3 pages essay

Early Agricultural Theories! “Agriculture industry is much more important before industrial evolution !!

economist focus on cyclical nature of agricultural production to explain recession and depression!!!

· W.S.Jevons (1884) “sunspot theory” ! low sunspot → low agricultural output → cyclical behavior of economies is following sunspot activity! Wrong → business cycle ≈10.43 years BUT the sunspot cycle ≈ 11 years!!! ·Ezekial (1938) “cobweb theory”! supply and demand could lead to cyclical fluctuations in price and output! 1) goods are perishable and cannot be stored! 2) farmer decided what/how much to plant and set price based on last fall! Wrong → Backward but not forward, farmer may plant too much or too less depend on the last trade!!! ·Malthus (1798) ! When land is fixed, the output is almost fixed! 1) less population → capital-to-labor ratio↑ → living standard↑ → more population → capital-to-labor ratio↓ → living standard↓ → less population !! Capital and technology are not fixed!! Role of Technology not only stabilizing eco. growth but also potentially driving business cycles!!!!!!!!!!!!!!!!

! Early Monetary Theories! (Before Great Depression & End of Gold Standard)! Gold reserve of a country is limited !! · Hawtrey (1913) ! 1) Cause of Business cycle: change in trade balance → fluctuation in money

supply → cause business cycle! 2）Business Cycle are endogenous ! 3) Solution → Abandon the gold standard for fiat money!! Wrong → business cycles have not end since modern economy have adopted fiat money! BUT Hawtrey’s model developed view that monetary policy plays a critical role in business model!!! Underconsumption and Marxist Theories! ! · Hobson (1922) ! 1) growth of consumption will not pace with the growth of production! 2) Average propensity to consume = consumption/income! Income↑ → average propensity to consume↓! 3）Business Cycle are endogenous and not initiated by external shocks! ! · Marxist! 1) excess capital accumulation → profitability of business↓ → periodic business failures! 2) Purchasing power fall was caused by inequality of capitalism! Purchasing power of most population↓ → over supply! Average propensity to consume↓→ cause business cycle! 3) Solution A: Wealth Redistribution! “redistribute income from rich to the poor who have higher propensity to consume”!! Solution B: Increase amount of government purchases within economy!! ROLE OF GOVERNMENT for stabilizing business cycle.! !

Profit Marginal Theories! (= Price - average cost of good)! ! ·Mitchell (1927)! 1) profit margins are strongly procyclical! - firms can reduce their inventories, reducing cost! - the beginning of expansion was characterized by lower input price ! - Economies of scale → quantity of good produced↑ → average cost↓! 2) profit margins↑ → expected profit↑ & investment↑ → economy approach to full capacity → cost↑ → profit margins↓! 3) Recognize that market is NOT PERFECT COMPETITIVE! !! ROLE OF EXPECTATION （in all modern business cycle theories）! ROLE OF IMPERFECT COMPETITION in explaining business cycle !!!! Early Investment Theories! (extremely volatile and important source of economic instability)! ! · 3 categories !! 1) Hawtrey (1913) & Wicksell (1936) → unstable fluctuations in money supply, which creates changes in investment! ! 2) Wicksell (1936) ! new technology → investment boom and bust → over investment!! 3) Clark (1917)! a)higher investment → aggregate output ↑ → spending↑ → additional increases in investment and output! b) small change in investment, large change in aggregate output! c) Spending Multipliers not only with investment, but also with exogenous changes in consumption and government purchases