ARTHUR SMITHIES, Harvard University
Practically every country that is exposed to business cycles has adopted policies designed to reduce their volume or to eliminate them. Political insistence on such action can hardly be attributed to business cycle research, but that research has had a decided influence on the types of policy that have been considered or adopted. While it is now generally agreed that business fluctuations are inherent in the capitalistic process, it is also agreed that the excesses of inflation or deflation that actually occur have no constructive purpose whatever. Fluctuations in private investment may be required to give effect to the irregular process of technological change and adaptation to it; but they also give rise to 'multiplier' and 'acceleration' effects which may account for the bulk of the business cycle.
This distinction between primary and secondary effects leads some to hope it may be possible to devise policies that will remove the secondary consequences and leave the capitalistic process not only unimpaired but improved. On the other hand, the same analysis leads others to the view that the sole way to cure the ills arising from the business cycle is to abolish it. They therefore recommend that the economy be kept in a state of continued inflationary pressure, held in by direct allocation and price controls. With such a policy a decline in activity in one sector of the economy can be compensated by relaxation of the restraints on another. This is essentially the type of full employment policy followed in several European countries at present. While such a policy can be relied on to eliminate the business cycle, it remains to be seen whether it will kill the capitalist goose.
The policy of the United States has so far been directed toward abatement of the rigors of the business cycle, and in this paper I shall discuss the possibility of action in that direction.
Policies designed to reduce the extent of business fluctuations can hardly fail to affect the equilibrium or trend values about which the economy fluctuates. In what follows we shall therefore be concerned with the contribution that economic research has made or can make to both these aspects of public policy.
Stabilization policy can lead to three categories of government action: