This Event has Passed
If you look up “what causes recessions” on Google, you get a very wide variety of very wrong answers. The situation is only marginally better in the economics discipline, with explanations ranging from “money illusion” (workers get confused about the purchasing power of their wage and subsequently quit their jobs) to random shocks (stuff happens). None of this is necessary when Keynes offered a version back in 1936 that is not only intuitively appealing, but strongly supported by empirical evidence.
Note that “Keynes” and “Keynesian” are not the same thing! The most revolutionary aspects of the former’s theory were very quickly forgotten and the school of thought that otherwise bears his name is really little different from that he was criticizing. What I will present is an explanation of business cycles focusing on what he thought was most important: the behavior of entrepreneurs. It will be argued that the constraints under which they operate—including especially something called “fundamental uncertainty”—create the patterns we see. It will NOT be argued that entrepreneurs are irrational or that price rigidity plays a role. These are two of the many modeling assumptions falsely attributed to Keynes.
Dr. John Harvey is professor of economics at Texas Christian University, where he has taught since 1987. His areas of specialty are exchange rates and business cycles. He has over forty journal articles, two books, and two edited volumes. He is in the final stages of completing a scholarly monograph on US business cycles since 1954.
