Unemployment or Inflation: Experience, Theory, and Policy 1825–1960

The cycle—more or less regular fluctuations consisting of alternating periods of inflation with falling unemployment, and deflation with increasing unemployment, of modem industrial and financial capitalism. Among prewar theories of business cycles, the best explanation of why capitalistic economies should experience occasional spurts in private investment, leading to economic fluctuations, is the theory of "innovations" developed by Professor Joseph Schumpeter of Harvard University. When cycles are generated from the supply side, a different kind of stabilization policy is required from that suggested by orthodox fiscal policy. The impact effect is clear and direct: no harvest, no work for the rural population, and perhaps even no seed for them to plant for the next harvest. The role of psychological factors in economic fluctuations seems clear enough. The area of the triangle is the total amount of capital in use; the lowest bar can be thought of as the inventory of unsold consumers&s; goods at any point of time.