Capital Stock Adjustment Theories of the Trade Cycle and the Problem of Policy
THE HISTORY of economic thought furnishes us with plentiful evidence that when economists agree it by no means follows that their conclusions will be vindicated by the test of experience. Agreed conclusions have not infrequently proved an obstacle to the advancement of knowledge by creating prematurely the impression that an issue is closed and discouraging further research upon it. In surveying the present state of trade cycle theory, this is a point which it is well to bear in mind; for there is an increasing measure of agreement among theorists on the essentials of the problem. What we propose to do in the present paper is to take as our starting point the basic idea which underlies most modern theoretical writing on the trade cycle, and see what are the conclusions for policy that appear to follow from models of the cycle built upon it as a foundation. The policies suggested will be no better than the models from which they are derived, and if these models do not present a fair approximation to "what happens during business cycles," the policies derived from them will likewise fail to provide a proper starting point for the practical policy maker. The many issues of policy on which the models give no guidance serve to remind us of the many respects in which they are incomplete as explanations of the facts of business cycles. But since the models are seriously advanced as explanations of reality, albeit simplified and schematic explanations, it is legitimate to use them in seeking a guide to policy, so long as we recognize that their empirical basis is as yet extremely unsure and that at best they can do no more than provide an outline of the solution required. Thus we shall not in this essay be treating such problems as wage-induced inflation or complications arising out of international trade, nor shall we discuss the issue 1 I am indebted to Dr. R. M. Goodwin and to the editor for valuable suggestions and criticisms.