ECONOMIC FLUCTUATIONS A LATER VIEW by Alvin H. Hansen The Persistence of Business Cycles In an article appearing in the Dutch De Economist in 1926, Hawtrey stated emphatically the view that "since the war there has been no trade cycle." While the output of literature on the subject had increased beyond precedent, writers "have not always noticed that for the time being there is no trade cycle." In a somewhat similar vein, Gustav Cassel, in the preface (written in 1931) to the second English edition of his Theory of Social Economy, expressed his belief that trade-cycle theory could not fruitfully be applied to the period of economic history following the First World War.
As we look back over it now, we must, I think, conclude that these were hasty and unwarranted judgments. Every period is indeed characterized by more or less unique conditions. The boom of the twenties and the depression of the thirties were certainly affected by conditions peculiar to those periods. But special conditions were also strikingly present in the eighteen-seventies and the nineties.
Again following the Second World War one hears it said that the concept of the cycle is obsolete, that we are passing through a period for which business-cycle theory has no relevance. Among other things the vast peacetime military outlays, together with the foreign aid program, it is suggested, play so large a role that market forces have little effect on income formation.
That governmental fiscal operations exerted in 1947-50 a much larger influence than in any earlier peacetime period cannot be questioned. This indeed represents a major structural change in the economy. Moreover, in other directionsócollective bargaining, social security, farm programs, financial, banking, and stock market reformsóthe American economy has undergone a far-reaching and fundamental remodeling of its institutional framework. But the process of structural change is not new. Other developments, also revolutionary for their time, occurred in the nineteenth century, notably the emergence of the modern giant corporation, the growth of commercial banking, and finally the beginnings of governmental regulation and control.
the same distortions common to all boom periods. They were not years, as was sometimes alleged, in which the economy had reached a maintainable balance. True, the price level flattened out by 1948, but an economy may be violently distorted even when the price level is substantially stable.
That this is true is apparent when we consider the good years of the nineteen-twenties. A common mistake then made was to confuse "balance" in the economy with mere price stability. This, perhaps more than anything else, accounts for the quite unwarranted complacence of the twenties.
Private gross domestic investment averaged 16.3 per cent of the gross national product for seven consecutive years, from 1923 to 1929. In no year did it fall below 15.1 per cent, and it reached 17.5 per cent in the peak year. Now 16 per cent of gross national product is more than can profitably be laid out on private income-producing capital year in and year out. Experience in the twenty-year period 1921-40 indicates that it was probably not possible to invest profitably more than, say, 12 per cent of the gross national product in capital facilities.
It is indeed quite possible that the $104 billion poured into new construction, producers' equipment, and inventory accumulation (the latter amounted to only $6.5 billion) in the seven years 1923-29 might have been reasonably justified if a full employment income could somehow have been maintained from 1929 on. It is not just a question of mistaken investment. It is simply a question of the "bucket of capital formation" (determined by the requirements of technique and population growth) being filled to the brim. By 1929 we had "caught up" with our then prevailing capital requirements and needs. We could not continue to pour around $15 billion a year into office buildings, apartment houses, business plant and equipment, and other private investment projects. We had temporarily reached, more or less, a point of saturation.