Abstract
Real business cycle (RBC) theories are nonmonetary explanations of the business cycle. Supporters of RBC theory claim that business cycles arise due to changes in real factors, instead of monetary factors, in the economy. The focus is on alleged causes of the business cycle that emanate from places other than changes in the supply of money and spending. Further, such cycle theory assumes markets are always in equilibrium (i.e., they always clear, even during recessions and depressions).1
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Notes
See John B. Long, Jr. and Charles I. Plosser, “Real Business Cycles,” Journal of Political Economy vol. 91, no. 1 (February 1983), pp. 39–69
and George Stadler, “Real Business Cycles,” Journal of Economic Literature vol. 32, no. 4 (December 1994), pp. 1750–1783 for detailed articles describing RBC theory.
For a basic description of RBC theory, see Roger A. Arnold, Economics, 5th ed. (Cincinnati, OH: South-Western College Publishing, 2001), pp. 379–380.
For a description of this version of RBC theory, see Andrei Shleifer, “Implementat ion Cycles,” Journal of Political Economy vol. 94, no. 6 (December 1986), pp. 1163–1190.
Hear Richard Salsman, “The Myth of Market Bubbles,” audio recording (Gaylordsville, CT: Second Renaissance Books, 2000) for examples of this kind of RBC theory.
For an example, see José A. Scheinkman and Michael Woodford, “Self-Organized Criticality and Economic Fluctuations,” The American Economic Review vol. 84, no. 2 (May 1994), pp. 417–421.
On this idea, see Robert B. Barsky and Jeffrey A. Miron, “The Seasonal Cycle and the Business Cycle,” Journal of Political Economy vol. 97, no. 3 (June 1989), pp. 503–534.
See Ludwig von Mises, Human Action, 3rd rev. ed. (Chicago: Contemporary Books, Inc., 1966), pp. 554–555 and 580–586.
See Federal Reserve Bank of Minneapolis, “In This Issue,” Quarterly Review (Fall 1986), pp. 1–2. In particular, see p. 1. Also see Robert G. King and Charles I. Plosser, “Money, Credit, and Prices in a Real Business Cycle,” The American Economic Review vol. 74, no. 3 (June 1984), pp. 363–380. See in particular p. 363.
See Brian P. Simpson, Money, Banking, and the Business Cycle, Volume 1: Integrating Theory and Practice (New York: Palgrave Macmillan, 2014).
See Sushil Bikhchandani, David Hirshleifer, and Ivo Welch, “A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades,” Journal of Political Economy vol. 100, no. 5 (October 1992), pp. 992–1026
and Fischer Black, “Noise,” The Journal of Finance vol. 41, no. 3 (July 1986), pp. 529–543 for examples of these theories. The former article does not explicitly focus on the business cycle but can be used as a basis for business cycle theory. The latter does explicitly focus on changes in taste causing the business cycle.
See Fischer Black, Business Cycles and Equilibrium (New York: Basil Blackwell Inc., 1987), pp. 117–118 and 123–124 for an example of this theory.
For those who do not know how the standard of living is raised through the law of comparative advantage, see George Reisman, Capitalism: A Treatise on Economics (Ottawa, IL: Jameson Books, 1996), pp. 350–354.
See J. Joseph Beaulieu, Jeffrey K. MacKie-Mason, and Jeffrey Miron, “Why Do Countries and Industries with Large Seasonal Cycles also Have Large Business Cycles?” The Quarterly Journal of Economics vol. 107, no. 2 (May 1992), pp. 621–656 and Barsky and Miron, “The Seasonal Cycle.”
See King and Plosser, “Money, Credit, and Prices,” pp. 368, 370, 372, and 374–376 and Richard M. Salsman, Gold and Liberty (Great Barrington, MA: American Institute for Economic Research, 1995), pp. 33 and 35 for examples.
For an example of a critique, see Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles, translated by Melinda A. Stroup (Auburn, AL: Ludwig von Mises Institute, 2006), pp. 512–542 and 582. While not all Huerta de Soto’s criticisms of monetarist theory are valid, overall he provides a good analysis of the theory.
Joseph A. Schumpeter, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, vol. 1 (Chevy Chase, MD: Bartleby’s Books, 2005 [1939]), pp. 138 and 143.
Wesley Clair Mitchell, Business Cycles and Their Causes (Berkeley, CA: University of California Press, 1941), pp. ix and 149–162.
Irving Fisher, Booms and Depressions: Some First Principles (New York: Adelphi Company, 1932), pp. viii, 41–49, and 141–142.
Michal Kalecki, Essays in th e Theory of Economic Fluctuations (New York: Farrar & Rinehart, Inc., 1939), pp. 144–149.
See Reisman, Capitalism, p. 716, note 19; Murray N. Rothbard, America’s Great Depression, 5th ed. (Auburn, AL: Mises Institute, 2000), pp. 60–68;
and Jeffrey Herbener, “The Myths of the Multiplier and the Accelerator” in Mark Skousen, ed., Dissent on Keynes: A Critical Appraisal of Keynesian Economics (New York: Praeger, 1992), pp. 73–88. See in particular pp. 79–87 of the latter work. While not all the criticisms in the latter two works are valid, they do provide a number of valid criticisms worthy of citation.
Paul A. Samuelson and William D. Nordhaus, Economics, 13th ed. (New York: McGraw-Hill Book Co., 1989), pp. 215–216.
A.D. Knox, “The Acceleration Principle and the Theory of Investment: A Survey,” Economica vol. 19, no. 75 (August 1952), pp. 269–297.
See p. 275. 43. George Reisman, “The Stock Market, Profits, and Credit Expansion,” http://capitalism.net/articles/Stock%20Market,%20Profits,%20Credit%20Expansion.htm (2002). See section 6 titled “Why the Credit-Expansion Boom Cannot be Sustained.” Article accessed December 10, 2011.
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© 2014 Brian P. Simpson
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Simpson, B.P. (2014). Real Business Cycle Theory. In: Money, Banking, and the Business Cycle. Palgrave Macmillan, New York. https://doi.org/10.1057/9781137336569_4
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DOI: https://doi.org/10.1057/9781137336569_4
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