J. R. Commons’ Business Cycle Theory

Abstract

:In Institutional Economics (1934), John R. Commons argued that insufficient profits and expectations based on the “profit‐margin” theory, not the “profit‐share” theory, were the primary causes of economic depressions. He also posited a business cycle theory to analyze historical global depressions and explained a pricing theory within the context of capitalism's historical development. Based on this discourse, Commons evaluated the economic actor that would receive the benefits of increased efficiency under different circumstances and determined that lowering the price from the buyer‐consumer's standpoint deprived producers of gains, while raising the price from the producer‐seller's standpoint deprived consumers of benefits. Thus, Commons concluded that prices should be stabilized, since they affect expected profits on which future production will be based, and the effects of supply and demand should be controlled using state power for a period of time to protect intangible properties. This makes macro‐economic policy an important tool in stabilizing the business cycle. According to Commons, we should safeguard public interest by stabilizing prices through macro monetary policy and protection of efficient producers’ profits.