Psychological Theory of the Business Cycle

a bourgeois theory that attempts to explain the alternation of phases in the capitalist business cycle in terms of subjective psychological factors.

The psychological theory of the business cycle was widely held in the late 19th century. The English economist W. S. Jevons believed that cyclical economic crises were purely psychological phenomena. In his opinion, the development of the cycle depended on the alternation of moods of melancholy, optimism, agiotage (speculative fever), disillusionment, and panic. In the early 20th century the psychological theory of the business cycle was worked out in detail by the English economist A. Pigou, who believed that the changing assumptions of entrepreneurs regarding future market conditions play a key role in the cyclical fluctuations of capitalist reproduction. According to Pigou, a crisis of overproduction is the result of an accumulation of “errors of optimism” in the business world.

Keynesian concepts prevail among contemporary bourgeois theories of the capitalist business cycle, and the psychological theory is part of Keynesian economics. According to the English economist J. M. Keynes, during boom periods exaggerated expectations win out over sound calculations. By contrast, under the conditions of an economic crisis, entrepreneurs lose faith in the possibility for the intensive expansion of production. The course of the capitalist business cycle is influenced by a number of “psychological determinants”—in particular, the basic psychological law that brings about a decline in the marginal propensity to consume, as well as subjective factors associated with the preference for liquidity that characterizes the owners of monetary capital. In Keynesian conceptions of the capitalist cycle, entrepreneurs’ assessments of the marginal efficiency of capital are especially important. In Keynes’ opinion,” these assessments depend on the psychology of the business world, which is not subject to control or direction.

Mathematical models of the capitalist business cycle, which are popular in Western economics, tend to take “expectations” into account as a special factor. In this context, the term “expectations” means the judgments of entrepreneurs regarding the possible expansion or contraction of market demand and changes in prices and market rates on loans. A subjective idealist methodology is strongly characteristic of endeavors to explain the cyclical character of capitalist reproduction in terms of the alternation of waves of optimism and pessimism or other psychological factors. According to the psychological theory of the business cycle, crises are the result not of the objective economic laws inherent in capitalism but of the alternation of optimistic and pessimistic expectations inherent in human nature. Thus, the problem of the capitalist business cycle is removed from its historical and social context. The psychological theory of the business cycle blames not the capitalist economic system but people’s changing moods and other behavioral characteristics for the destructive phenomena associated with cutbacks in capitalist production, for the critical drop in the incomes of the working people, and for rising unemployment.

Marxist-Leninist economic theory has never denied the role of psychological factors in the development of the capitalist cycle. The operation of these factors is very graphically manifested, for example, during stock market panics, in the worsening of credit and monetary crises, and at times when bank deposits are wiped out on a mass scale. However, the cyclical course of the reproduction of social capital is determined not by psychological factors but by the basic contradiction of capitalism—the contradiction between the social character of production and private capitalist acquisition. The antiscientific character of the psychological theory of the business cycle is evident in its absolutization of “psychological determinants” and its failure to recognize their derivative quality. In reality, a mass change of mood is always the result of objective economic processes activated by an abrupt worsening of the contradictions of capitalist reproduction.