Business Cycles: History, Theory and Investment Reality By Lars Tvede Copyright 2006 John Wiley & Sons Ltd Appendix 1 List of Important Events in Business Cycle Theory 1705 John Law publishes Money and Trade with a Proposal for Supplying the Nation with Money, where he calls for the establishment of a landbank. 1716 Law & Company is founded. 1734 Cantillon dies and leaves behind him the manuscript for Essai sur la Nature du Commerce en General. The manuscript includes an analysis of the effects of velocity of money. 1759 Adam Smith publishes The Theory of Moral Sentiments. 1764 Adam Smith sails to France, where he meets Quesnay. 1773 Adam Smith publishes The Wealth of Nations, which includes the concept of the Invisible Hand. 1788 Jean Babtiste Say reads The Wealth of Nations. 1797 The British House of Commons invites Henry Thornton to testify about the causes of a panic. 1799 David Ricardo reads The Wealth of Nations. 1802 Henry Thornton publishes Paper Credit of Great Britain, which is a detailed account of how monetary policy works. He proposes stabilization through active monetary policy. 1803 Jean Babtiste Say publishes Traite d Economie Politique, which includes Say s Law, suggesting that supply creates its own demand. 1808 James Mill meets David Ricardo and starts to persuade him to write about economics.
424 Business Cycles 1809 David Ricardo publishes The High Price of Bullion, a Proof of the Depreciation of Bank Notes. 1816 David Ricardo publishes Proposals for an Economical and Secure Currency. He suggests that use of paper money that is convertible to gold will stabilize the economy. 1819 James Mill s son John Stuart Mill publishes Elements of Political Economy at the age of 13. 1822 Charles Babbage publishes Observations on the Application of Machinery to the Computation of Mathematical Tables. 1826 John Stuart Mill introduces the concept of competitive investment in his Paper Currency and Commercial Distress. 1848 John Stuart Mill publishes Principles of Political Economy, where he relates velocity of money to economic upswings and speculation, and emphasizes the importance of confidence. Karl Marx writes the first draft texts for Das Kapital, which contain descriptions of business cycles. 1862 Clement Juglar publishes Les Crises Commerciales et leur Retour Periodique en France, en Angleterre et aux Etats Unis; the first clear description of business cycles as caused by inherent instability phenomena. 1867 The first volume of Karl Marx s Das Kapital is published. 1871 William Stanley Jevons publishes The Theory of Political Economy, which contains the first formal description of Rational Man. 1873 Walter Bagehot (the editor of The Economist) publishes Lombard Street: A Description of the Money Market, which describes the roles and main economic consequences of banking. 1875 William Stanley Jevons writes a series of articles about business 1882 cycles, which he tries to explain as the consequence of sunspots, or of expectations of sunspots. 1885 Simon Newcomb introduces what is later called the Quantity Theory of Money in his Principles of Political Economy. 1889 Leon Walras publishes Elements of Pure Economics, where he attempts to describe the economy in mathematical terms. John Atkinson Hobson publishes The Physiology of Industry, where he introduces an underconsumption theory of business cycles. 1890 Marshall publishes Principles of Economics, where he describes positive feedback processes in the economy. 1894 Mikhail Tugan-Baranovsky publishes The Industrial Crises in England with an overinvestment/exhaustion model of business cycles. 1896 Irving Fisher distinguishes between natural and real interest rates in his Appreciation and Interest.
Important Events in Business Cycle Theory 425 1902 Arthur Spiethoff publishes Vorbemerkungen zu einer Theorie der Überproducktion, with an overproduction/technology theory of cycles. 1903 Arthur Spiethoff publishes Die Krisentheorien von M. v. Tugan- Baranovsky und L. Pohle. 1907 Knut Wicksell publishes The Influence of the Rate of Interest on Prices, where he introduces the concepts of real rate and natural rate. 1910 Roger Ward Babson publishes Business Barometers Used in the Accumulation of Money. The book describes how money rates, stocks, bonds, commodity prices and real estate fluctuate in relation to business cycles. Nikolai Kondratieff describes a long-term cycle in Archiv fur Sozialwissenshaft. 1911 Irving Fisher publishes The Purchasing Power of Money. The main theme is the destabilizing effects of inflation and fluctuations in money supply. Joseph Schumpeter publishes The Theory of Economic Development, where he introduces the theory that innovations arrive in clusters and that these can explain business cycles. He also introduces the concept of creative destruction. 1913 Ralph George Hawtrey publishes Good and Bad Trade, which focuses on monetary instability and an explanation of business cycles. Wesley Mitchell publishes Business Cycles. 1915 Dennis Holme Robertson publishes A Study of Industrial Fluctuations, which emphasizes fluctuating capital investments as a key driver behind business cycles. 1920 Irving Fisher publishes Stabilizing the Dollar, where he suggests initiatives to stabilize inflation and money supply. Wesley Mitchell cofounds the National Bureau of Economic Research (NBER). 1923 Joseph Kitchin publishes Cycles and Trends in Economic Factors, where he describes a short-term business cycle phenomenon. Catchings and Foster publish Money with an underconsumption theory. 1925 Catchings and Foster publish Profits. 1926 Irving Fisher publishes A Statistical Relationship between Unemployment and Price Changes. This describes what is later known as the Phillips curve. 1927 Pigou publishes Industrial Fluctuations. Catchings and Foster publish Business Without a Buyer. Mitchell publishes Business Cycles: The Problem and its Setting. 1929 Babson predicts a stock market crash, Fisher disagrees. 1930 Ragnar Frisch founds The Econometric Society together with Joseph Schumpeter, Irving Fisher and others. Kuznets publishes
426 Business Cycles Secular Movements in Production and Prices, where he describes a medium-term cycle. 1931 R.F. Kahn introduces the concept of the multiplier in The Relationship of Home Investment to Unemployment. 1933 Friedrick von Hayek publishes Monetary Theory and the Trade Cycle. He suggests that the monetary system in itself is unstable and that monetary inflation can go on for some years without leading to inflation. Homer Hoyt publishes One Hundred Years of Land Values in Chicago with the first theories of property cycles. The first issue of Econometrica is published. Ragnar Frisch publishes Propagation Problems and Impulse Problems in Dynamic Economies, where he shows how random shocks can generate cyclical fluctuations in the economy. Joseph Schumpeter starts to write a book about business cycles. Robert Bryce visits the USA and gives a speech about John Maynard Keynes s new ideas. 1936 John Maynard Keynes publishes The General Theory of Employment, Interest and Money in which he suggests that the state should use fiscal policy to stabilize the economy. The book also describes propensity to consume and propensity to save, liquidity preference and the multiplier. Jan Tinbergen develops a 24-equation model of the American economy. 1937 Von Haberler publishes Prosperity and Depression on the initiative of The League of Nations. The book examines all the existing business cycle theories. 1938 Einarsen publishes Reinvestment Cycles, a book that describes some echoes in investments in the Norwegian shipping industry. Ezekiel publishes The Cobweb Theorem. 1939 Jan Tinbergen publishes two articles where he tests the theories in von Haberler s book. One of his conclusions is that fluctuations in aggregate profit are by far the most important explanation of fluctuations in aggregate investment. Paul Samuelson publishes an article where he examines the combined effect of the accelerator and the multiplier. He finds a complicated pattern where several completely different effects are possible, depending on parameter values. Joseph Schumpeter publishes Business Cycles, where he suggests that there are three dominant fluctuations: Kitchin, Juglar and Kondratieff, and that depressions can be the result of synchronized downturns. 1941 Lloyd Appleton Metzler publishes The Nature and Stability of Inventory Cycles, which explains how fluctuations in inventory can generate short-term business cycles.
Important Events in Business Cycle Theory 427 1943 A.C. Pigou publishes The Classical Stationary State, where he suggests that deflation under a recession increases the purchasing power of the circulating cash, which is a negative feedback loop. This is later called the Pigou Effect. 1946 ENIAC, the world s first computer is formally introduced to the public. Jay Forrester gets approval for his Whirlwind project. 1948 Milton Friedman joins the NBER. 1951 H.E. Hurst publishes Long Term Storage Capacity of Reservoirs, where he introduces the Hurst Exponent. 1953 Von Mises publishes his Theory of Money and Credit. 1954 Kenneth Arrow and Gerard Debreu publish Existence of an Equilibrium for a Competitive Economy, which provides a mathematical demonstration of how an economy may become inherently stable. 1956 Jay Forrester joins the Sloan School of Management, where he later introduces the concept of system dynamics. 1957 Hyman Minsky publishes Central Banking and Money Market Changes, which is the first of a series of publications where he describes instability in capital markets as key aspects of business fluctuations. 1958 The Phillips curve is rediscovered by Phillips, who publishes The Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom, 1861 1957. 1961 Edward Lorenz discovers the butterfly effect in a simulation of a weather system. Muth publishes Rational Expectations and the Theory of Price Movements. This is the forerunner of the Rational Expectations hypothesis. 1963 Milton Friedman publishes A Monetary History of the United States with Anna J. Schwartz. They conclude that over the short term, money growth is reflected in activity, and over the long term, it is reflected in inflation. 1967 Hamilton Bolton publishes Money and Investment Profits, where he describes the effects of financial liquidity. 1969 Ragnar Frisch and Jan Tinbergen receive the Nobel Prize for having developed and applied dynamic models for the analysis of economic processes. 1970 Paul A. Samuelson receives the Nobel Prize for the scientific work through which he has developed static and dynamic economic theory and actively contributed to raising the level of economic analysis in economic science. 1971 Simon Kuznets receives the Nobel Prize for his empirically founded interpretation of economic growth, which has led to new
428 Business Cycles and deepened insight into the economic and social structure and process of development. Robert May discovers Feigenbaum cascades in the simulation of a fish population. Friedrich A. von Hayek and Gunnan Nyrdal receive the Nobel Prize for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena. 1975 James Yorke and Tien-Yien Li publish Period Three Implies Chaos, which introduces the term deterministic chaos. 1976 Jay Forrester publishes Business Structure, Economic Cycles and National Policy. Milton Friedman receives the Nobel Prize for his achievements in the fields of consumption analysis, monetary history and theory, and for his demonstration of the complexity of stabilization policy. 1979 Edward Lorenz publishes Predictability: Does the Flap of a Butterfly s Wings in Brazil Set Off a Tornado in Texas? 1980 Lawrence R. Klein receives the Nobel Prize for the creation of econometric models and the application to the analysis of economic fluctuations and economic policies. 1981 Lucas and Sargent publish Rational Expectations and Economic Practice, where they apply the rational expectations hypothesis to econometric models. 1982 Finn Kydland and Edward Prescott publish Time to Build and Aggregate Fluctuations, which introduces the modern concept of real business cycles. 1986 Mosekilde and Aracil receive the Jay Forrester Award for their system dynamics research. 1989 Sterman publishes Deterministic Chaos in an Experimental Economic System. 1990 Sterman, Mosekilde and partners study the M.I.T. System Dynamics National Model and find hyperchaos in it. 1991 Edgar Peters publishes Chaos and Order in the Capital Markets, where he demonstrates the presence of fat tails (indications of positive feedback) in a number of markets. 1995 Robert E. Lucas Jr receives the Nobel Prize for having developed and applied the hyphothesis of rational expectations.