Transformational Growth and the Business Cycle

Recent debates over the changing volatility of the business cycle have concentrated on the possible effects of government policy, and have paid little attention to differences in the character of the economy in different periods. Yet its character has changed dramatically from pre-World War I to post-World War II. Prices, money wages, output and employment exhibit different patterns, and move differently relative to one another among periods. The structure of the economy is different, as is the nature of business organization. The role of government, and its relation to the rest of the economy, changes completely. Broadly speaking, market adjustments in the earlier period follow Marshallian patterns, while those of the latter are Keynesian. These changes can be examined in the framework provided by the theory of "transformational growth." From this perspective both sides in the debates over volatility appear to have misunderstood the changing role of government.