Business cycle theory

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The economic theory examines and describes the causes and effects of the economic and business cycle . In 1937 Gottfried Haberler , on behalf of the League of Nations at the time, created a system and an overview of the first business cycle theories.

In it he distinguished five groups of business cycle theory:

  1. Purely monetary theories
  2. Overinvestment theories
  3. Underconsumption Theories
  4. Psychological theories
  5. Harvest theories

Gottfried von Haberler is considered a pioneer of business cycle theories. Since the creation of the above theories, advocates of these theories have considered different causes of business cycles and advanced other theories. Other or similar theories are also referred to as " overproduction theories " or "over-accumulation theories ". The latter plays a role especially in Marxist crisis theory .

Pre-Keynesian business cycle theories

Purely monetary business cycle theory

Here, the granting of credit by the commercial banks plays a central role. An upswing comes about when the banks lower the lending rate. The trade reacts by expanding its inventory, which in turn means that the manufacturers have to increase their production in order to be able to satisfy the demand of the trade. This also increases household incomes and thus increases consumer demand. The retailer continues to build up its inventory, thus initiating a cumulative process.

In the course of this upswing, households' need for cash is also steadily increasing. This means that there is an outflow of central bank money from the commercial banks. If the central bank / central bank does not provide central bank money willingly and at unchanged costs, the commercial banks can only cover the growing need for credit with higher interest rates. The upswing leads to a price increase, which promotes imports and disadvantages exports. This causes the trade balance to deteriorate, which leads to a downturn.

If the domestic and foreign currencies have a fixed parity with gold, gold is exported instead of devalued. At the same time, the central bank money supply is falling as it is linked to the gold holdings. As a result, interest rates rise and thus end the upswing. The trade is reducing its inventories as a result of the increased interest rates. The ensuing fall in demand causes manufacturers to cut employment, which in turn leads to lower household incomes. As a result, the demand for consumer goods is also falling and intensifying the economic downturn. The cash holdings of non-banks are also falling. Price cuts worsen the terms of trade , which in turn improves the trade balance and leads to gold imports. The central bank money supply can also rise again. As a result, the commercial banks' credit leeway is expanded, interest rates fall again and a new upswing is initiated again.

Monetary overinvestment theory

Here, the reason for business cycles is assumed to be a permanent imbalance between the production of capital goods and consumer goods. The production structure is balanced when the planned savings match the demand for replacement and expansion investments. The proponents ( Friedrich August von Hayek (1899–1992) and Wilhelm Röpke (1899–1966)) of this theory assume that the commercial banks initiate the upswing, since cheap credit could reduce the costs of capital-intensive production and thus the demand for productive goods ( Capital goods ) is increased.

The expansive impulse assumes a difference between the monetary interest and the natural interest.

Non-monetary overinvestment theory

Main article: Overinvestment Theory

According to the proponents ( Gustav Cassel (1866–1945) and Arthur Spiethoff (1873–1957)) of this theory, the upswing is triggered by investments or due to technical progress with which new markets are opened up. It should be noted that while the bank loans make these projects possible, they do not trigger them. Nonetheless, production in the capital goods industry is increased and household incomes grow. If the capacities of the consumer goods industry are fully utilized, it will ask for additional means of production and thereby increase the momentum.

One also speaks of the accelerator principle , i.e. H. on the one hand, the upswing is increased and, on the other hand, when it fades, the downswing is initiated. The upswing is slowed down because savings cannot keep pace with investments. This means that when the credit boom comes to a halt, banks will raise their interest rates. As a result, some of the investment projects that have already started can no longer be financed, which makes the existing and capital-intensive production technologies unprofitable. Furthermore, the demand for expansion and replacement investments is falling . The consequence is that household income stagnates and the downturn is initiated by the accelerator effect .

Underconsumption theory

Main article: Underconsumption theory

There are a number of arguments used to try to explain the downturn. They do not contain a separate explanation for the business cycle and assume that a lack of consumer demand can lead to underemployment. Furthermore, two lines of argument must be distinguished here.

The first will u. a. represented by John Hobson (1858–1940), who reversed the argument into its opposite. This means that it is not the shortage, but rather excessive savings that lead the downturn. He assumes that the sustained upswing in the producer goods industry will lead to the consumer goods markets being flooded with new products at the end of the investment maturity period. As a result, prices would fall and losses would arise, whereupon investment demand in the consumer goods industry would decline again. Coupled with the decline in capital goods production and household incomes, consumer demand falls and the downturn occurs.

The second argument comes from Emil Lederer (1882–1939), he takes the view of the lack of consumer demand. According to this, the price rises faster than wages during the upswing, which shifts the distribution of income in favor of those who receive capital income. This leads to a higher savings rate, which has a negative effect on consumer demand in the economy as a whole and in turn initiates the cumulative downturn.

Schumpeter's business theories

In his theory of economic development (1911), Joseph Schumpeter established the interplay between companies as innovators or “Schumpeter pioneer entrepreneurs” and imitators as the driver of the business cycle. The starting point, as a "purely conceptual auxiliary construction", is a Walrasian equilibrium in which corporate profits are zero, all profits are competed away. On this basis, “pioneering entrepreneurs” can plan innovations . According to Schumpeter, every innovative entrepreneur initially presents himself as a monopoly with a temporary monopoly profit. If imitators appear, there is an economic upswing, but the position of the creative entrepreneurs is weakened by the competition of the imitators. While the innovators upset the market equilibrium at first, with the spread of the imitators a new equilibrium gradually emerges, again characterized by zero corporate profits, which forms the starting point for a new cycle. Schumpeter recognized the interplay between innovation and imitation as the driving force of competition . It forms the basis for a number of business cycle models .

Psychological theories

This is also a non-independent business cycle theory. References by various representatives ( Arthur C.Pigou (1877–1959) and John M. Keynes (1883–1946)) to the importance of price and sales expectations as possible reinforcers for upswing and downturn are merely defined.

The profits made by companies through the upturn lead to a positive mood, which makes the profitability of investments overestimated. If, on the other hand, the real expectations are disappointing for the company, exaggerated pessimism occurs. This leads to the fact that the restrictions on investments increase and thus the downturn (depression) is accelerated. A drop in demand diminishes discouragement and cautious optimism for investments emerges, which in turn can lead to an upturn.

Neoclassical business cycle theories

The neoclassical business cycle theories can be divided into monetarism and the new classical macroeconomics . The monetarist theory deals exclusively with the inflation problem and only in exceptional cases with business cycle issues. Milton Friedman is an important representative . The New Classical Macroeconomics (English abbreviation NCM ) also assumes market clearance, but in contrast to monetarism, rational expectations are assumed here. Robert Emerson Lucas is an important representative of the New Classical Macroeconomics

Exogenous business theories

These include, on the one hand, the equilibrium theory of the business cycle , according to which business fluctuations are due to monetary disturbances, and, on the other hand, the theory of real business cycles , which explains business cycles through real disturbances, such as changes in available technology.

Endogenous Business Theories

These include, on the one hand, models in which business cycles rely on non-linear internal dynamics ( intrinsic dynamics ) of the economy and, on the other hand, the Sunspot theory , which defines the business cycle using a modified theory of rational expectations.

Monetaristic economic models (monetarism)

Main article: Monetarism

At the heart of monetarism is a monetary theory for determining nominal income. He assumes that the nominal income is determined by the money supply and that the influences of fiscal policy would be "temporary and minor" if these are not accompanied by changes in the money supply. Friedman next defined the quantity theory of money, which he reformulated as the theory of demand for real coffers. A connection between the money supply and nominal income is formed on the one hand by temporarily influencing real income and on the other hand by permanently influencing the price level. This means that fluctuations in the money supply cause serious fluctuations in real income. Thus there are Phillips tradeoffs in monetarism as well . Theoretically, it is very difficult to say in which period the real effects will occur, how long they will last and when the impact on the price level will start. According to Friedman , the delays are long and variable. He assumes that the overall effect from the change in the money supply to the change in the nominal income takes six months to two years. Friedman therefore rejects fine-tuning through discretionary monetary policy measures, as these are very likely to take effect too late and thus prove to be destabilizing. Accordingly, the stabilization policy in this monetarist model is not very promising and therefore unimportant, since the relatively quickly reacting prices and wages never allow private demand to deviate significantly from the equilibrium of full employment.

If the balance is upset by shocks caused by the inherent stability of the private sector and the lesser importance of external relations, then these are monetary shocks . I.e. the adjustment is delayed because economic agents form their expectations adaptively. If the money supply is implemented via a portfolio adjustment process, the demand for goods and production factors increases.

Because of the short-term and incalculable effects on the real quantities, due to the powerful and permanent effect on the price level, Friedman (1959) suggests the money supply rule. This monetarist money supply rule states that the money supply is adjusted and linked to the economic growth rate. A constant growth of the money supply is an intermediate goal, the nominal interest rate is unsuitable for this. This means that the real effect is based on the real interest rate and the nominal interest rate, reduced by the expected inflation rate. It must be noted that the real interest rate is not a variable that is easy to measure and cannot be controlled by economic policy. Even an orientation towards this can cause destabilization. On the one hand, increasing the money supply serves as an instrument to lower the interest rate and, on the other hand, to increase demand, which in turn increases inflation expectations. This increases the nominal interest rate, despite the constant and decreasing real interest rate. I.e. If the nominal interest rate is chosen by the central bank as an interim target, it acts expansively when interest rates are high, which leads to higher inflation and a further rise in the nominal interest rate, whereby the real interest rate does not fall and thus does not stimulate demand, but rather causes the opposite.

An economic policy via the automatic stabilizer of constant monetary growth is also seldom necessary in the monetarist model. The reason for this is that the private economy tends to be stable; thus the system can process occurring shocks relatively quickly. Possible deviations from the equilibrium path can arise through discretionary measures of economic policy, especially stabilization policy, which have a procyclical effect due to their delayed effect. A steadily growing amount of money thus has a steady effect on (price) expectations and serves as an automatic stabilizer, because an increase in the amount of money is too scarce with high growth and too abundant with low growth. Furthermore, the model cannot differentiate between monetary effects of the price and the real sector. It is therefore a theory of nominal national income. At the same time, the cash-keeping function is not really stable and the money supply is not an optimal intermediate goal of monetary policy. Because of this, the monetarist model was developed into the NCM model .

New Classical Macroeconomics (NCM)

Main article: New Classical Macroeconomics This model presents a much more radical challenge to the traditional model of economic policy than does monetarism. The main difference between the models is, on the one hand, that the assumption of rational expectations are even more important and have more serious consequences and, on the other hand, that the market is cleared at all times.

The Lucas criticism by Robert E. Lucas says "Since the structure of an econometric model includes optimal decision-making rules for economic subjects and since optimal decision-making rules change systematically with the time series data relevant to economic policy, every change in economic policy will change the structure of the econometric model". "If you don't know why prices are not reacting quickly enough, changes in behavior cannot be forecast because you don't know when prices will react faster and when they will react more slowly."

In both assumptions of the rational expectations it is assumed that the economic subjects in this model type are called agents and that they use all the information available to them, know crucial economic relationships (of the model) and that they do not make any systematic errors when forming expectations. The criticism here is that in a world with uncertainties, the necessary information is often lacking. This becomes clear in the information (or expectations) about the reactions of others to the shocks in general and one's own behavior. Different assumptions can lead to self-confirming results and thus, contrary to the expectations of the NCM ( Phelps and Friedman), prove that multiple equilibria are quite possible. Thus, no clear rational assumptions can be made in this way. However, it can also be assumed that the model is unknown to many economic subjects and that systematic errors cannot be avoided. In the stochastic analogy to perfect security and perfect foresight of the neoclassical model, such rational assumptions as the neglect of these problems are common and could therefore be called stohastic perfect foresight.

More decisive than assumptions of rational expectations is the assumption of the NCM model of complete market clearance at all times. This states that the price mechanism works so efficiently that supply and demand are balanced even in the short term. This means that the agents select the price, wage and interest rate in such a way that at the time of the decision, with the information given, they can completely clear the markets at any time and thus maximize their benefits and profits. Furthermore, the assumption that markets will be completely cleared at all times is also assumed on the labor market, so there is no involuntary unemployment. That would mean that the employment and production fluctuations could only result from adjustment delays or from false expectations resulting from insufficient information.

The two most common mistakes that are made are the permanent / transitory confusion and the absolute / relative confusion. Here the agents cannot distinguish whether a development or a price increase is long-term or temporary. It is initially unclear to them whether the price level or just the (relative) prices are affected by a disruption. If the agents make a false assumption that it is a total or partial permanent or relative increase in prices, they will increase their supply until they find out this error in the next period. This means that production fluctuations can also arise in an NCM model because, in certain cases, not all markets are completely cleared. A simple model of this type consists of a supply, demand, money supply and money demand function.

Nowadays there is largely a consensus, even among economists of the New Classical Macroeconomics, that wages and prices do not adjust as quickly as necessary to restore the equilibrium between supply and demand. The hypothesis of the ineffectiveness of monetary policy is therefore hardly supported nowadays.

Supply-side economics

The supply-side school tries to stimulate the economy by means of tax cuts in such a way that tax revenue increases and the budget deficit is reduced. A distinction is made between two roots and two schools.

The first, theory-based root of supply-side economics is the classic tradition. Here, only the supply side is emphasized, and the demand side is completely neglected because, according to Say's law, every supply always creates its own demand, whereby the supply of goods determines the balanced transaction volume of a market. That is why the supply is defined as a decisive factor in this model. This line of thinking has traditionally continued in any study of the influence of a tax burden, social security or relative prices on the supply of production factors. This position was constantly represented in the entrepreneurial parties of Europe and thus played a decisive role in economic policy, especially in tax and investment policy. This tradition, which is liberal in Europe, has also continuously emphasized the role of free enterprise and state-free areas (i.e. within a fixed regulatory and competition policy framework) for the favorable development of the economy and employment.

The second root of the supply economy emphasized the stimulating effect of tax cuts, it even promised to reduce budget deficits. An ideological leader of this school is George Gilder , and the leading figure is Arthur B. Laffer , whose " Laffer curve " popularized the central fact. With this he showed that every tax yields higher income with increasing rates and decreasing income from a maximum point.

This school is not about new theoretical ideas, but about the magnitude of effects that may already be known. Furthermore, this school could not provide any convincing empirical evidence for the correctness of the orders of magnitude of the supply-side economics it postulated .

In supply-side economics , the focus is on the supply of production factors, the capital stock and the willingness to work. Furthermore, they refer to the importance of taxes and social security contributions for investing, saving, employment rate and working time.

In the view of supply economics, there are initially increases in profits, which lead to better productivity and growth and thus to rising wages. An uneven distribution of income is seen as a prerequisite for better overall prosperity. According to this view, the growth spurt also solves the inflation problem because there is temporarily excess supply and thus pressure on the price.

Supply economics had its greatest influence on economic policy in the early years of the Reagan Administration ( Reaganomics ) . The economic policy ( Thatcherism ) carried out by Margaret Thatcher in Great Britain also largely followed the ideas of supply economics . In Germany, a moderate form of supply economy was propagated by the Expert Council for the Assessment of Macroeconomic Development (SVR) up to the occurrence of the global recession as a result of the global financial market crisis in 2007.

Keynes' monetary business cycle theory

Comparison of the classic / neoclassical model with Keynes and the balance mechanics

According to Keynes, the orthodox economy was an exchange economy theory because of the supposed neutrality of money . In contrast, Keynes wanted to prove in his work The General Theory of Employment, Interest and Money the influence of money on the economy.

Keynes had already contradicted the alleged neutrality of money in 1923 because a severe deflation in prices would lead to losses for most companies and especially their investments and inventories. Saving on consumption by households does not lead to increasing savings and investments, as the neoclassical theory taught, but falling incomes and savings, as described by the saving paradox . This also refutes Say's theorem , according to which the production potential of the economy is always fully utilized. Falling expenditure through an investment that is not profitable in competition with financial investments and households saving on consumption lead to a production gap and falling incomes in the economy.

As soon as monetary causes, such as a high level of interest rates or a severe deflation in prices, cause corporate investments to collapse, production is restricted and involuntary unemployment occurs. This is because the extent of household savings is entirely determined by corporate investment and deficit spending by the state. Without investment and a budget deficit, the economy would have to become so impoverished in an economic crisis that, on balance, savings are no longer possible:

“The stock of capital and the level of employment will consequently have to shrink until the community becomes so impoverished that total saving has become zero, so that the positive saving of some individuals or groups is offset by the negative saving of others. In a society that conforms to our assumptions, the equilibrium must therefore adopt a position under laissez-faire conditions in which employment is low enough and living conditions are sufficiently miserable to bring savings to zero. "

For the orthodox economists, the income of the economy was determined by the extent of the production factors capital and labor. According to Keynes, it is the savings possible through net investment, the national deficit and the foreign trade surplus that only allow a corresponding level of income and, conversely, determine the stock of capital and the level of employment. A higher real income does not fail because of a lack of capital or a lack of labor; it fails because the private sector would save more from a higher income, for which the state's budget deficit is too low, i.e. because of the monetary interrelationships of the economy. In a very severe crisis, in which there is no net investment and the state balances the budget, private households and companies would have to become so poor that, on balance, they can no longer save anything despite desperate consumption cuts.

Income determines the factors of production

While the orthodox economy taught that the income of the economy, according to its production function, depends on the use of the production factors capital and labor, according to Keynes it is just the opposite: Because income is monetarily limited, the stock of capital (capital destruction through insolvency and bankruptcy, neglect Investments, research and development) and the level of work (starvation, impoverishment, declassification of human capital, demotivation, loss of qualification in crises) according to Keynes shrink accordingly, so that no higher production is possible than the scope of the possible Saving forced impoverishment of the community allowed.

With the monetary impoverishment and impoverishment of the community, a kind of full employment at a lower level of work would then be possible (e.g. the unemployed chief doctor as a less productive farm worker, the teacher as a newspaper deliverer, the interpreter as a cleaning lady). Corresponding social and economic processes of capital destruction and dequalification of work are evident in every crisis, but are viewed by orthodox economics as an adjustment process to the optimal use of resources that is necessary according to the rules of the market. The orthodox economists demand measures in every crisis, such as increased savings, which must further exacerbate the impoverishment of the economy and the destruction of capital. The social cuts and the deregulation of labor markets, which are emphatically demanded in crises, also intensify the devaluation process of human capital in the economy.

The savings determine the income

The connection between income and savings emphasized by Keynes was twisted in the subsequent reception of his teaching: While in the monetary business cycle theory according to Keynes the savings possible through investment, government deficit and export surpluses determine the level of the economic income, the different directions of the (bastard- Keynesianism, on the other hand, that savings are dependent on the level of income from the economy. This obscures the causal connection that the possible savings limit the income that can be generated through production and not vice versa.

Further developments based on Keynes

Neoclassical synthesis

Main article: Neoclassical synthesis

With the General Theory of Employment, Interest and Money from 1936, John Maynard Keynes tried to draw the theoretical and economic policy consequences of the Great Depression. However, the work is considered difficult to understand even among economists. With the 1937 IS-LM model , John R. Hicks provided a simplistic interpretation of the general theory. The IS-LM model (later modified and expanded) became part of the Neoclassical Synthesis, which in turn was gratefully received by the vast majority of economists, because on the one hand the failure of the 1930s could be thrown off and on the other hand the neoclassical world of thought was preserved. The compromise of the neoclassical synthesis resulted in the fact that the neoclassic applies in the long term, but Keynesian disturbances can become relevant in the short term. According to this, markets with flexible prices and wages lead to full employment and a Pareto-optimal state. Price and wage rigidities can, however, hinder or prevent the necessary adjustment and thus block the reduction of unemployment or delay it for an unacceptably long time. The neoclassical synthesis only partially coincides with Keynes' ideas. For decades it was the absolutely dominant structure of economic thought.

Post Keynesianism

This is an NKM model, which represents a new neoclassical synthesis and does not take into account real uncertainties and macroeconomic aspects of the formation of expectations and thus forms the starting point of the post-Keynesian approach. The representatives of this model are GLS Shackle , Paul Davidson , Hyman P. Minsky , Brian Loasby and Jan Kregel .

The focus of post-Keynesian considerations is of course the uncertainties, which differ from the risk of the NCM models because they cannot be assessed . This means that there is an absolute ignorance when assessing the results. Accordingly, the uncertainty, in contrast to the risk, cannot be calculated. Because of this, future events cannot be foreseen, whereupon economic agents are forced to adopt different behaviors and other institutional arrangements.

So is z. For example, debt financing is extremely dangerous for both lenders and borrowers in the event of uncertainty, because in such a case consumption depends primarily on current income and, as an aggregate, also on income distribution. The investments are dependent on current profits and expectations, which are often associated with intuitions. Because the consequences of price changes cannot be foreseen in the event of uncertainty and can cause further uncertainty among customers, prices are changed less often than in the case of security. At such times, investments ( accumulation ) are the focus of corporate planning. The companies are hoping for rapid growth so that, on the one hand, they can increase profits through economies of scale and market power ( oligopoly ) and, on the other hand, can reduce uncertainty. As a result, contracts are often concluded without a specific content in order to be able to take later information into account. Furthermore, hierarchical forms of organization (in companies) are becoming more important than market-based coordination. The reason for this is that the content of contracts (e.g. supply and employment contracts) cannot be determined in advance. Optimization in the event of uncertainty is difficult because not all alternatives are known and cannot be evaluated. The only possible thing that could or could occur is a satisfying behavior. Because of this, an imbalance is the norm and not a transition stage between the equilibria in post-Keynesianism. Therefore, power phenomena have an important role in this model; H. historical, institutional, socio-psychological, political and other factors influence development. Thus, the formation of expectations is shaped by contagion effects, so optimism and pessimism , economic miracles and financial crises occur with a certain probability.

Furthermore, the theory can be derived from the post-Keynesian model that there are no model-based courses of action but that there are certainly indications for economic policy. Keynes himself has drawn up two groups of measures.

First measure

  • Interventions are intended to prevent undesirable developments in individual cases; this approach places high demands on the economic and political authorities.

Second measure

  • Includes that stabilizing factors are built into the economic system, so-called "socialization" (social control) of the investment, i. H. a restriction on international capital movements and redistribution in favor of lower income groups.

To this day, various instruments and institutional precautions are being developed with which one tries to intervene in the economic and social system in a regulated manner.

These include u. a .:

  • Efforts to stabilize economic policy
  • Defense of discretionary measures against rule-building without feedback
  • Measures to stabilize the (world) financial system
  • Discussions to achieve a working mixture of regulation and deregulation

New Keynesianism (or New Neoclassical Synthesis)

Main article: New Keynesianism

The New Keynesian Macroeconomics developed in two characteristic spurts. In terms of time, these developments can be classified on the one hand in the second half of the 60s, the 70s and on the other hand in the 80s.

The first batch is called NKM I or New Keynesian Macroeconomics I and focuses on the imbalance models. In these, transactions are carried out at non-market-clearing prices. Whereby “Keynesian” unemployment and thus tasks for the stabilization policy result from these nominal price rigidities .

The second batch, NKM II , has focused since the 1980s on the question of why nominal shocks can have real consequences. This means micro-theoretical considerations for a compatible justification of price and wage rigidities . A model of incomplete competition is assumed here.

New Keynesian Macroeconomics I

The development of this model was u. a. characterized by Clower , Barro / Grossman and Malinvaud and is called the imbalance theory and has nothing to do with real imbalances and real uncertainty. It is more a question of temporary equilibria with quantity rationing . That is, if certain restrictions on the goods, labor and money markets are absent, more would be offered or demanded at the current prices. These restrictions arise because prices and wages do not adjust quickly enough to completely clear the markets. These quantity discrepancies can remain for an uncertain period of time and during this period the transactions are carried out at non-equilibrium prices ( trading at false prices ). A temporary equilibrium remains in the sense that the actions between the economic subjects are consistent.

The spill-over processes from one rationed market to another are particularly significant . If all the work on offer is not asked for at the given wage, then there is a reduction in households on the labor market. Furthermore, they have to adapt their transaction requests to the other markets as well. This means that when demand falls, the entrepreneurs are rationed on the goods market as a result and can no longer sell their entire production on the goods market. I.e. the spill-over processes cause the imbalances to rock each other. In contrast to the neoclassical synthesis , NKM I offers a microeconomic and decision-making foundation on the basis of traditional rational behavior and ensures the consistency of the important hypotheses.

Compared to the NCM , supply restrictions are taken into account and the focus is on the adjustment process, which is gaining in importance due to the delayed reaction of prices. The system is therefore constantly in an imbalance, since the reaction of prices and wages to the frequently occurring changes in exogenous influences ( shocks ) is hesitant. This is always in an adjustment process because it is always disturbed before it can achieve its goal. The is NKM I against the view that there is only one equilibrium, which is responsible for the stabilization policy debate of great importance. What is important about the rationing model for stabilization policy is that unemployment does not have to result from excessive real wages, but can also arise if nominal wages and nominal prices do not adjust to nominal demand promptly. In such cases, demand management and not wage policy would be an appropriate policy. In addition to the labor market or the goods market , even the credit market can be rationed in advanced models due to underlying behavioral assumptions and reaction mechanisms.

Prices and wages will change under the influence of rationing and there will be inventory adjustment processes. Nevertheless, Malinvaud continued to assume that excess demand would lead to price or wage increases in the respective markets and that investments are dependent on adaptive expectations of capacity utilization and factor prices as well as labor productivity . With this assumption, the model reacts sensitively to the exact specification of the behavior equation and is partly ad hoc . There is a tendency towards cyclical adjustments through regime change, towards a persistence of the Keynesian regime and towards a movement towards Walras equation with prompt price and wage adjustments.

Malinvaud tried u. a. to record the lack of price flexibility, lack of adjustment, rationing phenomena and especially the continued effect of rationing from one market to another ( spill-over ) in order to make the importance of NKM for stabilization policy clear. Criticism of his assumption is that the realistic formulation of the model very quickly becomes complex and no longer manipulative and thus the rationing becomes more pictorial than analytical. It is not easy to understand what is worded under temporary and under what conditions prices and wages will be adjusted. So in this, as in the other models, a real uncertainty is neglected and the adjustment process of the rationed economic agents takes place infinitely quickly. I.e. the same behavioral assumptions apply to economic subjects as in the classical model. Even if transactions at non-market-clearing prices enable different behaviors among economic subjects and the system.

New Keynesian Macroeconomics II

This model had its roots in the early 1980s, when an attempt was made to find a central assumption for slowly reacting prices and wages, which, in contrast to the assumption that markets would be completely cleared at all times, seemed more realistic. It must on the one hand between real pay - and Nominallohnrigiditäten and on the other hand, real and nominal price rigidity can be distinguished.

Real wage rigidity

Real wage rigidity is understood as the rigidity of relative wages. This can u. a. arise from implicit contracts , the existence of trade unions, the structure of the labor market or from efficiency considerations.

Wage rigidity

The wage rigidity from implied contracts ( Baily and Azariadis ) states that entrepreneurs are usually less risk averse than employees and are therefore prepared to bear the risks of fluctuations in sales for the most part alone. So are z. B. wage payments at the time the contract is signed are a hypothetical insurance premium lower than market clearing wages. Furthermore, the variance in unemployment increases due to the rigidity of real wages ( Akerlof / Miyazaki) .

Furthermore, there can be a relative stability of the real wage in the case of strong fluctuations in employment due to the existence of formal wage negotiations between trade unions and employers' associations when they face each other as monopolists (McDonald / Solow ) .

In addition, the structure of the labor market must still be used to explain real wage rigidity (Doering / Piore and Lindbeck / Snower ) . When looking at the model, a distinction must be made between union members and non-members, permanent staff and temporary workers, specialist and semi-skilled workers, and between employed and non-employed (unemployed). There is a strong relationship of trust between the workers in the first group and the company, which results from knowledge of the qualifications and which can only be recognized through longer observation. Furthermore, the employees of the primary labor force (the first group mentioned) resist the hiring of new staff at lower wages. Because they fear that their own wages could be lowered or that they could be replaced by cheaper labor. However, since it mostly only affects people in the second group ( secondary labor force ), the majority implicitly approves.

Efficiency wage hypothesis

The assumption here is that the productivity of the labor force depends on real wages . I.e. the higher this is, the greater the effort and loyalty of the employees. This also leads to a better selection of staff, lower absenteeism and lower fluctuation, with productivity gains falling again with increasing real wages. As a result, companies need to find the point where wages and marginal productivity are equal. Even if there is a change in demand, the company cannot react with wage cuts, but has to react with layoffs. Frequent or constant layoffs can counteract the factors that increase productivity.

Nominal wage rigidity

These are mostly overlapping contracts, i. H. one employee concludes an unchangeable wage contract at time t and another at time t + 1 (Fischer & Taylor) . It follows that the wages of the next negotiating group are lower because they are depressed by the monetary shock , the labor market is not evacuated because the other group becomes wholly or partly unemployed from the fixed nominal wage level. Furthermore, this is repeated for the next group when the employment contracts of the opening group expire. This seldom leads to a full adjustment of market clearing wages, but when this situation will be reached is not known in terms of time. Furthermore, price rigidities are very important, as these could adequately eliminate the disadvantages of wage rigidities due to the flexible prices. The real price rigidity can be seen in price regulations, oligopolistic strategies, search costs and input-output interrelations .

Oligopolistic Markets

Price rigidities arise here because price strategies can be less efficient. The reason for this is that the competition can easily observe price changes and react accordingly. However, this does not apply to the same extent to other strategies (such as for quantity adjustment, product differentiation, research, advertising, etc.) ( Schmidt ).

Search cost approaches

A distinction is made here between auction and customer markets ( Okun ). It should be mentioned that the quality of the products in customer markets is not clearly visible or, for other reasons, a complete overview of the market cannot be obtained. That is why well-established customer contacts are very helpful as they are not disturbed by temporary price changes. As a result, a price reduction under the conditions mentioned brings the provider slightly more sales and can prove problematic under certain conditions. Because the price change means the customer will automatically re-explore the market in search of a cheaper provider.

Input-output declarations of price rigidity ( Blanchard and Gordon )

Here the adjustment costs are i. w. S. the basis for the input-output linkages . It is assumed here that there are different companies with different cost items and that these items are changed at different times. The company does not know which changes are temporary or permanent and which will be compensated or reinforced by other cost changes. Due to the uncertainties (such as more frequent price change costs, long lead times for price changes and the entire input-output structures ), it can take a relatively long time for the price change to affect the consumer, because even the immediate price adjustments of each producer are subject to the aggregated price level (due to the long lead times ). Indexing all reasons for price rigidity is also not recommended, because this requires a large number of complicated contracts, which from a practical point of view is difficult to enforce and expensive. Defining the possible causes of price and wage rigidities is an important step, but two problems remain.

  1. The main problem with business cycle theory is that the nominal rigidities take on / represent the central role due to the nominal shocks. The justification of nominal rigidities is less convincing than that of real ones. Furthermore, the nominal rigidities can be overcome by indexing.
  2. In addition to the price adjustment costs, there are also the quantity adjustment costs. Furthermore, it can be assumed that a slight deviation in prices from the profit-maximizing prices means only a slight loss. Therefore, small deviations can be tolerated, since they have a poor economic effect. It looks completely different with large deviations. These have a much stronger effect and are hardly tolerable.

George A. Akerlof , Janet Yellen and Gregory Mankiw take a different view . They claim that the above assumptions are incorrect for oligopolistic competition. Since the profit function is derived from the price, the optimum = (equal to) 0 for a price-setting company. This means that a small deviation of the price from the optimum results in only small ( second order ) loss of profit if the others do not adapt either. Furthermore, if there are price adjustment costs, a slight increase in the money supply causes a price change that is hardly worth mentioning. Accordingly, producers suffer only a small loss of profit. On the other hand, a higher amount of money leads to income and possibly welfare increases ( first order ). If the increase in the money supply is permanent, sooner or later prices will adjust again.

Furthermore, the behavior of other economic agents influences whether nominal shocks are handled or act as nominal or real. I.e. if other economic agents do not take part in a nominal shock adjustment and one economic agent expects this, then the relative price change has the effect of a real shock . The consequence is that nominal and real price and wage rigidities interact.

New Political Economy (NPÖ)

Main article: New Political Economy

In 1958 Duncan Black published the book "The Theory of Committees and Elections", whereupon in the 1960s and 1970s a large number of American economists devoted themselves to state decision-making in democratic societies.

These include u. a .:

The New Political Economy is an extension of economic analysis to include politics. The focus is on political institutions and the actions of political actors. Furthermore, the representatives of the NPÖ use different methods, such as:

However, the classical methods of political economy are also used.

The focus of the NPÖ is the investigation of the actions of political actors, i. H. the voters , politicians , bureaucrats , interest groups and media. They have sufficient rational decision-making behavior and act like private persons, which u. a. the conventional neoclassical, game-theoretical, new institutional economic instruments of economics are applicable to the field of politics. Furthermore, it is assumed that political decision-makers primarily pursue their own personal interests rather than being interested in the well-being of the community. This means that politicians can be described as entrepreneurs and voters as consumers. According to this, bureaucracy makes the public goods available, while the media act as a provider of information. This interaction of interest groups, bureaucrats and politicians is also described as the "iron triangle". The actual behavior of political actors is empirically represented by the positive theory. The normative approaches must be used so consciously by the corresponding institutions that they achieve certain normative goals. This creates a close connection to constitutional economics, i. H. here the normative public choice theory and positive public choice theory of the NPÖ are compared. Thus there is a normative NPÖ between the positive and a positive constitutional economics between the normative .

Thus the NPÖ has developed in methodological and thematic terms into a wide range of research within economics and has gained importance in other areas. Thus public choice approaches in the context of rational choice theory in sociology to find and in political science. It can also be observed that the economic analysis of politics is increasingly opening up to existing and new areas. The economic analysis of politics (also called legal economics ) is now regarded as an independent subject within economics . Current research fields in which economic analysis is applied to the field of politics include: a. the change in political institutions, global political phenomena, the actions of supranational organizations, individual attitudes and perceptions of citizens towards politics, the institutionalization of trust, the influence of the media and the effect of political advice.

See also

Individual evidence

  1. ↑ a b c d e f Alfred Maußner: Konjunkturtheorie . Springer Verlag, Berlin / Heidelberg 1994, ISBN 3-540-57790-4 , p. 25 ff.
  2. ^ Alfred Müller: The Marxian business cycle theory - an over-accumulation-theoretical interpretation. Dissertation 1983, published in Cologne 2009.
  3. ↑ Frank Schohl, p. 13.
  4. ↑ Frank Schohl: The market-theoretical explanation of the economy . Tübingen 1999; G. Haag, W. Weidlich, G. Mensch: The Schumpeter Clock. In: D. Batten, J. Casti, B. Johansson (Eds.): Economic Evolution and Structural Adjustment . Berlin 1987, pp. 187-226; Wolfgang Weidlich, Günter Haag: Concepts and Models of a Quantitative Sociology - The Dynamics of Interacting Populations . Berlin / Heidelberg / New York 1983. Chapter 5 " Non-Equilibrium Theory of Investment: 'The Schumpeter Clock' "
  5. ↑ a b c d e f g h i j k l m n o p q r s t u v Gunther Tichy: Economic policy, quantitative stabilization policy in the event of uncertainties. 4th edition. Springer Verlag, Berlin / Heidelberg 1999, ISBN 3-540-65910-2 , p. 79 ff.
  6. ↑ a b c Jürgen Heubes: the economy and growth. Vahlen Verlag, Munich 1991, ISBN 3-8006-1485-5 , p. 28 ff.
  7. ↑ Kevin Hoover: New Classical Macroeconomics . econlib.org
  8. ^ John Maynard Keynes: A Monetary Theory of Production (1933) in The Collected Writings. Volume XIII p. 408:
    “An economy, which uses money but uses it merely as a neutral link between transactions in real things and real assets and does not allow it to enter into motives and decisions, might be called - for want of a better name - a real-exchange economy. The theory which I desiderate would deal, in contradiction to this, with an economy in which money plays a part of its own and affects motives and decisions and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted, either in the long period or in the short, without a knowledge of the behavior of money between the first state and the last. And it is this which we ought to mean when we speak of a monetary economy. "
  9. ^ Keynes: Essays in Persuasion. Macmillan 1931, p. 189f:
    "The policy of gradually raising the value of a country's money to (say) 100 per cent above its present value in terms of goods amounts to giving notice to every merchant and every manufacturer, that for some time to come his stock and his raw materials will steadily depreciate on his hands, and to every one who finances his business with borrowed money that he will, sooner or later, lose 100 per cent on his liabilities (since he will have to pay back in terms of commodities twice as much as he has borrowed). Modern business, being carried on largely with borrowed money, must necessarily be brought to a standstill by such a process. It will be to the interest of everyone in business to go out of business for the time being; and of everyone who is contemplating expenditure to postpone his orders so long as he can. The wise man will be he who turns his assets into cash, withdraws from the risks and the exertions of activity, and awaits in country retirement the steady appreciation promised him in the value of his cash. A probable expectation of deflation is bad enough; a certain expectation is disastrous. "
  10. ↑ John Maynard Keynes: General Theory of Employment, Interest and Money. Duncker & Humblot, Berlin 1936/2006, p. 183.
  11. ^ John Maynard Keynes: The General Theory of Employment, Interest and Money. Chapter 16 / III :
    Hence the stock of capital and the level of employment will have to shrink until the community becomes so impoverished that the aggregate of saving has become zero, the positive saving of some individuals or groups being offset by the negative saving of others . Thus for a society such as we have supposed, the position of equilibrium, under conditions of laissez-faire, will be one in which employment is low enough and the standard of life sufficiently miserable to bring savings to zero.
  12. ^ Paul Krugman: The Mutilated Economy. In: New York Times. November 7, 2013:
    How so? According to the paper (with the unassuming title “Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy”), our seemingly endless slump has done long-term damage through multiple channels. The long-term unemployed eventually come to be seen as unemployable; business investment lags thanks to weak sales; new businesses don't get started; and existing businesses skimp on research and development.
  13. ^ Paul Krugman: The Mutilated Economy. In: New York Times. November 7, 2013:
    These dry numbers translate into millions of human tragedies - homes lost, careers destroyed, young people who can't get their lives started. And many people have pleaded all along for policies that put job creation front and center. Their pleas have, however, been drowned out by the voices of conventional prudence. We can't spend more money on jobs, say these voices, because that would mean more debt.
  14. ↑ Michael Heine, Hansjörg Herr: Economics: Paradigm-oriented introduction to micro- and macroeconomics . Oldenbourg Verlag, 2012, ISBN 978-3-486-71523-1 , pp. 507-508