An Oscillatory Mechanism with a Flexible Accelerator

Almost everyone is agreed that investment constitutes the key to the problem of cycles. Some theorists go so far as to say that the investment process, by itself, contains practically the whole of the explanation. The classic exposition of this view is Professor Schumpeter’s, and it is in this direction that Professor Hansen appears to incline. In opposition to this are most of the ‘self-generating’ theories, which maintain that the whole of the economic structure determines the periodic reversals. Neither theory alone is, in my opinion, quite satisfactory. The structural approach is condemned to the sterility of one constantly repeated wave form, which must either die out or explode in ever-increasing violence. The innovational theory handles both these difficulties well, but is not altogether convincing on what constitutes the strong point of the other theory — the unmistakable element of regularity in the recurrence of booms. The mere fact of the bunching of innovational investments cannot be taken as proof of an inherent tendency. The circumambient economic structure may alternately inhibit and encourage investment, and hence contain the explanation of the bunching. Surely, a combination of the two types of theory possesses the desired qualities.