Chapters 7 and 9, combined with the review of supply-side theories in Chapter 11, makes clear the opposing points of view. This chapter attempts a synthesis in which there is room for both the demand-side factors (which affect revenue) and the supply-side factors (which affect cost).

      I call this theory the nutcracker theory because a downturn is caused by the closing of the jaws of the nutcracker on profits from the demand side as well as from the supply side. The hypothesis is that profits are limited both in the production of profits (through...

  8. Part Three: More Realistic Approximations

    • CHAPTER 14 Credit and Financial Crises
      (pp. 269-294)

      This chapter explores the vital role of money, credit, and finance in the business cycle, including both its demand aspects and supply aspects. The main hypothesis of this chapter is that the downturn is initiated by the decline in profits, but the credit system plays a crucial role in determining whether a recession becomes a depression. As many other economists have argued, the economic system becomes more vulnerable and financially fragile in an expansion, so a small decline in profit expectations may set off a financial crisis, causing a depression. On the other hand, credit plays a positive role in...

    • CHAPTER 15 Monopoly Power and Business Cycles
      (pp. 295-316)

      The main concern of this chapter is the effect of monopoly power on the cyclical behavior of prices and profits. As a background, it begins by considering the long-run and cyclical behavior of average prices as well as the trends in monopoly power (the cyclical behavior of aggregate profits was considered in Chapter 12).

      The Keynesian framework stresses that there may be price inflation if aggregate supply is less than aggregate demand (conceptualized as consumption, investment, government, and net exports). The monetary framework stresses that there will be inflation if aggregate supply (conceptualized as prices times output) is less than...

    • CHAPTER 16 The International Economy and Business Cycles
      (pp. 317-338)

      This chapter removes the unreal assumption that the U.S. economy is isolated and self-sufficient. The closed economy assumption was useful till now to clarify the domestic aspects of the business cycle; but its unreal nature is emphasized by Dernberg (1989), who says: “Since there is no such thing as a closed economy . . . it follows that much of macroeconomics [using that assumption] is not only incomplete, but it is also incorrect” (p. 1). This chapter examines how the U.S. business cycle behaves in the real world of international trade, investment and finance (an outstanding collection of articles on...

    • CHAPTER 17 Government Fiscal Behavior and the Business Cycle
      (pp. 339-360)

      The main hypotheses of this chapter are that government fiscal behavior is an endogenous part of the business cycle, and that it has a significant impact on the business cycle, but that it is far from the most important factor in peacetime cycles.

      The endogeneity of government monetary behavior was discussed in Chapter 14; this chapter focuses exclusively on the question of the endogeneity of fiscal behavior (that is, government spending and taxation). There are two aspects to this question. The political aspect raises the question of what determines government behavior; the economic question is whether there is a roughly...

  9. Part Four: Policy

    • CHAPTER 18 Can Reform Policies Lessen the Business Cycle under Capitalism? Fiscal, Monetary, and Income Policies
      (pp. 363-385)

      The analysis in the earlier parts of this book produced certain conclusions important for policy:

      1. Say’s law is incorrect.

      2. The business cycle is primarily endogenous.

      3. Effective demand is a very important determinant of the cycle.

      4. Income distribution is an important determinant of consumer demand.

      5. But the cost of supply is also important to the determination of profits.

      Given these findings, there are some policy views that must be rejected. First, there is the supply-side notion that taxes on wealthy capitalists should be reduced to increase investment. This is incorrect because the fact of more saving...

    • CHAPTER 19 Can the Business Cycle Be Eliminated? Economic Democracy and Democratic Planning
      (pp. 386-392)

      From the evidence in this book, it appears that the business cycle is caused by the capitalist system. To eliminate the business cycle, it follows that it is necessary to change to an alternative economic system. This chapter proposes a system based on economic democracy and democratic planning, as defined below. This chapter contains only a brief sketch of such a system; full discussion of all of the problems would require a long book. The issues raised by this solution are discussed in detail in Sherman (1987) and the problems of alternative economic systems are compared in Zimbalist, Sherman, and...

  10. Appendixes

    • APPENDIX A Definitions of Variables
      (pp. 393-394)
    • APPENDIX B: Cycle Bases in Seven Cycles
      (pp. 395-398)
    • APPENDIX C: Cycle Relatives, Average, Seven Cycles, 1949–1982
      (pp. 399-400)
    • APPENDIX D: Cycle Relatives, Average, Four Cycles, 1949–1970
      (pp. 401-402)
    • APPENDIX E: Cycle Relatives, Average, Three Cycles, 1970–1982
      (pp. 403-406)
    • APPENDIX F: Growth per Quarter, Average, Seven Cycles, 1949–1982
      (pp. 407-409)
    • APPENDIX G: Growth per Quarter, Average, Four Cycles, 1949–1970
      (pp. 410-412)
    • APPENDIX H: Growth per Quarter, Average, Three Cycles, 1970–1982
      (pp. 413-416)
  11. References
    (pp. 417-432)
  12. Index
    (pp. 433-447)