Why Do Crises Occur? Causal Theories

Business cycles, trade cyclestrade cycle, boom-and-bust cycles,boom-and-bust cycles or macroeconomic fluctuationsmacroeconomic fluctuations refer in economiccrises parlance to the recurrent alternation of business activity between two phases, one of expansion, boom, or recovery; the other of recession, depression, slump, bust, or downturn. These are however modern ways of expression, because in the earlier times of political economy, the usual way to refer to periods of economic decay or distress were terms such as “gluts,” “panicspanics,” “crisescrises,” “revulsionsrevulsions”, or “stagnations.” The variety of terms to mention the phenomenon may be a symptom of the large confusion about its nature and causes; indeed, in modern economics is common to find the view that the causes of recurrent recessions are unclear so that numerous theories have been proposed but none of them has succeeded in providing an accepted explanation of the phenomenon. The chapter discusses the causes of the cycle suggested by a variety of authors since the late eighteen century. Say's law, accepted in classical economics and in new classical macroeconomics—the idea that generalized overproduction is impossible in the market economy because in the production of commodities sufficient purchasing power would be generated and transferred to society for the purchase of all that is produced—, is rejected here on the basis of both empirical and theoretical considerations. Overproduction with markets flooded of unsaleable commodities is a reality of capitalism that becomes dramatically evident in periods of crisis. Following ideas from Sismondi, Karl Marx, Wesley Mitchel, and Jan Tinbergen as well as statistical analyses of quarterly data from the US economy in recent decades, a causal scheme is proposed in which profits are a key element to determine investment and thus macroeconomic conditions of expansion or contraction. This model is a causal endogenous scheme of the business cycle in which profits and investment are linked in a kind of predator-prey model: movements in profits are followed some quarters later by movements in investment in the same direction, and movements in investment are followed by movements in profits in the opposite direction. The model does not exclude a role of accumulating debt as part of the phenomena leading to the sudden appearance of acute turmoil in both the financial markets and the real economy at the start of the crisis.