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Tendency to Equilibrium, the Possibility of Crisis, and the History of Business Cycle Theories

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  • Daniele Besomi

    (Université de Lausanne - Centre Walras-Pareto)

Abstract

In 1926 Adolf Löwe suggested that business cycle theories are fundamentally incompatible with the idea that the system tends towards equilibrium. Hayek, his disagreement with such a conclusion notwithstanding, recognised that the issue is central to business cycle theorizing, and agreed with Löwe that the proper way to classify business cycle theories is to examine how writers stand on this point. This paper is a preliminary attempt to take Hayek and Löwe seriously on this historiographical issue. After Löwe’s and Hayek’s positions are examined in context, the paper shows that Löwe’s problem had been, implicitly or explicitly, at the heart of theoretical treatment since the early debates on crises. Next, the paper discusses how some crises and cycle theorists gradually switched from considering a stationary equilibrium as a theoretical norm to the idea of cyclical fluctuations as the natural state of the system, while others continued to focus on a stable equilibrium and explained movement as the result of exogenous events, frictions or mismanagements. Finally, the merits of Löwe’s and Hayek’s suggestions are examined in light of this dichotomy.

Suggested Citation

  • Daniele Besomi, 2006. "Tendency to Equilibrium, the Possibility of Crisis, and the History of Business Cycle Theories," History of Economic Ideas, Fabrizio Serra Editore, Pisa - Roma, vol. 14(2), pages 53-104.
    • Handle: RePEc:hid:journl:v:14:y:2006:2:3:p:53-104
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    Cited by:

    1. Claudio Borio, 2013. "On Time, Stocks and Flows: Understanding the Global Macroeconomic Challenges," National Institute Economic Review, National Institute of Economic and Social Research, vol. 225(1), pages 3-13, August.
    2. Mathias Drehmann & Claudio Borio & Kostas Tsatsaronis, 2012. "Characterising the financial cycle: don't lose sight of the medium term!," BIS Working Papers 380, Bank for International Settlements.
    3. Claudio Borio, 2011. "Rediscovering the Macroeconomic Roots of Financial Stability Policy: Journey, Challenges, and a Way Forward," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 87-117, December.
    4. Caviglia-Harris, Jill & Sills, Erin & Bell, Andrew & Harris, Daniel & Mullan, Katrina & Roberts, Dar, 2016. "Busting the Boom–Bust Pattern of Development in the Brazilian Amazon," World Development, Elsevier, vol. 79(C), pages 82-96.
    5. Claudio Borio, 2014. "The financial cycle and macroeconomics: what have we learned and what are the policy implications?," Chapters, in: Ewald Nowotny & Doris Ritzberger-Grünwald & Peter Backé (ed.), Financial Cycles and the Real Economy, chapter 2, pages 10-35, Edward Elgar Publishing.
    6. Alvaro Cencini, 2012. "Is there a common cause to economic and financial crises?," Chapters, in: Claude Gnos & Sergio Rossi (ed.), Modern Monetary Macroeconomics, chapter 7, pages 193-217, Edward Elgar Publishing.
    7. Borio, Claudio, 2014. "The financial cycle and macroeconomics: What have we learnt?," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 182-198.
    8. Claudio Borio, 2019. "On money, debt, trust and central banking," BIS Working Papers 763, Bank for International Settlements.
    9. Besomi, Daniele, 2008. "James Anthony Lawson on commercial panics and their recurrence," Structural Change and Economic Dynamics, Elsevier, vol. 19(4), pages 330-341, December.
    10. Adél Bosch & Steven F. Koch, 2020. "The South African Financial Cycle and its Relation to Household Deleveraging," South African Journal of Economics, Economic Society of South Africa, vol. 88(2), pages 145-173, June.

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