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Keynes's Theories of the Business Cycle: Evolution and Contemporary Relevance

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  • Pablo Gabriel Bortz

Abstract

This paper traces the evolution of John Maynard Keynes's theory of the business cycle from his early writings in 1913 to his policy prescriptions for the control of fluctuations in the early 1940s. The paper identifies six different "theories" of business fluctuations. With different theoretical frameworks in a 30-year span, the driver of fluctuations--namely cyclical changes in expectations about future returns--remained substantially the same. The banking system also played a pivotal role throughout the different versions, by financing and influencing the behavior of return expectations. There are four major changes in the evolution of Keynes's business cycle theories: a) the saving–investment framework to understand changes in economic fluctuations; b) the capabilities of the banking system to moderate the business cycle; c) the effectiveness of monetary policy to fine tune the business cycle through the control of the short-term interest rate or credit conditions; and d) the role of a comprehensive fiscal policy and investment policy to attenuate fluctuations. Finally, some conclusions are drawn about the present relevance of the policy mix Keynes promoted for ensuring macroeconomic stability.

Suggested Citation

  • Pablo Gabriel Bortz, 2021. "Keynes's Theories of the Business Cycle: Evolution and Contemporary Relevance," Economics Working Paper Archive wp_986, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_986
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    References listed on IDEAS

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    7. Luca Fantacci & Maria Cristina Marcuzzo & Annalisa Rosselli & Eleonora Sanfilippo, 2012. "Speculation and buffer stocks: The legacy of Keynes and Kahn," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 19(3), pages 453-473, June.
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    9. Pablo Gabriel Bortz, 2017. "The road they share: the social conflict element in Marx, Keynes and Kalecki," Review of Keynesian Economics, Edward Elgar Publishing, vol. 5(4), pages 563–575-5, October.
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    Cited by:

    1. Mark Setterfield & George Wheaton, 2024. "Animal spirits and the Goodwin pattern," Working Papers 2407, New School for Social Research, Department of Economics.

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    More about this item

    Keywords

    John Maynard Keynes; Business Cycle; Fiscal Policy; Monetary Policy; Financial System; Uncertainty;
    All these keywords.

    JEL classification:

    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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