CHAPTER 22

Notes on the Trade Cycle

Since we claim to have shown in the preceding chapterswhat determines the volume of employment at any time,it follows, if we are right, that our theory must be capableof explaining the phenomena of the Trade Cycle .

If we examine the details of any actual instance ofthe Trade Cycle , we shall find that it is highly com-plex and that every element in our analysis will be re-quired for its complete explanation. In particular weshall find that fluctuations in the propensity to consume,in the state of liquidity-preference, and in the marginalefficiency of capital have all played a part. But I sug-gest that the essential character of the Trade Cycle and,especially, the regularity of time-sequence and of dura-tion which justifies us in calling it a cycle, is mainly dueto the way in which the marginal efficiency of capitalfluctuates. The Trade Cycle is best regarded, I think,as being occasioned by a cyclical change in the marginalefficiency of capital, though complicated and oftenaggravated by associated changes in the other signifi-cant short-period variables of the economic system. Todevelop this thesis would occupy a book rather than achapter, and would require a close examination of facts.But the following short notes will be sufficient to indi-cate the line of investigation which our preceding theorysuggests.

i

By a cyclical movement we mean that as the systemprogresses in, e.g ., the upward direction, the forces313