Edited by Dimitri B. Papadimitriou
Chapter 1: The Analysis of Business Cycles: The Problem and the Approach
Paraphrasing Voltaire, we can assert that if business cycles did not exist, the economic theorist would have invented them. For if we look at the problem of business cycles, without any doctrinaire bias, it seems obvious that in this branch of economics a natural connection occurs between the often too separate compartments of economic analysis: between the ‘monetary’ and the so-called real phenomena. Therefore, a theory of business cycles, to be consistent with the observable material and the inherited doctrines, should be a blend of the analytical material which deals with the interrelations among a few broad aggregates – which traditionally has been the approach of monetary theory – and the analytical material which deals with the behavior of individual economic units and of particular markets – which has been the sphere of price and distribution theory. This thesis can be interpreted as an attempt to construct such an eclectic business cycle theory by utilizing a number of elements drawn from inherited economic analysis. To be complete such an attempt would have to explore such purely theoretical material as the relation between macro and micro analysis, between partial and general equilibrium analysis and between monetary and real phenomena, as all of these separate pieces of economic theory have to be used in an analysis of business cycles. That task is both too big and too general. What will be attempted here is to try to develop a technique of business cycle analysis which does draw upon the various portions of inherited doctrine. In...
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