Tendency to Equilibrium, the Possibility of Crisis, and the History of Business Cycle Theories

Abstract

In 1926 Adolf Lowe suggested that business cycle theories are fundamentally incompatible with the idea that the system tends towards equilibrium. Hayek, his disagreement with such a conclusion notwithstanding, recognised that the issue is central to business cycle theorizing, and agreed with Lowe that the proper way to classify business cycle theories is to examine how writers stand on this point. This paper is a preliminary attempt to take Hayek and Lowe seriously on this historiographical issue. After Lowe’s and Hayek’s positions are examined in context, the paper shows that Lowe’s problem had been, implicitly or explicitly, at the heart of theoretical treatment since the early debates on crises. Next, the paper discusses how some crises and cycle theorists gradually switched from considering a stationary equilibrium as a theoretical norm to the idea of cyclical fluctuations as the natural state of the system, while others continued to focus on a stable equilibrium and explained movement as the result of exogenous events, frictions or mismanagements. Finally, the merits of Lowe’s and Hayek’s suggestions are examined in light of this dichotomy.