ABSTRACT
John Maynard Keynes brought the analytical apparatus developed to an analysis of the business cycle. In Keynes’s cycle theory, developed in the midst of the Great Depression, financial markets not surprisingly play a crucial role in creating cyclical instability. He starts his description of the cycle when the economy begins to expand following a recession. The actual rate of profit starts to rise, which causes the expected rate of profit or marginal efficiency of capital (mec) to follow suit. The mec or expected profit rate will continue to increase for some time after the actual profit rate peaks because most investors will initially see the leveling off as a temporary deviation from its upward trend. The continuation of the economy past its profit-rate maximum by itself might not cause a crisis and economic downturn; it could simply lead to a slowdown in the rate of growth.
