The Trade Cycle

With the exception of Hawtrey, the trade and credit cycle theories adopted by the Cambridge writers were broadly based on Marshall’s approach. Hawtrey, however, stressed the monetary aspects of the cycle to a far greater extent and denied the psychological causes underlying the Marshallian approach. This chapter considers some developments of Cambridge trade cycle theory in the period up to 1923. This period is characterised by three phases. The first, pre-war, phase saw some interesting theoretical developments: Hawtrey propounded a model which gave great importance to changes in stocks and quantity adjustments to equilibrium,1 while Keynes provided a model which concentrated on the amounts of savings and investment. Neither innovation was immediately adopted by the Cambridge School, though from this period through to the late 1920s there was close co-operation and contact between Keynes and Robertson.2 The second phase broadly covers the war years; in this period Robertson first expounded his over-investment theory of trade cycles, and there was an increasing awareness of the limitations of the invisible hand. The final phase covers the 1920s (in fact extending beyond 1923) during which time some of the first period developments began to assume greater prominence, and there was continued concern over the limits to the working of the invisible hand.