Business cycle theories after Keynes: A brief review considering the notions of equilibrium and instability

Abstract

In this paper, we review the theories of business cycles in the 20th century after the work of John Maynard Keynes. Fluctuations in economic activity have been observed with considerable regularity since the beginning of the last century, motivating empirical efforts to, identify, measure, and understand business cycles, contributing to the identification of stylized facts on business cycles, facts the business cycle theories should try to explain. Theories however have been very distinct through the years. Despite the different explanations for the sources of cycles, in mainstream economics, there was the underlying hypothesis of stability and equilibrium as a main characteristic of the economic system. The heterodox view on business cycles, in contrast, starts with Keynes pre-dynamic theory, considering the intrinsic instability of the system and extends through several other authors and theories. In this paper, we use the concepts of equilibrium and instability as a demarcating guide to separate theories in two groups: the mainstream view and the heterodox view. We notice however that, even though different authors and theories might share similar views on the self-equilibrating property of the economic system, there is no coherent integration between similar theories. We conclude the paper with some methodological insights that might lead to a coherent and integrated approach to explain business cycles in the heterodox view, requiring new and complex methods and tools.