Recessions are to the entrepreneur like droughts are to the farmer: You can work from sunup to sundown and do everything just right and still face ruin. This was the case after the financial crisis of 2007–2008, when roughly 1.8 million small businesses – virtually none of which had any connection whatsoever to the underlying forces leading to the collapse – failed between December 2008 and December 2010 (Weltman Reference Weltman2023). Who knows how many of these were owned by families who had put their personal finances on the line, hoping that their enthusiasm and hard work would be sufficient to turn a profit. They were not. Workers, too, are subject to these same ill fortunes. In December 2007, the date marked by the National Bureau of Economic Research as the start of the financial crisis recession, unemployment was 7.6 million. By its official end in June 2009, it was 14.7 million (finally peaking at 15.4 million in October 2009). Once again, they were innocent of the actions that brought them economic, social, and psychological hardship.

What causes the cyclical downturns that can wreak havoc on our lives? That is the central question asked – and answered – by this volume. Most economists will say that they are the result of random external shocks and that without these, the economy would sail along beautifully. Take, for example, this quote from Dr. Christina Romer, one-time Chair of President Barack Obama’s Council of Economic Advisors: “Just as there is no regularity in the timing of business cycles, there is no reason why cycles have to occur at all. The prevailing view among economists is that there is a level of economic activity, often referred to as full employment, at which the economy could stay forever. (Romer Reference Romer2008)” We are only knocked off of this happy equilibrium by chance events. None of these, according to mainstream economics (aka Neoclassicism or orthodoxy), occurs in a manner that creates a recognizable pattern.

To be fair, there are of course random, non-economic factors that can have a serious impact on the economy. COVID certainly proved that. I will argue, however, that the overwhelming weight of evidence points toward the conclusion that there exists an internal dynamic, one related to the behavior of economic agents, that generates what we call a business cycle. Expansions create the conditions that cause recession and vice versa. Whatever fate may then throw at us is on top of this.

The reason Neoclassical economics has failed to recognize this is because their theories and models have become increasingly divorced from reality. Indeed, Nobel Laureate Paul Romer (no relation to Christina) – himself a mainstream economist – calls ours the era of “Post-Real” economics (Romer Reference Romer2016: 4). In his words, “In the last three decades, the methods and conclusions of macroeconomics have deteriorated to the point that much of the work in this area no longer qualifies as scientific research” (Romer Reference Romer2016: 1).Footnote ¹ I think this is an understatement and, given the importance of economic theory to our lives, a crime.

Fortunately, orthodoxy is not the only game in town. There exists a deep and insightful literature reaching back over a century. Wesley Clair Mitchell (1874–1948), for example, an Institutionalist economist who was one of the founders of the National Bureau of Economic Research (the private-sector think tank that still officially dates business cycles in the US), did brilliant, path-breaking work on the subject that pointed to real-world phenomena such as systemic fluctuations of profits and input costs as the culprits.Footnote ² Today, however, his efforts are all but forgotten; and when they are not, he is criticized by the mainstream for having “eschewed theory in favor of meticulous empirical investigation” (Williamson Reference Williamson1996: 391).Footnote ³ This is code for Mitchell not having expressed the “complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols” (Keynes Reference Keynes1936: 298). In other words, he did not produce pages of equations and proofs. Instead, he focused on real-world data and their fluctuations over the course of actual business cycles.

The nature of the mainstream dismissal of his work is typical of what Romer describes in his critique, and it neatly illustrates one of the primary obstacles to useful economics: an obsession with complex mathematics regardless of the light they shed on the question at hand. Some have argued that this is a function of the discipline’s “masculinist bias,” wherein the author’s real goal is to prove their (usually “his,” given how white-male dominated our discipline is) superiority over their colleagues/opponents (Nelson Reference Nelson1995). “If you can’t understand my model, then clearly I’m smarter than you.” That by itself is disturbing, but it leads to further problems: “With enough math, an author can be confident that most readers will never figure out where a FWUTV (fact with unknown truth value) is buried. A discussant or referee cannot say that an identification assumption is not credible if they cannot figure out what it is and are too embarrassed to ask. (Romer Reference Romer2016: 15)” In other words, not only is there a strong tendency to prefer complexity over relevance as a form of posturing, but this has also had the effect of causing the peer-review process – so vital to the maintenance of scientific standards – to break down.

There is nothing wrong with mathematics, of course. It is an essential shorthand and one of the things that attracted me, a former physics major, to the discipline. But, to give the extended passage from which the above Keynes quote is drawn:

Mitchell’s work is an excellent example of someone following Keynes’ advice (albeit before he actually gave it!). It will be one of the foundations – along with that of John Maynard Keynes, Michal Kalecki, Hyman Minsky, and Paul Davidson – of the theory forwarded in this volume.

Note that disappointment in existing macroeconomic theory is not limited to professional economists such as Romer or non-mainstream ones like myself. Its state is so abysmal that even their own PhD students avoid it:

These students are not afraid of the math, per se, as the entire discipline has become increasingly mathematically oriented. Rather, their lack of enthusiasm is a function of the fact that “the macro that is taught to the students in the core has lost touch with both policy and empirical evidence” (Colander Reference Colander2005: 196).

Hence, mainstream macroeconomics stands before us today bleeding from a series of largely self-inflicted wounds. To start, in the post–World War II period they essentially declared the business cycle dead, focusing instead on growth (Backhouse Reference Backhouse2017). It was their opinion that Keynesian – as opposed to Keynes’, there is a big difference – policy had developed means of fine-tuning the economy such that any fluctuations that occurred were the result of shocks or errors. As you will see in Chapter 4, which offers a history of US business cycles, it is very difficult to defend such a position. Only someone already wearing those blinders could have interpreted the events that way. Furthermore, in such an environment, the business cycle theories that did emerge – particularly Real Business Cycles – were based on the premise that there was no cycle! This was the dead end about which Paul Romer was so upset. And Neoclassicism became increasingly insular. A combination of factors allowed them to build barriers to entry against other schools of thought both at the stage at which we train new economists and once they gain employment. The journal ranking system that has emerged is probably the most egregious of these. In addition, classes at both the undergraduate and graduate levels have de-emphasized lessons that offer context to the theories we put forward (see Harvey Reference Harvey2020a pp. 8–54 for an extensive discussion of these last two issues). Last, the very tools of analysis embraced by Neoclassicism makes it extremely difficult for them to explain real-world macroeconomic fluctuations (Harvey Reference Harvey, Hermann and Mouatt2020b).

Things have reached the point that some PhD programs have even asked whether or not it is worth continuing to include macroeconomics as a core part of the curriculum (Colander Reference Colander2005: 195–6). This means making it optional for budding economists to study such concepts as unemployment, inflation, interest rates, expansions, recessions, monetary policy, fiscal policy, and GDP growth. I wonder what members of the general public would think of this state of affairs, wherein most of the factors that have a direct impact on their quality of life are treated as “electives?”Footnote ⁴ Policy makers, too, have had second thoughts regarding the utility of Neoclassical macro models (Giles Reference Giles2017).

For all these reasons and more, this volume puts forward yet another business cycle theory. To offer a brief preview, the argument will be made that developments during the upturn cause the downturn. In particular, the environment in which entrepreneurs make decisions, the relationship between their investment spending and profits, and the relative ease with which we can add to our stock of physical capital combine to create a situation in which the expansion witnesses a saturation of the market for physical capital, a fall in investment (and therefore profits), and a panicked reaction to the latter on the part of entrepreneurs. This happens time and time again because it is built into the system.

This does not mean that we are forced to live with the consequences, however. There exist policies, in particular those associated with the Job Guarantee, that can not only insulate us from the damaging effects of recession but at the same time deliver a more experienced and skilled workforce and address many of the social problems we face today (including, especially, climate change). And it’s easily affordable (although in a very real sense, we cannot afford not to do it regardless of the “cost”). That will be the subject of Chapter 5. Before that, a basic theory of business cycles will be laid out (Chapter 2), additional factors added (Chapter 3), and a history of US cycles from 1954 to 2020 offered (Chapter 4). After Chapter 5, there is an appendix showing more sophisticated versions of the models upon which the volume is based.

It is my sincere hope that the reader – economist or otherwise – finds the analyses presented here to be logical, reasonable, firmly grounded in the real world, and, in the end, hopeful.