Open Access Journal Article

Keynesian Without the Policy: Why the Business Cycle is all about Business Confidence and Finance

by Karl Johan Bergstrӧ m a,* orcid
a
Statistics Sweden, Stockholm, Sweden
*
Author to whom correspondence should be addressed.
Received: 27 February 2023 / Accepted: 18 April 2023 / Published Online: 28 April 2023

Abstract

Many of Keynes´s ideas and concepts are proven correct in this paper. The demand side, mainly business investments, drives the economy. Business firms steer the business cycle via profit expectations and animal spirits. Injections to and withdrawals from the circular flow of income are multiplied throughout the economy in accordance with Keynes´s multiplier. A sudden and sharp rise in households´ saving rates has a detrimental effect on aggregate demand, in line with Keynes´s paradox of thrift. Finance, not saving in the S=I sense, is the necessary condition for business investments and economic growth to be realized. Keynes´s finance motive thus makes money endogenous, contradicting the textbook result that exogenous money steers aggregate demand, contradicting the mainstream loanable funds theory and putting into question the Keynesian theory of sticky prices as a condition for real growth. However, a crucial omission in Keynes´s productive writings is the lack of an accelerator tying income to investment. Some of his followers such as Paul Samuelson tried to remedy that by developing multiplier-accelerator models. The problem with them is that the accelerator lacks micro foundations, in specific disregarding business confidence. Linking macro accounting identities with empirical national accounts data for five major economies produces the finding that business firms explain more than all aggregate expenditure growth during a 25-year period. Thus, it is concluded that business confidence is the root of the business cycle. Making the accelerator account for business confidence casts new light on the perhaps most well-known Keynesian “truth”: active fiscal policy as a main force stabilizing the business cycle. With business confidence being the endogenous and ubiquitous variable driving the business cycle, it turns out that any exogenous factor has the possibility to affect it. Policy needs to be viewed as a competing factor to the factor(s) driving the cycle in the other, destabilizing direction. The more powerful those factors are (e.g., a deadly virus), the tougher it gets for policy to “win” the competition, turning business confidence around. This leads up to the paper´s main conclusion: the worse the economy, the stronger is the case for active fiscal policy, but the lesser is the chance for it to succeed.


Copyright: © 2023 by Bergstrӧ m. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.
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ACS Style
Bergstrӧ m, K. J. Keynesian Without the Policy: Why the Business Cycle is all about Business Confidence and Finance. Journal of Economic Analysis, 2023, 2, 29. https://doi.org/10.58567/jea02020008
AMA Style
Bergstrӧ m K J. Keynesian Without the Policy: Why the Business Cycle is all about Business Confidence and Finance. Journal of Economic Analysis; 2023, 2(2):29. https://doi.org/10.58567/jea02020008
Chicago/Turabian Style
Bergstrӧ m, Karl J. 2023. "Keynesian Without the Policy: Why the Business Cycle is all about Business Confidence and Finance" Journal of Economic Analysis 2, no.2:29. https://doi.org/10.58567/jea02020008
APA style
Bergstrӧ m, K. J. (2023). Keynesian Without the Policy: Why the Business Cycle is all about Business Confidence and Finance. Journal of Economic Analysis, 2(2), 29. https://doi.org/10.58567/jea02020008

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