JAN TINBERGEN, Netherlands School of Economics, Rotterdam
The business cycle is largely a measurable phenomenon, showing itself in the movement of many economic variables. It is a coherent movement but not rigorously cyclical. A large number of theories aim to explain its nature. Most of those current in economic textbooks and literature run in qualitative terms. The need for testing these theories is now generally felt, because of their multiplicity, their mutual inconsistency, and their incompleteness or indeterminacy from the quantitative point of view. Testing will hence be of great significance, both for our factual knowledge of economic fluctuations and for the further development of the theories concerned.
Before discussing how business cycle theories may be tested, it seems useful to analyze briefly not only the nature of current theories, but also their purpose. Evidently their proximate purpose is to make the mechanism of economic fluctuations understandable. The immense effort devoted to business cycle research during decades would hardly have been justified, however, by scientific curiosity alone. One further purpose is to meet the need for forecasting economic depressions; another, in the author's opinion more important, is to uncover an appropriate 'business cycle policy', e.g., practical means of influencing economic fluctuations. It is of some use to state this ultimate purpose, since theoretical investigations seem hardly germane to it, a point to which we shall return later.
If we want to describe the nature of business cycle theories, it appears to be appropriate to use certain concepts introduced by econometrics. When speaking of business cycles and their explanation, we have in mind a number of phenomena, variable in time, which for short we call 'variables'; e.g., incomes, consumption, import duties, crops. Some of these variables are considered to be given to the economists. They relate to phenomena outside the economic sphere or outside the part of the economic sphere that is under consideration, e.g., one country. They may be called data, independent variables or exogenous variables. The other ones, the subject of economic explanation, may be called dependent or endogenous