The Political Business Cycle

Abstract

One of the most significant features of the ‘Keynesian revolution’ in modern economic thinking has been the raising of the status of the government as an economic agent. Economics after Keynes sees governments as being possessed of a range of powers, powers to influence, even determine, the course of national economic affairs. In theory at least, these powers should imply that the periodic crises of instability besetting capitalist economies for more than a century — the business cycle — are things of the past. In the earlier years of the Keynesian revolution, however, when Keynes’s model was being developed and extended and when real-world governments were establishing the preconditions to policy management in escalating their activities to come to terms with world war, few people bothered to appreciate the corollary of the proposition advanced above — if governments had the power to stabilise the economy then they also possessed the power to destabilise.