Oskar Morgenstern: Business-Cycle Research and Its Unfinished Foundations (1933)

Oskar Morgenstern’s untitled contribution to Der Stand und die nächste Zukunft der Konjunkturforschung is a three-part assessment of business-cycle research and its immediate tasks. Its governing claim is that cycle theory cannot advance independently of general economic theory, whose unresolved problems it inherits. The essay moves from this dependence and the difficulties of application, through a theoretical research programme, to the inadequacy of crisis policy. Its constructive argument is that progress requires closer attention to economic interdependence, time, heterogeneous capital goods, and the institutional conditions under which theoretical propositions are applied.

Section I begins with Böhm-Bawerk’s conception of business-cycle theory as the final chapter of economic theory. Empirical-statistical research can expose weaknesses and supply new experience, but Morgenstern assigns the greater transformative role to advances in pure theory. This priority does not imply that existing theory is secure:

Solange wir Grund haben anzunehmen, daß die allgemeine ökonomische Theorie in ihren wichtigsten Kapiteln nicht abgeschlossen ist (was wohl noch einige hundert Jahre dauern dürfte!), so lange muß sich die Konjunkturtheorie stets in einem unbefriedigenden Zustand befinden.

English translation: As long as we have reason to assume that general economic theory remains unfinished in its most important chapters (which will probably take another few hundred years!), business-cycle theory must remain in an unsatisfactory state.

Morgenstern welcomes monetary cycle theory’s retreat from a strictly monocausal explanation. Durable capital goods increasingly compel monetary theorists to consider changes in the structure of production, although their treatment remains inadequate. A second source of instability lies in application: economic organization changes. Propositions may remain valid under their original assumptions while losing practical significance as an economy becomes more monopolistic. Relationships among discount rates, prices, production, wages, and employment therefore require renewed investigation rather than automatic extrapolation.

Section II develops four connected research problems. First comes the relation between general and partial equilibrium. Cycle theory seeks to explain economy-wide connections but largely employs instruments derived from partial-equilibrium analysis; the legitimacy of holding other conditions constant consequently becomes decisive. Yet general-equilibrium theory is itself becoming rigid, prompting Morgenstern to question whether attachment to equilibrium contributes to the difficulty. Accounts of economic movement must explain shifts and changes in supply and demand curves, not merely movements along them. Whether wage reductions can eliminate unemployment, for example, depends on the concrete capital goods available. Ignoring those requirements conceals a difficulty potentially serious enough to unsettle marginal-productivity distribution theory.

The second problem is time. Morgenstern proposes investigating how economic agents and entrepreneurs arrange their activities across periods and incorporating those decisions into price theory. Current market prices reflect individual calculations concerning the future and the past. A sufficiently developed account might replace isolated pronouncements about expectations with an explanation of how temporal judgments enter actual bids. He stresses, however, that this research remains embryonic.

Third, cost theory must examine the distribution and behaviour of cost factors over shorter and longer periods, in close connection with production theory. Studying different industries during depression could revise apparently settled propositions. The relation is reciprocal: cost theory would clarify cyclical processes, while cycle research would test and improve cost theory, especially its assumptions about response times.

These questions lead to the fourth problem, liquidity, understood beyond banking:

Darunter ist nicht nur die Liquidität im bankmäßigen Sinne zu verstehen (hier würde eine Prüfung der tatsächlichen Durchführbarkeit und Geltung der sogenannten „goldenen Regel des Bankwesens“ und der damit gegebenen Ordnung des Kreditwesens klärend wirken), sondern namentlich die Starrheit und Bewegbarkeit eines ökonomischen Gesamtsystems zu untersuchen.

English translation: This should not be understood merely as liquidity in the banking sense (an examination of the actual feasibility and validity of the so-called “golden rule of banking” and the associated organization of credit would help clarify matters here); rather, what must especially be investigated is the rigidity and mobility of an economic system as a whole.

At any moment, goods have definite arrangements and uses; only some can be changed within a given interval. The forms and speeds of reallocation, particularly of produced means of production, belong at the centre of cycle theory. Morgenstern’s emphasis on pure theory thus accompanies an explicit rejection of theorists’ contempt for empirical confirmation.

Section III draws the policy consequences. The current crisis has painfully exposed the weakness of economic knowledge. Models assuming free competition and unrestricted mobility cannot simply yield prescriptions for economies characterized by monopoly and institutional constraints. Repeating inherited rules evades the problem of application. This criticism encompasses both intervention and liberal nonintervention: neither can claim exemption from theoretical revision.

Ursachenpluralität bei ständiger Gefahr des Determinantenwechsels bereitet namentlich der Anwendung theoretischer Erkenntnis Schwierigkeit.

English translation: A plurality of causes, together with the constant risk of a change in determinants, creates difficulties particularly for the application of theoretical knowledge.

The essay’s lasting methodological point is that policy requires knowledge of changing systemic connections, not merely confidence in abstract propositions. Its conclusion treats instability as an opportunity for intellectual progress. Invoking Max Weber’s ideal of scholarship willing to be superseded, Morgenstern makes revisability a particular obligation of the cycle researcher:

Beim Konjunkturforscher sollte dieser Wunsch besonders ausgeprägt sein.

English translation: In the business-cycle researcher, this wish should be especially pronounced.