The Theory of Economic Cycles Based on the Capitalistic Technique of Production
My principal thesis is that the chief responsibility for cyclical fluctuations should be assigned to one of the characteristics of modern industrial technique, namely, the long period required for the of fixed capital. To the consumer the value of goods purchased depends on the satisfaction which he expects to receive from them. To the producer the value of materials depends on the price which he expects to obtain for them upon resale after transformation, that is to say, the value depends on his forecast of future prices. My theory implies that the expectations of those directing are alternately too optimistic and too pessimistic, a feature which it has in common with other theories. My theory differs from other theories, however, in the explanation given of the rhythm in the forecasts of business men. It does not appear that business men are, necessarily, consistently optimistic for several years and consistently pessimistic during other years. The rhythm in expectations results from the capitalistic technique of production, the necessity to, satisfy the needs of production, of an industrial equipment requiring a long time for its construction. In other words, the rhythm is a consequence of the long delay which often separates the moment when the of goods is decided upon and a forecast is made from the moment when the manufacture is terminated, and the forecast is replaced by reality. A time comes, at the end of a period of depression, when stocks of goods are greatly diminished and a shortage of certain classes of goods is observed. The particular classes of goods affected by this shortage, however, vary from one cycle to another. Let us classify goods, as is often done, according as the successive stages of transformation are farther and farther removed from the stage of final consumption and designate the classes as the first, second, third, fourth, fifth, sixth and so on. Experience shows that the goods of the first class, sold at retail to the consumer, do not appear to be among those in which cyclical movements originate. Let us suppose, for example, that the movement starts with goods of the third class, and that it is in this class that the insufficiency of merchandise and the exhaustion of stocks are observed. The prices of these goods may not increase. But merchants begin to buy them in greater quantity to restock their stores, and producers begin to order the products necessary for their manufacture, that is, goods of the fourth or fifth class. The prices of goods in these last classes may be the first to rise. There are products, notably raw materials, sold in highly centralized markets, the prices of which are very sensitive and vary with much greater rapidity than do those of the semi-manufactured and finished goods in the manufacture of which they are used. Prices of raw materials usually rise first and go highest, even when the general movement does not originate with these goods. The increase of orders and the rise of prices will bring about, during the phase of the business cycle characterized by prosperity, an expansion of production. In this phase manufacturers are induced to increase industrial equipment, to enlarge factories, or build new ones, either because the existing equipment does not make it possible to fill all the orders, or because the rise in prices has led to the expectation of a further rise. Great productive activity is displayed which affects principally fixed capital: industrial plants, blast furnaces, steam engines, manufacturing equip'Paris: Marcel Riviere et Cie. I9I3. Tome I, variations periodiqutes des prix et des revenuis and Les theories doominantes, Xii, 2,/ pp. Tome II, mouvements periodiques de la production and Essai d'une theorie, 418 pp.