Prosperity and Depression

Purpose of the book.

As has been explained in the Preface, this book is a first step in a more extended enquiry undertaken by the Economic Intelligence Service of the Secretariat of the League of Nations into the causes of the recurrence of periods of economic depression.

The present study confines itself to the task of analysing existing theories of the business cycle and deriving therefrom a synthetic account of the nature and possible causes of economic fluctuations. However, the next stage in this investigation—the application, as far as possible, of quantitative tests to the various causal hypotheses—has largely influenced the manner in which the preliminary problem has been approached in the following pages. The reader is invited to keep in mind, while studying the present report, the fact that it is planned as but a part of a greater whole.

Analysis of theories.

In view of the scope of the investigation as a whole, the purpose of the first part of this report—i.e., of the Systematic Analysis of the Theories of the Business Cycle—is not to present a history of the development of economic thought on this subject (although every attempt has been made to interpret as accurately as possible the meaning of the various writers whose theories are discussed), nor to give anything like an exhaustive bibliography of business-cycle theory. The purpose is rather to gather together various hypotheses of explanation, to test their logical consistency and their compatibility with one another and with accepted economic principles. It is intended to give a rounded picture of the possible explanations of economic fluctuations and it is hoped that, by theoretical reasoning, the number of these possibilities can be considerably reduced.

Synthetic exposition of the nature of the cycle.

The second part of the present report—the “Synthetic Exposition relating to the Nature and Causes of Business Cycles”—contains the comprehensive explanation which emerges from the analysis of theories in the first part. As has been said, it does not claim to be an entirely new theory, but a synthesis and development of existing theories, so far as they can be synthesised. What is presented there is furthermore not a closed and rigid system, but a flexible and open one: there are many points where no definite solution can be proposed, but where the existence of a number of possibilities will be indicated. The choice between these can then be made only on the basis of empirical investigations. In many cases, theoretical reasoning supported only by such broad facts as one happens to know without special statistical or historical investigations can put intelligent questions, but cannot definitely answer them.

That by analysing various theories it should be possible to give an explanation of the business cycle which, while leaving some questions open or offering in other cases alternative answers, nevertheless clarifies a number of problems presupposes that the difference between the theories analysed is not so radical as is sometimes believed. In fact, the assumption is that the real differences in opinion have been frequently exaggerated, and that, for certain important questions, a much greater harmony between writers of different schools can be established than the superficial observer would believe or even than these same writers would be willing to admit. It is a natural thing that most writers are inclined rather to dwell on the controversial issues than to stress the points of general agreement. Here the opposite principle will be followed and, in the following sections, it will be shown how theories which seem prima facie to contradict one another can sometimes be reconciled.

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