Balance Mechanics and Business Cycles

Abstract

Many mainstream business cycle theories were not able to cope with the financial crisis theoretically. With his concept of balance mechanics, the German economist Wolfgang Stützel developed a framework for comparing different theories of business cycles which helps to understand the reasons for this inadequacy. This paper works out Stützel’s considerations and his four “model cases” of cycles more systematically and shows how the theories of the business cycle Stützel mentioned are related to theories discussed today. Modern business cycle theories did not cover all “model cases” and therefore had a blind spot.

Keywords:

• Balance mechanics
• business cycles
• quantity theory
• real business cycle theory
• New Keynesian macroeconomics
• Wolfgang Stützel

JEL CODES:

• B22
• E32
• E43
• E44
• E52

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Acknowledgements

I would like to thank three anonymous referees for their detailed and constructive suggestions. Furthermore, the participants of a seminar in 2017 at the Norwegian Business School (Oslo), of the 2017 FMM conference (Berlin), and of the 2018 ESHET conference (Madrid) made helpful comments. All remaining errors are my own.

Notes

1 His approach has certain similarities with the stock-flow consistent modelling in Post Keynesian theory (Godley and Lavoie 2007) but it would be beyond the scope of this paper to work out the relations between the two approaches.

2 The content of this section is mainly taken from Schmidt (2017), 44–49.

3 In a modern paper currency standard (in contrast to the gold standard), one can no longer demand something from the central bank; but as the emitted bank notes are still listed on the liability side of a central bank’s balance sheet it is counted as a liability.

4 Tangible assets or non-financial assets are goods of any kind that are used over a longer period: properties, houses, machines, but also the stock of finished or half-finished products. Immaterial assets like patents or the so-called “goodwill” of a firm shall also fall into that category although they are not tangible in a literal sense. The purchase or the production of such a tangible asset is called (net) investment.

5 “Group ‘and’ complementary group” together make up the aggregate economy.

6 Note that the stock of means of payment is not zero in the aggregate and that it can indeed also change in the aggregate: if a bank grants a loan to a customer, the customer’s account is simply credited with the amount of the loan; therefore, his/her stock of money (means of payment) increases, that is, he/she gets a receipt. But when crediting the customer’s account the bank newly creates these means of payment so that there is no decrease of money on the bank’s side.

7 “Veränderungen der Gesamtausgaben”(Stützel 1968, 1007).

8 This point will be taken up again in “Model case IV”.

9 Stützel did not formulate that in an optimising framework.

10 Barro talks about deposits but the banking system does not play a role in his model; therefore one can safely assume that the stock of money refers to outside money.

11 Formally, that can be done by introducing the so-called transversality condition that assumes that all accounts are always settled so that bankruptcies are excluded.

12 For a more detailed critique of Barro’s model using the tools of balance mechanics, see Schmidt (2017), 58–64.

13 These shocks may also increase (or diminish) the productive potential of an economy so that business cycles are not only about the degree of utilisation of a given productive potential. But as the shock to the potential also leads to cyclical movements there is nothing to be said against incorporating it in a business cycle theory.

14 In the original: “Da für die Gesamtwirtschaft prima facie keinerlei Korrelation zwischen Bestandsgröße und Strömungsgröße besteht, ist es durchaus der Normalfall, daß der Quotient aus Strömungsgröße (als Zähler) und Bestandsgröße (als Nenner), d.h. aber ‚die Umlaufsgeschwindigkeit’ beständig wechselt! Daß er irgendwann einmal konstant oder unabhängig gegeben wäre, wäre etwas durchaus Erstaunliches! Die Entwicklung trivialer Größenbeziehungen steht solchen empirischen Beobachtungen sicher nicht im Wege. Aber sie klärt, daß immer zunächst derjenige die Beweislast trägt, der irgend davon ausgeht, daß dieser Quotient fest gegeben wäre. Er hätte auch für die Beurteilung wirtschaftspolitischer Maßnahmen vor Anwendung seiner (auf Konstanz der Umlaufsgeschwindigkeit aufgebauten) Überlegungen erst zu beweisen, daß auch für die Situation nach diesen Maßnahmen die von ihm empirisch vermutete Regelmäßigkeit bleibt, daß also diese Regelmäßigkeit von den Maßnahmen unabhängig gegeben ist.”

15 The recent developments in macroeconomics after the crisis led to a greater emphasis on the importance of financial balances; for a survey see Gertler and Gilchrist (2018).

16 By consolidation, Stützel means: converting short-term debt, mainly bank loans, into long-term debt, mainly long-term securities.

17 In the original: “Dieser Fall zeigt, daß die ‚finanzielle Stabilität‘ der Gesamtwirtschaft und die ‚finanzielle Stabilität‘ der einzelnen Unternehmungen durchaus nicht immer so Hand in Hand zu gehen brauchen, wie es häufig dargestellt wird. Man sieht nämlich: Ein sehr günstiges Kapitalmarktklima kann gerade in dem Maße, in dem es den Unternehmungen die Konsolidierung ihrer Verschuldung erleichtert, also die finanzielle Stabilität der einzelnen Unternehmungen verbessert, dazu beitragen, daß die Gesamtausgaben übermäßig anwachsen, der Geldwert gefährdet, also die finanzielle Stabilität der Gesamtwirtschaft verschlechtert wird. Umgekehrt kann es sehr wohl sein, daß die Zentralbank die Konsolidierungsmöglichkeiten bewußt verschlechtern, also die finanzielle Stabilität der einzelnen Unternehmungen beeinträchtigen muß, um die Stabilität des Geldwerts zu erhalten und eine Übersteigerung der Konjunktur zu vermeiden”.