Macroeconomics, History of up to 1933

Robert W Dimand, Brock University, St. Catharines, ON, Canada

2015 Elsevier Ltd. All rights reserved.

Abstract

The eld that became known as macroeconomics emerged from long and rich traditions of monetary theory, business cycle
analysis, and discussion of economic growth. Macroeconomics is the analysis of aggregate levels and rates of change of output
and employment, the price level (and its inverse, the purchasing power of money), the interest rate, and the balance of
payments. This eld had a long history before it received its name with Ragnar Frischs (1933) distinction between mac-
rodynamics and microdynamics and before John Maynard Keynes General Theory of Employment, Interest and Money
(1936). This article analyzes the prehistory of the concept the various strands of economic thinking that coalesced in about
1933 to produce modern macroeconomics, i.e., roughly the history of macroeconomics up to Keynes. The subsequent history
is covered in a companion article, Macroeconomics, history of, from 1933 to the present.

Macroeconomics, the analysis of aggregate levels and rates of
change of output and employment, the price level (and its
inverse, the purchasing power of money), the interest rate, and
the balance of payments had a long history before the eld
received its name with Ragnar Frischs (1933) distinction
between macrodynamics and microdynamics and before John
Maynard Keynes General Theory of Employment, Interest and
Money (1936).
Prehistory
Three currents of analysis and discussion, overlapping
but distinguishable, emerged on subjects later considered
macroeconomics, coalescing in the 1930s. The theory of
money and prices began with the quantity theory of money
as an explanation of the Price Revolution of the sixteenth
century and of balance of payments adjustment under the
gold standard (Grice-Hutchison, 1952; Locke, 1991;
Gervaise, 1720; Hume, 1752; Christiernin, 1761; Monroe,
1923; Hegeland, 1951; Vickers, 1959; Guggenheim, 1989),
was extended to inconvertible paper currency during the
French Revolution and Napoleonic Wars (Thornton, 1802;
Murphy, 2009; Arnon, 2011), debated Jean-Baptiste Says
law of markets and the possibility of a general glut of
commodities at the end of the Napoleonic Wars (Sowell,
1972; Link, 1959; Corry, 1962; Green, 1992; Baumol,
1999; Davis, 2005), and achieved analytical sophistication
during the Banking SchoolCurrency SchoolFree Banking
School debates (Fetter, 1965; OBrien, 2007), culminating in
Walter Bagehots treatment of the lender of last resort in
Lombard Street (1873) and then in the contributions in the
1890s by Alfred Marshall, Irving Fisher, and Knut Wicksell,
the three theorists appropriately pictured on the cover of
David Laidlers The Golden Age of the Quantity Theory (1991a);
the interwar ourishing of monetary analysis of saving
investment adjustment (Eshag, 1963; Bridel, 1987; Jonung,
1991; Laidler, 1999; Dimand, 2003; and sources reprinted
in Wood and Capie, 2000). A second approach, brought to
prominence by Clment Juglar (1862) and W. Stanley Jevons
(1884), viewed that uctuations in production and prices are
cycles, oscillations with more or less regularity in amplitude
and periodicity, producing a vast literature sampled by
D.P. OBrien (1999), Harald Hagemann (2001), and
Mauro Boianovsky (2005), and leading to the creation in the
interwar period of business cycle research institutes such as
the National Bureau of Economic Research (NBER)
(Mitchell, 1927; Kondratiev, 1997; Glasner, 1997). Histories
of crisis theories, and particularly of theories of periodic
crises, have been published as early as E. von Bergmann
(1895) and Edward D. Jones (1900), with histories of the
phenomenon of crises going back to M. Wirth (1858).
Thirdly, Franois Quesnays Physiocratic Tableau conomique,
tracing the circular ow of spending and income in the
economy as whole, was followed by the magnicent
dynamics of classical economists such as David Ricardo,
Thomas Robert Malthus, and John Stuart Mill, exploring the
paths of population, production, and wage and prot rates as
a growing economy approached a stationary state (Eltis,
1984; Davis, 2005; Brewer, 2010), with the beginnings of
formal algebraic models of economic growth sketched by
J.C.L. Simonde de Sismondi and developed in Karl Marxs
schemes of simple and expanded reproduction (Arthur and
Reuten, 1998) and a false dawn of modern growth theory in
with Allyn Young (1928) on increasing returns to scale and
economic growth, Frank Ramsey (1928) on optimal capital
accumulation, and Grigorii Feldman (1928) on the growth
rate in a planned economy.
These extensive pre-1933 contributions to what would
later be called macroeconomics raised issues that resonate in
later macroeconomics (as the terms New Classical and New
Keynesian indicate, as do Divisia monetary aggregates
(Franois Divisia, 1925), Ricardian equivalence, Schumpe-
terian creative destruction). The work of Milton Friedman and
his students revived the quantity theory tradition (see
Friedman, 1956). Michael Woodfords Interest and Prices
(2003) harks back to the analysis of a pure credit economy in
Knut Wicksells Interest and Prices (1898). Christopher Sims
vector autoregression (VAR) approach to modeling economic
uctuations without assuming too much a priori knowledge
of the underlying model is, with more modern statistical
techniques, in the spirit of Wesley Mitchells NBER statistical

406 International Encyclopedia of the Social & Behavioral Sciences, 2nd edition, Volume 14 http://dx.doi.org/10.1016/B978-0-08-097086-8.03058-0

approach to business cycles, starting with time series analysis
of uctuations rather than with theoretical models (an
approach that produces the concept of leading indicators).
Irving Fisher, although spectacularly mistaken about whether
stock prices had reached a permanently high plateau in
October 1929, shaped macroeconomic analysis and practice
through the Fisher equation relating real and nominal
interest, the Fisher diagram for intertemporal consumption
smoothing, indexed bonds, distributed lags, the Fisher ideal
index number (the geometric mean of the Paasche and Las-
peyres indexes), and, especially since the credit crunches of
2007 and 2008, his debt deation theory of depressions (see
e.g., Korinek and Mendoza, 2013), with Ralph G. Hawtreys
concept of a credit deadlock and the MisesHayek Austrian
trade cycle theory also attracting renewed attention. Central
bank responses to the credit crunch were informed by the fact
that Ben Bernanke of the Federal Reserve, in his doctoral
dissertation, and Mervyn King of the Bank of England, in his
European Economic Association presidential address, had
studied the US debt deation of the early 1930s, with close
attention to Fisher (1933), just as monetary policy decisions
at the Bundesbank and then at the European Central Bank
were informed by acquaintance with the literature
surrounding the German hyperination of the early 1920s
(including Keynes, 1923). Macroeconomics did not begin in
1933 or 1936, although certainly Keynes (1936) provided
a transformative focus on the equilibrium level of aggregate
output and employment rather than on prices and cycles.
The Theory of Money and Prices
European prices roughly quadrupled from 1530 to 1600, as
was documented for English prices by Bishop William
Fleetwood (1707), pioneer of price history and of quantica-
tion of changes in the purchasing power of money (but because
the commodity prices examined by Fleetwood all changed in
roughly the same proportion, he did not have to consider
appropriate weights in a price index). This Price Revolution
occasioned the emergence of the quantity theory of money,
described by Mark Blaug (in Blaug et al., 1995) as the oldest
surviving theory in economics and by David Laidler (1991b)
as always and everywhere controversial. Martin Navarro de
Azpilcueta of the University of Salamanca, writing in Latin in
1556, and the French political theorist Jean Bodin in 1568
attributed the rise in European prices to the rise in the same
proportion of the quantity of money circulating in Europe, due
to the inow of gold and especially silver to Spain from Mexico
and Upper Peru (now Bolivia) and to increased output of
European silver mines (see Marjorie Grice-Hutchison, 1952 on
the Salamanca School, and Arthur E. Monroe, 1923 and Hugo
Hegeland, 1951 on Bodin). Azpilcueta and the other Sala-
manca writers were the last phase of a medieval scholastic
tradition that included Nicole Oresmes analysis around 1360
of how the princes seigniorage from debasement of the
coinage took purchasing power away from the public (Oresme
et al., 1989), a discussion that drew in turn on Aristotles
remarks on the functions of money. Isaac Gervaise (1720),
Richard Cantillon, P.N. Christiernin (1761), and, above all,
David Hume (1752) used the quantity theory of money to
Macroeconomics, History of up to 1933 407
analyze the automatic restoration of international payment
equilibrium and critique the mercantilist obsession with
a balance of trade surplus, holding that in the long run a change
in the quantity of money will cause prices and money wages to
change in the same proportion, and the money supply will be
distributed across countries in proportion to the demand for
real money balances in each country. In Humes pricespecie
ow mechanism, mercantilist interventions, using tariffs and
quotas on imports, regulations, bounties on exports, and
monopolies on colonial trade to increase the quantity of
money in a country through a trade surplus would, in the long
run, just raise prices in the home country and lower prices in its
trading partners, reducing net exports until equilibrium was
restored. In the short run, an increase in the quantity of money
would give a temporary stimulus to economic activity until
prices and wages fully adjusted (see Filippo Cesarano, 2007;
Arie Arnon, 2011; Dimand, 2013). The specie (gold and silver)
that owed into Spain from its empire in the New World
owed out again in trade. In Adam Smiths critique of
mercantilism, closer than Humes of the twentieth century
monetary approach to the balance of payments, the terms of
trade would not change for a country that, like Scotland, was
small enough to be a price taker in world markets (Humphrey,
1993; Laidler, 2003: Chapter 1; Arnon, 2011). If mercantilist
interventions articially increased the quantity of money in
a country, the resulting excess supply of money would be spent
on imports and on exportable goods (and on foreign lending),
causing the gold and silver to ow out of the country again,
until the world money supply was distributed in proportion to
demand for real money balances, with money supply equal to
money demand in each country.
Although John Law had experimented with inconvertible
paper currency in France until the collapse of Laws system in
1720, David Hume, Adam Smith, and their contemporaries
analyzed price and payments adjustment under a metallic
standard, with gold and silver coin and bullion circulating
(see Murphy, 2009, on Law). Following a bank run sparked by
reports of a French invasion, conversion on demand of Bank
of England notes into specie was suspended from 1797 to
1821. Henry Thornton, the Bullion Committee of the House
of Commons, and David Ricardo extended the quantity
theory of money to inconvertible paper, conclusively estab-
lishing that the rise in British prices during the Napoleonic
Wars and the high price of bullion on the Hamburg market
(when purchased with Bank of England notes) resulted from
the increase in the Bank of Englands note issue, an analysis
that failed to convince either the Banks directors or the
majority in the House of Commons (Thornton, 1802; Hayek,
[1931]1991; Viner, 1937; de Boyer des Roches, 2003; Davis,
2005; Arnon, 2011). The Bank directors insisted that they
could not overissue notes as long as they only discounted real
bills of exchange to accommodate the needs of trade, forget-
ting that the nominal volume of trade would grow as prices
increased. The directors invoked the authority of Adam Smith
for this real bills doctrine, even though Smiths analysis had
dealt with bank notes that were convertible into coin on
demand. Similarly, John Law had argued in 1705 that a land
bank could not overissue notes as long as the notes were
created by lending with land as security, overlooking the
endogeneity of the price of land.
408 Macroeconomics, History of up to 1933
At the end of the Napoleonic Wars, the sharp reduction in
military spending, availability of cheaper grain imports from
Continental Europe and the United States, and the contraction
of the note issue as the Bank of England moved toward resto-
ration of convertibility at the prewar parity combined to
produce industrial and agricultural depression in Britain. The
classical theory of rent and of comparative advantage emerged
from the classical critique of the Corn Laws, the protectionist
reaction to the agricultural depression. Thomas Robert Malthus
and J.C.L. Simonde de Sismondi attributed the industrial
depression to a general glut of commodities, an insufciency of
effective demand. David Ricardo, James Mill, and Jean-Baptiste
Say held that such a general glut was impossible, because
people only supply goods, services, and assets because they
wish to acquire other goods, services, and assets, so that the
industrial depression was a transitional problem, as wage and
price signals shifted factors of production from producing
commodities in demand during wartime to producing
commodities in demand during peacetime (Link, 1959; Corry,
1962; Patinkin, 1965; Sowell, 1972; Green, 1992; Hollander,
1997; Davis, 2005). The problem of transition was not
considered by the classical economists as something to be
ignored Say endorsed public works to provide employment
during the transition, whereas Ricardo wished to restore
convertibility at the depreciated value of notes rather than the
prewar parity but it was a temporary, short-run issue, resulting
from a change in the mix of commodities demanded, not from
a shortfall of demand in general. Following a tradition going
back to Aristotles invocation of the myth of King Midas,
Ricardo, Say, and James and John Stuart Mill held that people
sell commodities for money intending to use the money as
a medium of exchange, not with the hoarding of money as the
ultimate goal. In the debate over what Keynes was to call Says
law of markets (see Baumol, 1999), (aggregate) supply creates
its own (aggregate) demand, the classical economists (in
Keynes sense of classical as accepting some form of Says Law)
tried to say something stronger than what Oskar Lange (1942)
later termed Says Equality (the value of excess demand sums to
zero in equilibrium over all markets other than money that is,
the truism that the value of aggregate excess demand is zero if
excess demand is zero in each market), but weaker than what
Lange termed Says Identity (the value of excess demand sums
to zero over all markets except money, at any set of prices,
market clearing, or otherwise which, together with Walras
Law, implies that the money market always clears for any set of
prices). Keynes (1933a, 1936) drew inspiration from Malthus
emphasis on the concept of effective demand (demand allow-
ing for quantity constraints: if the labor market is in excess
supply, unemployed workers cannot spend on goods the wages
they would have earned if employed), even though Malthus
failure to distinguish a decision to save from a decision to invest
undermined his response to Ricardos analysis.
The Bank Act of 1844 and the British banking crises of 1825,
1832, 183637, 1847, and 1857 occasioned the debate
between the Currency School and Banking School over the
appropriate structure and policy of the Bank of England
(Viner, 1937; Fetter, 1965; Skaggs, 1999; Laidler, 2003;
OBrien, 2007; Arnon, 2011), with the Free Banking School
denying the need for any legally privileged bank of issue
acting as a central bank (Smith, 1936). Drawing on Ricardos
presentation of the quantity theory of money and the price
specie ow mechanism, Currency School writers such as J.R.
McCulloch, G.W. Norman, and Lord Overstone urged that
the Bank of England should act so that a mixed paper and
metallic currency would behave like a metallic currency (for
instance, a 100% marginal reserve requirement on note
issue), and should manage the volume of currency to prevent
gold outows. The Currency School, whose ideas shaped Sir
Robert Peels Bank of 1844, attributed banking crises to
mismanagement by the Bank of England. Banking School
writers such as Thomas Tooke and John Fullarton
emphasized the endogeneity of credit, with the volume of
credit more likely to react to changes in prices than to cause
them, and with the quantity of banknotes demand-
determined. Rather than expecting the Bank of England to be
able to prevent gold drains by varying the discount rate, the
Banking School wished the Bank to hold a large enough
bullion reserve to accommodate temporary balance of
payments uctuations without unsettling credit markets.
These debates in monetary theory culminated in Walter
Bagehots Lombard Street (1873), the classic account of how
the central bank should act as lender of last resort to preserve
the liquidity of the banking system, rather than acting as an
ordinary bank to maximize the prots of its shareholders.
1886 and All That
The Royal Commission on the Depression of Trade and
Industry (Northcote, 1886: p. x) reported that the trade and
industry of the country are in a condition that may be fairly
described as depressed; that by this depression is meant
a diminution, and in some cases, an absence of prot, with
a corresponding diminution of employment for the laboring
classes; that neither the volume of trade nor the amount of
capital invested therein has materially fallen off, though the
latter has in many cases depreciated in value; that the depres-
sion above referred to dates from about the year 1875, and that,
with the exception of a short period of prosperity enjoyed by
certain branches of trade in the years 1880 to 1883, it has
proceeded with tolerable uniformity. The same year, the rst
annual report of the US Commissioner of Labor was on
Industrial Depressions (Wright, 1886; Barnett, 1941). Lecturing in
Scotland on Irregularity of Employment and Fluctuations of Prices
(Foxwell, 1886: pp. 48, 96), Herbert S. Foxwell, professor of
political economy at University College, London (where Knut
Wicksell attended some of his lectures that year) and a fellow
and lecturer of St. Johns College, Cambridge, lamented the
most serious effect of falling prices. They depress industry and
trade leading to what is of all the many claims of labor, the
most grave, the most pressing, and the most just, . the claim I
have brought before you to-night, the claim for more regular
employment. The literature on depression and
unemployment grew until a bibliography on unemployment
published by the London School of Economics in 1909
extended to 71 pages (not counting Sidney Webbs
Introduction). Many shared Foxwells conviction that
uctuations in the purchasing power of money caused
uctuations in employment (although formal economic
theory, like Foxwell, was vague on the mechanism connecting

the two phenomena). As Foxwell (1886: p. 52 n) noted, So
long ago as 1856, Mr. William Cross ably advocated
a monetary standard corrected by means of an index number.
See his Standard Pound v. the Pound Sterling (Aberdeen, 1856).
Another method for securing the same object has recently
been proposed by M. Walras (see Lon Walras Thorie de la
Monnaie, 1886, and Bridel, 1997). Alfred Marshall (1887),
also of St. Johns College, Cambridge, and one of the
witnesses before the Royal Commission, tentatively
suggested, as a rst step toward stabilizing the purchasing
power of an index number, symmetallism, a monetary unit
of a certain amount of gold plus a certain amount of silver,
rather than just one metal, but backed away after Sir Robert
Giffen blasted fancy monetary standards that would tamper
with the trusted, impersonal, and automatic gold standard
(Laidler, 1991a; see also Marshall, 1923, 1926). The
possibility of using monetary policy to target a price index
(rather than an exchange rate or the price of gold), in the
interest of stabilizing output and employment, was a thought
that occurred to economists before the twentieth century
and although William Cross is a forgotten gure who was
never part of the mainstream of economics, the same cannot
be said of Walras or Marshall.
Monetary Theorists and Economic Stabilization
Bimetallists, such as William Jennings Bryan in his Cross of
Gold speech accepting the Democratic nomination for Presi-
dent of the United States in 1896, saw gradually declining
prices as a burden on debtors (especially farmers with mort-
gages), and proposed to increase the quantity of money and
thus raise prices by coining both gold and silver at a xed price
ratio (so that the monetary authority would have the daunting
task of xing the relative price between two metals, a problem
that Marshalls symmetallism avoided). J. Laurence Laughlin,
a hard-money opponent of bimetallism and an important
inuence on the design of the Federal Reserve System,
responded by rejecting the quantity theory of money,
emphasizing the cost of production of gold rather than the
quantity of money (Skaggs, 1995). Irving Fisher (1896, 1911)
offered a theoretical and statistical defense of the quantity
theory (see also Kemmerer, 1907), with changes in the
quantity of money determining the price level and short-run
real uctuations, but, contrary to the bimetallists, with
money neutral in the long run (Dimand, 2013). Fisher
(1896), equating the difference between interest rates in any
two standards (gold and silver, money and commodities, two
national currencies) to the exchange rate of appreciation of
one standard against the other, showed that the price
deation (appreciation of the purchasing power of money)
only burdened debtors if the deation was unexpected. If the
deation was expected, it would be reected in lower interest
rates. With acknowledgment to Marshalls evidence before
ofcial inquiries (later collected by Keynes as Marshall,
1926), Fisher (1896) introduced the Fisher equation
(nominal interest equal to real interest plus expected
ination), the expectations theory of the term structure of
interest rates, and uncovered interest parity between
currencies. Covered interest parity, equating the spread
Macroeconomics, History of up to 1933 409
between spot and forward exchange rates to the difference
between nominal interest rates in two currencies, was added
by Keynes (1923) (see Flanders, 1989 on developments in
open-economy monetary economics). Modeling expected
ination with a distributed lag of past price level changes,
Fisher (1911: Chapter IV, 1926) attributed uctuations in real
economic activity and employment to slow and incomplete
adjustment of ination expectations to monetary shocks,
a phenomenon that in a 1928 book title Fisher termed the
money illusion. Inuenced by Fisher (the only economist he
had read at the time of writing Hawtrey, 1913), Ralph
Hawtrey of the British Treasury also advanced a monetary
theory of the trade cycle (Hawtrey, 1913, 1919, 1932;
Deutscher, 1990). From the concluding chapter of Fisher
(1911) onward, Fisher advocated a compensated dollar,
seeking to stabilize the real economy by stabilizing the
purchasing power of money as measured by a price index. To
try to make this proposal operational, Fisher identied the
geometric mean of the Paasche and Laspeyres indexes as the
ideal index number, published a weekly price index, and
pioneered the issue of indexed bonds.
While Fisher and Hawtrey stressed monetary shocks and
advocated price level stabilization, Joseph Schumpeter
([1912]1934) and Dennis Robertson (1915) saw clusters of
entrepreneurial innovations, introducing new products or
techniques, as the real shocks driving economic uctuations
(see Presley, 1979 and Fletcher, 2000 on Robertson, and
Swedbergs introduction to Schumpeter, 1991). Pigou
(1927) argued that waves of optimism and pessimism
caused uctuations in investment. The Stockholm School
(Karin Kock, 1929; Erik Lindahl, 1939; Erik Lundberg, 1937;
Gunnar Myrdal, 1939) followed Knut Wicksell (1898, 1907,
1915) in emphasizing the distinction between the market
rate of interest, set by the banking system, and the natural
rate of interest, variously dened as the interest rate at which
the price level would be constant, or at which investment
equals saving, or which reects the marginal productivity of
capital. Monetary shocks shift the market rate of interest,
while innovations and other real productivity shocks change
the natural rate. As long as the market rate was less than the
natural rate, entrepreneurs would borrow for new invest-
ment, causing prices to rise, and the converse occurred when
the market rate was above the natural rate. Monetary policy
could stabilize the economy by varying the market rate to
match changes in the natural rate (which was not directly
observable). The process analysis of the Swedish economists,
of Robertson (1926), and of Keynes Treatise on Money
(1930), while motivated by concern with uctuations in
output and employment, formally modeled price level
movements and interest rates, with no explicit theory of
unemployment or aggregate income (Patinkin, 1982;
Jonung, 1991). Beginning with the rst German edition of
Mises (1935) in 1912, the Austrian monetary malinvestment
theory of the trade cycle drew on the Currency School
tradition and on Wicksell to interpret depressions as the
necessary corrections of unsound speculative investment
resulting from expansionary monetary disturbances, and to
reject price level stabilization as interfering with and pro-
longing necessary deationary adjustments (Mises, 1935;
Hayek, 1931, 1933; Ellis, 1934).
410 Macroeconomics, History of up to 1933
Fluctuations as Cycles
Although they were not the rst to detect some more or less
regular periodicity in the pattern of crises and booms (Jevons,
1884: p. 129, cited publications by Hyde Clarke in 1847), the
idea that trade and prices follow a cycle gained force in the
1860s with the empirical work of Clment Juglar (1862) and
W. Stanley Jevons (1884) (a collection of his articles from
1862 to 1882 edited after Jevons death by Herbert S. Foxwell,
his successor at University College), with later writers from
London School of Economics (LSE) director Sir William Bev-
eridge to NBER founder Wesley Mitchell (1927) and Joseph
Schumpeter (1939) going beyond a single cycle to interpret
time series as several superimposed cycles of differing ampli-
tude and periodicity. The literature was immense (OBrien
(1999), Hagemann (2001), Boianovsky (2005) offer 11
volumes of selections from the primary sources) and,
following the establishment of Wesley Mitchells NBER in the
United States and the London and Cambridge Economic
Service and the National Institute of Economic and Social
Research in Britain, conjuncture or business cycle research
institutes ourished in Vienna, Berlin, Kiel, Soa, Warsaw,
Moscow, and other European centers in the 1920s (the Aus-
trian Institute for Business Cycle Research became the Austrian
Institute for Economic Research after World War II).
Jevons attribution of the 11-year trade cycle to the 11-year
sunspot cycle, the periodic oscillation of solar activity, was
responsible for economics being allowed to remain in the
British Association for the Advancement of Science, by
offering an apparently objective, scientic physical explana-
tion for economic uctuations, but in modern macroeco-
nomics, the term sunspots refers to any intrinsically
irrelevant variable. Jevons hypothesis, while mistaken, was
not unreasonable: meteorologists of the time believed that
sunspots affected the weather: cycles in rainfall and temper-
ature would cause cycles in agricultural harvests, and agri-
culture accounted for a larger share of the world economy in
the 1860s than it does now. When sunspots were believed to
follow a cycle of 11.1 years, Jevons founds an 11-year cycle in
prices, and when the sun-spot cycle was revised to
10.45 years he was able to make the average interval
between English crises 10.466 years (Mitchell, 1927:
p. 384). Jevons assumed that a cyclical effect must have
a cyclical cause, but Frisch (1933) drew attention to
Wicksells remark that when a rocking horse is struck with
a stick, the motion of the rocking horse does not resemble
the motion of the stock. Seasonality, Jevons other discovery
of an economic cycle with a cyclical physical cause (also in
Jevons, 1884), has fared better, and is the progenitor of
seasonally adjusted time series.
With enough cycles, any time series could be explained as
the summation of cycles: using the periodogram (an early
version of spectral analysis), Beveridge found 19 cycles in
wheat prices with periods varying from 2.735 to 68 years
(Dimand, 1999). In a paper rst published in Russian in 1927
with an English summary, Eugen (or Evgenii) Slutsky (1937)
used a moving average of the last three digits of the winning
Moscow lottery numbers to demonstrate that summation and
averaging of random series would produce apparent cycles
where none existed. Slutsky (1937) and Ragnar Frisch (1933),
and Fishers critique of the so-called business cycle as
a dance of the dollar, turned the attention of economists
to oscillatory responses to external shocks (real or
monetary), rather than underlying cycles (see Andvig, 1981
on Frisch and V. Barnett, 2011 on Slutsky). The Moscow
Conjuncture Institute led by Nikolai Kondratiev, whose long
wave theory implied that capitalism would experience
another upswing after the Depression, was destroyed in
Stalins purges, with Slutsky retreating from economic topics
to meteorology and statistics ironically including research
on sunspots (Kondratiev, 1997; V. Barnett, 1998, 2011).
Other business cycle institutes survived but, as in the case of
Mitchells NBER, evolved into general economic research
centers, with seasonality and leading indicators as the most
specic lasting contributions of business cycle analysis.
More generally, Christopher Sims VAR approach to
macroeconomics, starting with time series analysis without
assuming much knowledge of the true underlying
theoretical model, is in the spirit of the statistical approach
to business cycle analysis undertaken by Juglar, Mitchell,
Beveridge, and others.
Dynamics and Growth
David Ricardo, Thomas Robert Malthus, and John Stuart Mill
analyzed the movement of prot rate, real wages, rent, and
output as economies moved toward a stationary state in
which the wage would equal the natural price of labor and
both population and the capital stock would be constant until
the next innovation changed agricultural productivity
(Hoselitz, 1960; Eltis, 1984; Hollander, 1997; Brewer, 2010).
More formal algebraic modeling of economic growth began
tentatively with Sismondi and then, drawing inspiration from
Quesnays Tableau conomique, more systematically with Karl
Marxs schemes of simple and expanded reproduction in
Volume II of Capital (Arthur and Reuten, 1998), which were
developed further in debates between Rosa Luxemburg
([1913]1951) and Otto Bauer about whether the capitalist
mode of production would inevitably break down after
a certain number of periods because of insufcient purchasing
power and sectoral imbalances (see Kalecki, 1967 and
Joan Robinsons introduction to the 1951 translation of
Luxemburg).
In his presidential address to Section F of the British
Association, Allyn Young (1928), recently transplanted from
Harvard to a chair at LSE, directed attention to Adam Smiths
linkage of economic growth to increasing returns to scale
(the division of labour is limited by the extent of the
market), ironically just 2 years after Piero Sraffa had, in the
same journal, shown that increasing returns are problematic
for modeling equilibrium of the Marshallian rm. In the same
journal issue as Young (1928), the Cambridge mathematician
and philosopher Frank Ramsey (1928) analyzed optimal
capital accumulation (with the rst use of calculus of varia-
tions in an economics journal) in the rst step toward what is
now taught as the RamseyCassKoopmans model, and the
same year G.A. Feldman (1928) attempted a formal model
of capital intensity and output growth rates for Soviet
central planning. But by 1930, Young and Ramsey were

dead (Ramsey at the age of 26), and Feldman had
disappeared in Stalins purges, and the lines of research they
indicated were not pursued until much later.
From Cycles and Price Dynamics to Analysis
of Aggregate Output and Employment
Although both monetary theorists and business cycle analysts
were motivated by concern over periods of high unemploy-
ment (as well as by the social costs of rapid ination, with
Keynes Tract on Monetary Reform and Fisher stressing the
collapse of monetary exchange in the German hyperination
of the early 1920s), they lacked a macroeconomic analysis of
unemployment. Pigou (1913) talked about effective demand
in an early short book for the general public about unem-
ployment, but his more formal and systematic Theory of
Unemployment (1933) offered only a one-market analysis in
which unemployment just meant that the wage rate was
above the market clearing level. The implication of Pigous
analysis, which Pigou steadfastly refused to draw in his
advice and writings on policy, was that wage cuts would
eliminate unemployment even in the Great Depression. But
Edwin Cannan did draw that conclusion in his 1932
presidential address to the Royal Economic Society
(reprinted in Dimand, 2002: vol. III). Beveridges
Unemployment, a Problem of Industry (1909 and 1930) (1930),
an expansion of his 1909 book, saw unemployment in
search-theoretic terms, with labor exchanges as the means to
more efcient matching of workers and jobs. Fisher (1933)
presented a debt deation theory of depressions, stressing
the scramble for liquidity because of fears of default on
inside debts with xed money values, which later inuenced
Hyman Minsky (1975), James Tobin (1980), Ben Bernanke
(2000), and Mervyn King, but at that time he had lost his
audience by being so memorably wrong about the stock
market. The mass unemployment of the early 1930s turned
public attention from such academic authorities to
underconsumptionists outside the mainstream (see Bleaney,
1976) or to Marxist claims that depressions and mass
unemployment were inherent in capitalism. Schumpeter
held that the Great Depression was just the regrettable
coincidence of the troughs of three cycles of different lengths.
John Maynard Keynes, in his pamphlet The Means to
Prosperity (1933b) and his 1933 Cambridge lectures (recon-
structed in Rymes, 1989), and then more fully and formally
in The General Theory of Employment, Interest and Money
(1936), offered a solution to this impasse. Contrary to the
Marxists, depressions and unemployment could be tamed
without revolution or abolition of capitalism, by appropriate
management of aggregate demand to offset uctuations
in expectations of the long-period protability of new
investment, uctuations resulting from fundamental
uncertainty about the future. Unlike John Hobson or other
underconsumptionists, or Michal Kalecki writing in Polish
within a Marxian tradition (Kalecki, 1967; translations of
essays written in the 1930s), Keynes was a well-established
gure within the profession, steeped in the Cambridge
heritage of Marshallian monetary theory and saving-
investment analysis (Eshag, 1963; Bridel, 1987; Laidler,
Macroeconomics, History of up to 1933 411
1999). Drawing on the multiplier analysis of his student
Richard Kahn (1931), who together with Giblin (1930),
Hawtrey (1932), and others had related changes in
equilibrium income to changes in autonomous investment
or exports (see Davis, 1980; Patinkin, 1982; Clarke, 1988;
Dimand, 1988), Keynes (1933b, 1936) offered a theory of
the equilibrium level of national income as the level of
income at which desired investment equals desired saving.
Noting that nominal wages had fallen by 30% in the
United States in the early 1930s without reducing
unemployment or real wages, Keynes (1936: Chapter 19)
invoked dynamic arguments to deny that wage and price
exibility would guarantee restoration of full employment
after a demand shock sticky wages were his
recommendation, not his assumption (see also Minsky,
1975; Tobin, 1980). Not only did Keynes have a message
welcomed by policy makers and the public, but, combined
with the creation of national income accounts and
advances in econometric technique, his theory of the
determination of aggregate income and employment
provided an agenda for macroeconomists, drawing together
the traditions of monetary theory and empirical studies of
economic uctuations. Regardless of later serious doubts by
macroeconomists about the shift of emphasis from
ination to unemployment, or the eclipse of search-
theoretic analysis of unemployment, or Keynes sanguine
view of the motivation of policy makers, the theory of
equilibrium aggregate income and employment sketched in
Keynes (1933b) and in his 1933 lectures (in Rymes 1989)
and pamphlet and presented in the General Theory marked
a transformation of a eld that had a long and rich history
by the time it acquired the name macroeconomics.
See also: Economics, History of; Financial Crises, History of;
Fisher, Irving (18671947); Hume, David (171176); Keynes,
John Maynard (18831946); Keynesianism and the Question
of State Interventionism; Macroeconomics, History of From
1933 to Present; Malthus, Thomas Robert (17661834);
Marshall, Alfred (18421924); Marx, Karl (181883); Mill,
John Stuart (180673); Myrdal, Gunnar (18981987);
Ricardo, David (17721823); Robinson, Joan (190383);
Schumpeter, Joseph A. (18831950); von Hayek, Friedrich A.
(18991992).
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