An Overinvestment (but Anti-Austrian) Explanation of the Turning Points of the Cycle: Italian Contributions of the Early 20th Century

The aim of this paper is to compare the Austrian theory of the business cycle with the approaches developed in Italy, during the first decades of the 20th century, mainly by Marco Fanno and Costantino Bresciani-Turroni. It is shown that — although, in both cases, an overinvestment explanation of fluctuations was accepted — Italian economists developed a different theory, both of the starting and of the upper turning point of the cycle. In particular, they argued that fluctuations are mainly caused by the improvement in firms’ expectations, while the growing phase of the cycle may be stopped by social conflict (i.e., by workers’ reaction to ‘forced saving’). Hence, according to these scholars — and outside the Austrian approach — (a) capitalist instability (the alternation of expansionary and contractionary phases) may not be due to exogenous interventions by banks, the State or the unions and (b) the business cycle may be driven by real variables, in that they did not assign a crucial role in the turning points of the cycle either to costs or to the Austrian ‘shortage’ of money supply. A formal model is proposed to test the logical consistency of this theory.