What is modern business cycle theory

If you want to know, have a look at this post. It is completely non-technical, and explains the way macro-economists look at things pretty danged well! (ht Marginal Revolution).

Fundamentally, this view of the business cycle is highly focused on methodological individualism – the business cycle occurs in the context of individuals maximising their happiness given constraints.

Before this strain of thought came out, business cycle theory was a surprising holistic section of economics – something that did not match with the individualistic nature of microeconomics (see Schumpeter). Furthermore, business cycle theory, long-term growth theory, and near term macroeconomics (effectively old school Keynesianism) were relatively incompatible.

Following the collapse of the “consensus” in macroeconomics during the oil crisis the one ray of hope was that we macroeconomics could be recreated in a way that is consistent with microeconomics. According to Kids prefer cheese this research area is still active – which is exactly what we want to hear.

Update: Paul Walker discusses the same article.

6 replies
  1. Matt Nolan
    Matt Nolan says:

    “Matt – if the free-market=happiness, why does venezuala rank higher than the US in the global happiness survey?”

    A) Not the point of the post – why didn’t you find a post on happiness to spam comments on?

    B) When have I ever said free-market=happiness? I have said that I believe a society that allows choice will end up with a higher level of happiness than a society that restricts it – but have I ever even said that a “free market” promotes choice?

    Define what you think a “free market” and I will tell you if I think its super duper.

    This blog is called “the visible hand” because we do believe there is a role for government – and that role comes from helping to create an environment where individuals can make choices, and where the costs and benefits of those choices accurately reflect the true social benefits and costs. If you had read the posts we do around here before (which I wouldn’t ask you to do – it just seems unusual that you feel you can describe my views without reading them) you would realise that.

    I think you are trying to find some dogmatic “neo-liberal/neo-conservative/evil-corporate” conspiracy here when one does not exist.

  2. roger nome
    roger nome says:

    “I have said that I believe a society that allows choice”

    More orwellian “choice” rhetoric. Choice to buy “arnots” crackers or “yumyum” crackers is pretty empty. If you think freedom to consume what ever you want whenever you want is what’s important in life, you’ve got a pretty hollow beliefs system.

    Everyone has “choice” in a free market, and it’s all a level playing field because everyone is born with the same opportunities. Crap. What a bout freedom from market externalities?

    Imagine if someone cut off your right arm and told you, you have the same “choices” as everyone else because you live in a free-market economy. This “choice” rhetoric will sound the same to someone who say, grew up in poverty and who only knew hopelessness desperation and depression, all because of the “choices” that the market gave their parents. And so the cycle goes on.

    Yes …. “choice” – another brainwashed economist.

  3. Matt Nolan
    Matt Nolan says:

    “Everyone has “choice” in a free market, and it’s all a level playing field because everyone is born with the same opportunities. Crap. What a bout freedom from market externalities?”

    I think you might be deaf – in a reading sense.

    A free market does not necessarily ensure that people have choices, or that there is opportunities for people. I have read Rousseau – in fact I’m a big fan:


    I think if you re-read my comment from before – you will realise that your comment makes no sense. You are attacking a straw man.

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