"The general character and agreement in the periodic turn in movements of factors of circulation -- these are the specific problems of business cycle theory which have to be solved within the closed interdependent system....If a business cycle theory which is system-conforming cannot be built, then "general overproduction" will not only drive the economy but also economic theory into a crisis."
(Adolph Lowe, "How is Business Cyle Theory Possible at All?", WWA, 1926: p.175).
"Since we claim to have shown in the preceding chapters what determines the volume of employment at any time, it follows, if we are right, that our theory must be capable of explaining the phenomena of the Trade Cycle."
(John Maynard Keynes, General Theory, 1936: p.313)
"Keynesian economics, in spite of all that it has done for our understanding of business fluctuations, has beyond all doubt left at least one major thing quite unexplained; and that thing is nothing less than the business cycle itself....For Keynes did not show us, and did not attempt to show us, save by a few hints, why it is that in the past the level of activity has fluctuated according to so definite a pattern."
(John Hicks, Contribution to the Theory of the Trade Cycle, 1950: p.1)
Adolph Lowe's (1926) condemnation of the state of business cycle theory in the 1920s rested on the charge that these contemporary theories did not use a "closed, interdependent system" to explain cyclical dynamics as an essential phenomena of a working economy. On the one hand, there was descriptive work on the cycle (which "never can...generate by itself theoretical insights", Lowe 1926: p.247), on the other hand, there were static equilibrium theories which rested all their dynamics on displacements or exogenous shocks to the system (an "incomplete" explanation) and those theories which did exist were but fragments and did not conform to a coherent theoretical system ("circular reasoning"). In short, Lowe lamented not so much the poverty of business cycle theory but rather the prevalence of business cycle untheory.
Friedrich Hayek (1929, 1931) took up Lowe's gauntlet and attempted a theory of the cycle on the basis of an interdependent equilibrium system, albeit still not entirely (or rather satisfactorily) closed. His rival, John Maynard Keynes (1936) attempted something a little bit more and a little bit less: more, in that he provided a consistent, closed, interdependent theoretical structure for the determination of aggregate output and phenomena such as unemployment, etc.; yet a little less, because save for a small chapter in the General Theory, Keynes did not spend much time considering cyclical phenomena or growth.
Yet, if Keynes's theory was to be taken seriously as a theory, in other words, one that applies in the long-run as well as the short, then the limitations of Keynes's General Theory are apparent. As Hicks notes:
"For there is a quite obvious reason why the equilibrium of the General Theory cannot be static. Saving and investment are flows, which extend over a period. It is accepted that what happens during the period depends not only on investment and savings propensities, but also upon the stock of capital goods with which the period opens....So it is impossible for behaviour of the economy, in the next period, just to repeat....It would have to be insisted that the Keynes equilibrium, like Marshall's, is a restricted equilibrium...It would have to be restricted to the determination of employment within the period that is under consideration, taking that period by itself."
(John Hicks, 1985: p.59)
This point was made no less forcefully by Roy Harrod:
"There is one concept, however, that plays a central role in the General Theory which is not static, and that is why the General Theory will not be satisfactory until it is brought into relation with Dynamics...Positive saving, which plays such a great role in the General Theory is essentially a dynamic concept. This is fundamental...[A] steady allocation of one-tenth of income to saving is essentially dynamic, since it involves a continuing growth in one of the fundamental determinants of the system, namely the quantity of capital available. This must entail, even if none of the other determinants are subject to change, continued changes in the values of many of the dependent variables."
(Roy F. Harrod, 1948: p.10-11).
Keynes's simple, aggregative theoretical system was thus eminently in a position to be extended into the "long-run". In deference to the pioneering roles of Roy F. Harrod and John Hicks (who were at Oxford) and the subsequent adoption of this research programme by the Cambridge Keynesians (Nicholas Kaldor, Joan Robinson, Richard Goodwin, etc.), we refer to this as the "Oxbridge" phase of the Keynesian Revolution.
There are effectively three parts to the Oxbridge research programme: the development of "multiplier-accelerator" theories of the cycle, the development of endogenous cycles via non-linear mechanisms and, parallel and underlying both of them, the development of Keynesian growth theory.
The multiplier-accelerator relationship was introduced by Roy F. Harrod (1936) in his theory of cycles, and then re-adapted by him again (Harrod, 1939, 1948) for a theory of growth. This was followed up by John Hicks (1950), who formalized the Harrodian trade cycle in accordance to the mathematical methods introduced by Paul Samuelson (1939) and Lloyd Metzler (1941). Subsequent work by James Duesenberry (1949, 1950) and Luigi Pasinetti (1960) helped merge the growth and cycle story.
The other strand of the Oxbridge programme was the "endogenous cycle" tradition initiated by Michal Kalecki (1937, 1939, 1954) and followed up by Nicholas Kaldor (1940) and Richard Goodwin (1951). These models have non-linear structures which are formally different from the Harrod-Hicks linear multiplier-accelerator models, and, in their focus on heterogeneous classes of agents and income distribution dynamics, they perhaps owe more to Marxian thought than they do to Keynes. They have nonetheless led to a distinct strand of Cantabrigian and Post Keynesian thought.
Finally, we should note that there is still another Keynesian tradition of cycle theory which moves beyond these income-expenditure relationships and attempts to reintroduce Keynesian financial variables -- notably, Keynes-Wicksell models of monetary growth and Minsky financial cycle theories. However, and we must note this with great care, that financial cycle theories ought not to be considered part of the Oxbridge research programme. We venture to propose, somewhat tentatively, that one of the defining features of the Oxbridge research programme is precisely that financial or monetary factors are not the causes of growth or cycles.
Such an assertion may seem odd, but we believe it is compelling. If Oxbridge researchers omitted factors like money and finance from their models, we contend, it was not merely because of oversight, but rather, it was purposeful. In part, this was because they wanted to stay as far away as possible from the old Neoclassical habit of ascribing the cause of the cycle to "exogenous" factors like money, finance and associated mislaid expectations -- precisely the kind of "British" cycle tradition that was pursued prior to 1936. Yet it is interesting to note that while Keynes (1936: Ch. 22) himself wanted to drive the General Theory precisely up the typically British "expectations-and-money" road; the Oxbridge reseachers took a very different one. In fact, they actually reached back beyond Keynes into the work of Dennis H. Robertson (1915) and the earlier "Continental" tradition of structural cycle and structural growth theory associated with Lowe and the Kiel School. The difference was that now, instead of relying on overinvestment conjoined with technological unemployment, the Oxbridgians employed the Keynesian theory of effective demand with unemployment of a quite different kind. It is no accident that Harrod emerged with the concept of steady-state growth, an eminently Continental notion that, with a few exceptions, was largely absent in the British tradition. Multi-sectoral models and redistribution over the cycle, the features of the Kalecki's theories, were perfectly in line with the Contintental concerns.
The absence of money and finance in the Oxbridge theories, then, was deliberate and not accidental. The "monetary" road had been taken by Friedrich Hayek (1929, 1931) and it was severely criticized by two of his ex-disciples -- Nicholas Kaldor and John Hicks -- both of whom were central figures in the Oxbridge programme. As Hicks writes, several years later:
"Where...I do not go along with [Hayek] is in the view that the disturbances in question have a monetary origin. He had not emancipated himself from the delusion (common to many economists, even the greatest economists) that with money removed "in a state of barter", everything would somehow fit. One of my objects in writing this book has been to kill that delusion. It could only arise because the theory of the barter economy has been insufficiently worked out. There has been no money in my model; yet it has plenty of adjustment difficulties. It is not true that by getting rid of money, one is automatically in "equilibrium" -- whather that equilibrium is conceived of as a stationary state (Wicksell), a perfect foresight economy (Hayek) or any kind of steady state. Monetary disorders may indeed be superimposed on other disorders; but the other disorders are more fundamental."
(John Hicks, 1973: p.133-4)
Consequently, it seems as if John Maynard Keynes's General Theory, for all its insistence on money and finance and expectations, served effectively as an unwitting midwife between pre-1936 structural growth-and-cycle theory and the post-1936 Oxbridge programme. The Oxbridge theorists - Harrod, Hicks, Kaldor, Kalecki, Goodwin, etc. - all perceived the market to be the creator of growth and cycles and developed models which generated these dynamic phenomena largely out of a real, closed, interdependent system. In a sense, they have, perhaps more than any other group of thinkers since World War II, seriously addressed Lowe's (1926) call for comprehensive, systematic theories of the business cycle proper.