J. R. Commons’ Business Cycle Theory

Abstract:

In Institutional Economics (1934), John R. Commons argued that insufficient profits and expectations based on the “profit‐margin” theory, not the “profit‐share” theory, were the primary causes of economic depressions. He also posited a business cycle theory to analyze historical global depressions and explained a pricing theory within the context of capitalism's historical development. Based on this discourse, Commons evaluated the economic actor that would receive the benefits of increased efficiency under different circumstances and determined that lowering the price from the buyer‐consumer's standpoint deprived producers of gains, while raising the price from the producer‐seller's standpoint deprived consumers of benefits. Thus, Commons concluded that prices should be stabilized, since they affect expected profits on which future production will be based, and the effects of supply and demand should be controlled using state power for a period of time to protect intangible properties. This makes macro‐economic policy an important tool in stabilizing the business cycle. According to Commons, we should safeguard public interest by stabilizing prices through macro monetary policy and protection of efficient producers’ profits.

Keywords::

• business cycle
• pricing theory
• expected profit
• rationing transactions

JEL Classification Codes::

• B25
• D21
• E31
• E32

Notes

1 See Tokutaro Shibata (2017) and Kota Kitagawa (2017) for a detailed explanation of profit‐share theory and profit‐margin theory.

2 Hiroyuki Uni (2019) analyzes Commons’ criticism of Wicksell's theory of interest. Uni focused on the influence of Ralph G. Hawtrey by comparing Commons (1928‐29), which was the early manuscript of Institutional Economics, with Institutional Economics (1934).

3 Kitagawa (2017) analyzes the difference between financial statement analysis and Institutional Economics regarding this point. According to him, Institutional Economics shows the present decision for the future, while financial statement analysis is a posteriori analysis.

4 See Ryuichiro Terakawa (2017) for details.

5 Commons explained the relationship between the two in Institutional Economics as follows: For example, at 10 cents per copy, 600,000 copies were sold, yielding $60,000 per week. At this time, he assumed that the margin for profit of this corporation was 3% of the selling price. This amounted to $1,800, leaving $58,200 as the total cost of production per week. Here, he assumed a decline of 1% per month, close to the rate of decline of commodity prices from 1929. He supposed that the debt of $58,200 was incurred at the beginning of the month and paid at the end of the month. If the prices fall 1% so that the gross sales fall from $60,000 to $59,400. On the other hand, the margin for profit fall from $1,800 to $1,200 ( = $59,400–$58,200). This difference ($600) is one‐third or 33%, of the first margin for profit ($1,800). Thus, a general fall in prices reduced the margin for profit 33% through a fall of 1% in the selling prices (Commons 1934, 577–579).

6 Commons said, “This is what we mean by Capitalism, double process of creating use‐value for others and restricting its supply so as to create scarcity‐value. Hence capitalism, unlike the Marxian Communism, requires two units of measurement, the man‐hour and the dollar” (Commons 1934, 284).

7 Uni explained that the concept of “proprietary scarcity” extended from 1927 to 1934. In the 1927 manuscript (Commons 1927), this concept meant only the control of supply by sellers. In 1934 (Commons 1934), this concept expanded to include both control of supply and demand for the sake of public welfare and public necessity (Uni 2014, 82).

8 As noted in previous studies (Ramstad 1996 and Takahashi 2006), the idea of rationing transactions has become a major difference between the transaction cost economics of Oliver E. Williamson and the institutional economics (transaction economics) of Commons. On the other hand, Glen Atkinson and Charles J. Whalen (2011) focus on the relationship between the monetary approach of Commons and the post‐Keynesian approach.

9 The first and second methods affect prices through bargaining transactions. The first method can increase proprietary scarcity by withholding supply or raise the price by using bargaining power if one is in a stronger position than the opponent. The second method can decrease the relative scarcity by restricting demand or decrease the price by using bargaining power if one is in a stronger position than the opponent.

10 Commons (1893a) and (1893b) insist that money should have elasticity.

11 See Whalen (1993), Takahashi (2008), and Youngku Koh (2013) about Commons’ monetary economics and monetary policy.

12 Takahashi (2017) analyzes the effect of the Great Depression on Commons’ institutional economics.

Additional information

Notes on contributors

Shingo Takahashi

Shingo Takahashi is a professor of Tokyo College of Transport Studies (Japan). This work was supported by JSPS KAKENHI Grant Number 18K01530.