Sunspots and Animal Spirits: The Origin of Keynes's Cycle Theory

Abstract

William Stanley Jevons’s “Sunspot Theory” of business cycles related the number of spots on the sun to economic activity, primarily through the weather and agriculture, but also through psychological components like optimism and uncertainty. The theory is widely discredited, but John Maynard Keynes agreed with Jevons’s underlying use of market participants’ moods to explain the transmission and magnification of the boom and bust phases of the cycle. Jevons’s use of psychology to explain business cycles originated in John Mills’s 1867 “On Credit Cycles and the Origin of Commercial Panics.” This paper establishes this connection between Mills, Jevons, and Keynes, which is not recorded in the literature that explores the origin of Keynes’s psychological “animal spirits” concept. John Mills’s “On Credit Cycles” is not well-known, so it is reviewed at length, noting points of comparison to the business cycle theories of both Keynes and the Austrian school. Another reason for the extensive treatment of Mills’s “On Credit Cycles” is that Jevons regarded it as an accurate description of the business cycle, even if he was unsatisfied with the unexplained fluctuations in “commercial moods.” If it is true that Jevons essentially founded the idea of market psychology and attitude determinants of the business cycle, then his impact on modern economic theory and policy via Keynes has been underestimated.