Theories of Economic Volatility


In reality most market Economies experience business cycle. The busine cycle causes unemployment and it is one of the causes of unemployment in market economies. The business cycle have a boom then a peak in economic activity, recession and recovery. However, all business cycle do not have the same duration and it is not produced in a predictable pattern. It is also true that all market economies go through business cycle and it is a historical fact. However, in the  longterm trend the GDP also has grown for most of the market economies from 18 century to the 21st century.

Theories of Business Cycle

There are many theories which explains why these cycles occur and they find causes indigenous to the market system or exogenous to the market system. All these theories are not complementary and many theories are contradictory . However, some theories are complementary. In addition, no theory is able to explain all the facets of business cycle and the real causes is different and many of theories may be relevant  for a particular economy at a particular period than one theory alone. That is, business cycle can be indigenous as well as exogenous for some economies, but in some economies they may be due to indigenous factors and in other market economies mostly due to exogenous factors. Put it simply, business cycle is a complex issue and classical, neo classical, Keynesian, monetarism or marxist theories of business cycle cannot account all the facets of business cycle.

This is due to nature and structure of market economies, institutional factors, labour market structures, market imperfections, nature of behaviour of economic agents from rational behaviour in practice, government intervention and level of intervention, welfare issues, financial market operations, historical factors, unevenness in economic development, the role of trade and investment flows for a particular economy, ability to come in to equilibrium to natural level, the role of economic and other shocks in the development of volatility in GDP, the role of rational expectations and its importance to an economy and its applicability, dependency of the economy directly and indirectly on trade and capital flows, market imperfections and level, price stickiness, role of unions in the labor market, money supply and its role in economic activity as well as income and wealth distribution in an economy. In addition,  positive and negative externalities and market failure and government failure in an economy and its impact on economic activity.


The causes of business cycle is multi faceted in reality. it is a complex issue and no theory of business cycle is completely correct whatever its status in current economic circles. In current times some monetary and neo classical theories are well accepted to explain and interpret business cycle theories. However, there is wide disagreements among Economists in the interpretation of business cycle a they find one reason or a few factors as major and others not relevant at all. This is not empirically correct and its assumptions are questionable. Simple and even accepted theories are fallible and no theories are perfect and account for the peculiarities of business cycle even they can have similarities. In this respect, in my view based on theory of business cycle is not aim and based on that to formulate economic policies for explaining business cycle in general is fundamentally incorrect and counter productive.