Economic History Association

The Birth of the Business Cycle

Author(s): Philip Mirowski
Source: The Journal of Economic History, Vol. 40, No. 1, The Tasks of Economic History
(Mar., 1980), pp. 171-174
Published by: Cambridge University Press on behalf of the Economic History Association
Stable URL: http://www.jstor.org/stable/2120442 .
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 Summariesof Dissertations 171

promoters appeared who were eager to profit by underwriting consolidation stock issues.
The resulting mergers were thus the product of a unique combination of historical events
and not an inevitable consequence of the development of capital-intensive methods of
production.
This analysis raises a rather significant question. If consolidations were not an inevi-
table development, did the fact that they occurred make any difference? Did the consoli-
dation movement have any lasting impact on the organizational structure of American in-
dustry? The evidence from my case studies indicates that for a small number of industries
the answer is yes. Where the immense financial resources at the disposal of the consoli-
dations allowed them to secure important advantages (such as the control of patents or vi-
tal raw material resources), they were able to forestall new competition, limit the expan-
sion of existing rivals, and achieve a remarkable degree of price stability. In most cases,
however, I believe the answer is a qualified no. Consolidation undoubtedly facilitated the
attainment of stable oligopolistic patterns of behavior by substantially reducing the num-
ber of firms in the industry, by removing individualistic entrepreneurs from positions
where they could disrupt the market, and by creating a natural candidate for the position
of price leader. Nonetheless, where consolidations lacked the means to prevent new com-
petition from developing, the effect of these organizational changes proved to be short-
lived. The giant combinations formed at the turn of the century generally lost their mo-
nopoly positions within a few years of their organization. The high prices they set stimu-
lated a wave of investment in their industries, creating problems of excess capacity and
threatening a recurrence of the severe price competition of the 1890s. This time, however,
no serious depression interrupted the process of adjustment to excess capacity, and oli-
gopolistic market structures began to take shape in these industries as well by the end of
the decade.
To the extent that there was any inevitable change in the structure of American indus-
try, it was the shift from competitive to oligopolistic forms of organization. Nonetheless,
the dominant firms' power to enforce stable oligopolistic behavior in the future would de-
pend on their ability to prevent problems of excess capacity from recurring. To this end,
large firms continued their search for means to forestall new competition. Though mergers
had occurred in most sectors of manufacturing during the years 1898 to 1902, in only a
minority of industries did the combines immediately succeed in achieving the goal of
long-term price stability. In most cases the transformation to stable oligopolistic modes of
price and output behavior took place much more gradually, after additional waves of ex-
pansion and competition had run their course. The consolidation movement was thus only
one phase in a long-term process of institutional adjustment to modern conditions of pro-
duction.
NAOMI R. LAMOREAUX, Brown University

The Birth of the Business Cycle

The original purpose of this dissertation was to examine whether a study of macroeco-
nomic cycles in the early stages of England's modern economic order might shed some
light on questions of macroeconomic stability.' In the course of the study, however, I rap-
idly discovered that the preexistent tools and concepts of conventional macroeconomics
were largely inapplicable to the eighteenth- and early nineteenth-century experience. This
realization led to a split in the expository form of the study: Book I concerns the economic

'This dissertationwas completedat the Universityof Michiganunder the directionof Gavin

Wright.

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172 Summariesof Dissertations

theory of business cycles, and develops the perspectives that are employed in Book II to
examine English macroeconomic experience from 1690 to 1825.
Book I begins with a survey of business cycle theory from the seventeenth century to the
present. An argument is made that in the past there have been four consecutive theoretical
innovations in the discussion of business cycles: a) first conception of a macroeconomic
system, in which every quantity must move proportionately; b) closure of the system is
achieved through the simultaneous determination of the level and distribution of eco-
nomic activity; c) the range of phenomena to be explained by economists is narrowed
through the endogenous/exogenous distinction; and d) the parameter/variable dichotomy
is made into a continuum. These "stages" are consecutive, not in a chronological sense
(and instances are produced to suggest periods of "retrogression"),but in the sense that an
innovation in any one stage is conditional upon a theoretical understanding and consoli-
dation of the previous stage. In this sense, it is of particular interest that strictly Walrasian
theories, when applied to questions of instability, have never managed to progress beyond
the first stage. The survey of macroeconomic thought traces various counter-Walrasian
themes through the work of Veblen, Mitchell, Keynes, and beyond. The contribution of
the large econometric models to the theory of instability is assessed, and the breakup of
the Keynesian consensus into the three modern schools-Rational Expectations theorists,
General Equilibrium with Rigidities, and the Left Post-Keynesians-is examined.
I approach the question whether the most up-to-date explanations of macroeconomic
instability can serve to guide a study of early cycles by first posing some rhetorical ques-
tions: Does the existence of the efficient markets hypothesis rule out a priori any role of
speculation in the South Sea Bubble? Did class struggle over shares of income in any sense
"cause" the crash of 1825? Can the multiplier-accelerator explain the extended slump of
the 1780s? The answer to all these is that the theories tendered by the three schools of
thought were never meant to apply to such situations. But then to what situations were
they meant to apply? We know that recent attempts to apply conventional "Keynesian"
theory to the Great Depression of the 1930s has met with appreciable difficulty. As I have
documented in my dissertation, it seems that theories of instability often arise in reaction
to a particular historical circumstance in order to explain that circumstance; however,
when imported outside of that limited historical context, they often fail as more general
explanations of cycles. The result is that existing cycle theories rule out many more plau-
sible explanations than they finally proffer. In some ways, this is a paradoxical result, for
those very same theories purport to be ahistorical because they are general, when in fact
they are ahistorical because their scope (or "vision") is severely limited.
The question of the historical generality of a cycle theory is then resolved into two dif-
ferent inquiries. i) What specific assumptions in previous analyses make historical appli-
cation difficult? ii) How have previous histories dealt with the non-applicability of existing
theories? The second question is dealt with in the beginning of Book II, while the first
takes up the remainder of Book I. The broad theoretical categories of value theory, time,
capital theory, income, the rate of profit, finance, and the status of the corporation are ex-
amined for potentially ahistorical biases, and some suggestions are made for offsetting
these biases. As an attempt to make these criticisms operational, Book I ends with the for-
mal development of a general model of the business cycle. The model is divided into a
physical element and a financial element, which are further subdivided into various sec-
tors. When these are aggregated, the equilibrium condition is found to be that the ratio of
flow net outputs to flow inputs (the "technology coefficient") times the rate of physical
turnover must be equal to the margin on sales times the ratio of sales to total financial
equity (the rate of financial turnover). I argue that the rates of turnover cannot be con-
ceived as an outcome of a large number of constrained maximization behaviors mediated
by the market, and therefore they must be "institutional" in the sense that they are histori-
cal data. This lack of determination in the internal mathematics of the model allows his-
torical information to enter directly and substantively into specific explanations of mac-
roeconomic instability. Finally, some manipulations of the model are performed to show

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 Summariesof Dissertations 173

that it subsumes under a more general framework the three modern schools of business
cycle theory.
Book II begins by taking up the question of how previous historians have dealt with the
ahistorical nature of received business cycle theories in their examinations of particular
historical epochs. Some writers merely maintain that all history is divided into a modern
and a pre-modern epoch (where "modern" is coterminous with the period of applicability
of the theory) without any further justification. More sophisticated writers have proposed
three different criteria which, for them, delimit modern and pre-modern times: the first
group points to the widespread employment of "fixed capital" in production; the second to
the development of modern credit institutions; and the third (and largest) group identifies
modernity with some fixed periodicities in various arbitrarily chosen indicators. None of
the three modes of periodization has a logical link to modern business cycle theories;
moreover, the first (usually associated with the work of Sidney Pollard) is also con-
tradicted on purely empirical grounds. The notion that pre-modern fluctuations were due
mainly to wars and harvest fluctuations is belied by the fact that Walrasian theory predicts
that there is no a priori expectation about the direction of their effects, while there is an
expectation that they will largely cancel out in the aggregate. In fact, the only logical peri-
odization in Walrasian theory is no periodization at all. The modern period should be co-
terminous with the historical existence of the market. This is just another way of saying
that Walrasian theory is truly ahistorical.
An argument is then made that the general theory developed in Book I does provide a
logical division of history into two periods, in only one of which the model applies. The
specific historical preconditions for the application of the model are the, existence of (1)
the sale of human labor by the owner on the same basis as other commodities to (2) a fi-
nancial entity called the "firm," defined by its balance sheet, for the purpose of the accu-
mulation of profit through (3) control of the organization and time structure of physical
production and (4) manipulation of balance sheet and cash flow variables under the firm's
control, which, (5) in the presence of intrafirm and interfirm competition, brings about a
tendency for an equalized rate of profit on the money value of firms. A case is made that
all of these preconditions were present in England by at least the last decade of the seven-
teenth century; therefore, the study of modern instability should logically begin at that
date.
The next step in a study of instability is to develop the quantitative indicator that the
theory suggests is the key measure of macroeconomic activity. In the case of the theory
outlined in Book I, that indicator is the economy-wide financial rate of profit. A very seri-
ous problem with previous work done on eighteenth- and early nineteenth-century fluctu-
ations by Ashton, Gayer, Rostow and Schwartz, and others is its lack of theoretical guid-
ance to a principal macroeconomic indicator, and the resultant scattershot empiricism.
This lack of a primary indicator in particular made it nearly impossible to make any state-
ments about the amplitude or severity of macroeconomic fluctuations. The present study
defines movements in the macroeconomy as movements in the rate of profit. In pursuit of
this indicator, I have combined published time series data from British business histories
with original archival reconstruction of business records to produce a small sample (17) of
time series of profit rates over the period 1728-1826. These rates are averaged to produce
an index of the eighteenth-century rate of profit. (Other accounting variables have also
been collected.) Some evidence is provided to support the assertion of a tendency to an
equalized rate of profit.
As a supplemental indicator of the state of speculative finance, I have also constructed
an annual share price index for the entire eighteenth century and, by splicing it onto the
Gayer-Rostow-Schwartz index, have extended it into the nineteenth century. The number
of corporate shares in the index is small because the source, the Course of the Exchange,
only reported a small number of share prices in the eighteenth century. The reasons for
this restricted set are explored in the same chapter of my dissertation.
Finally, the last chapter of Book II brings together the new evidence with other pre-

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174 Summariesof Dissertations

viously published data series in a chronology of the English macroeconomy from 1690 to
1825. Some of the major findings are that the most serious crises in the period occurred in
the decade after the South Sea Bubble, in the year 1825 and thereafter, and in the early
1780s. The pronounced crisis of 1720 and after contradicts the more conventional notion
that the Bubble was a fleeting affair with little substantial impact on the economy, while
the latter characterization of the 1780s belies the common notion that the "Industrial Rev-
olution" was a period of untrammeled expansion. A statistical examination of wars and
weather indicators (as exogenous proxies for harvest fluctuations) shows no consistent im-
pact upon the British macroeconomy over the course of the eighteenth century.
The other major finding is that, if instability is defined along the axis of variance of the
profit rate, then the British macroeconomy of the eighteenth century becomes progres-
sively more stable after 1720-30 until just after mid-century, after which it grows progres-
sively less stable. This is explained within the context of the theory of Book I in institu-
tional terms: finance, and financial turnover in particular, outran the physical capabilities
of the economy in 1720, inducing a reaction against the business corporation and finance
in general. This reaction stabilized financial turnover for almost a half-century, creating a
more stable macroeconomy. In the interim, innovations in technology and the institutions
of financial turnover increased the potential physical rate of expansion. Finance, re-
strained, first acts as a destabilizing drag on expansion; however, as institutional in-
novation speeds financial turnover, finance overshoots real expansion in the sharp crises of
the Napoleonic period and more spectacularly in 1825.
A sidelight on long-term trends is provided by a comparison of eighteenth-century
profit rates with twentieth-century U.S. experience. A t-test of the null hypothesis, that
there is no difference between the means of the British profit rate of 1760-99 and the U.S.
profit rate of 1931-70, does not reject the null hypothesis. Why, then, has there been a his-
torical preoccupation with the falling rate of profit in various schools of economic
thought? One possible explanation comes from an examination of the two components of
the profit rate: the markups and the rate of financial turnover. It appears that there has
been a secular decline in the markups coupled with a secular rise in the rate of financial
turnover, which has over the 200 years cancelled out trends. Thus the rate of profit has
been secularly constant. Contemporaries undoubtedly noticed the fall in the markup, and,
due to classical confusions over flows and stocks, this became transmuted into a concern
over a falling rate of profit. The relative constancy of the profit rate cannot, however, be
extrapolated into the future, because while there is no upper bound to the rise in financial
turnover, there is very definitely a lower bound to the fall in the markup. The "prognosis"
for an economy based upon those institutional frameworks, therefore, is one of increasing
instability.

PHILIP MIROWSKI, University of Santa Clara

The Economics of AgriculturalResearch in British

Punjab and Pakistani Punjab, 1905-1975
There have been only a few studies by economists on the role of governments in devel-
oping improved agricultural technology in the less-developed nations. The studies that
have been carried out do not cover a long enough time period to capture the long-run pat-
tern of technology development, nor the developments in technology during the colonial
period. My dissertation attempts to correct this situation by examining the development of
the Department of Agriculture of the Punjab both during the period when the Punjab was

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