Business Cycle Analysis

Though the range of his investigations in economic theory and policy was very broad, Tugan-Baranovsky’s place in the history of economics is primarily due to his works on business cycles and crises.

An important part of the book was devoted to an empirical study of the history of English business cycles, which is impressive both in scope and depth. One of the most important topics discussed was the periodization of British economic history, specifying different sub-periods with regard to prevalent trade policy and monetary policy regimes, which affected the amplitude of cycles and crises.

The second part of the book was devoted to a critical analysis of existing theo­ries of gluts and business cycles and development of the author’s own concepts. Tugan-Baranovsky argued both against the position of the classical economists, who claimed that general overproduction was impossible (Say’s law), and against the position of their opponents, who pointed to the insolubility of the “realization problem” in the expanding capitalist economy (Malthus, Sismondi).

Like his contemporaries Tugan-Baranovsky did not provide any coherent theoretical model of business cycles, but explored several relevant issues, giving important impetus to subsequent research. One of the issues was the

antagonistic nature of the capitalist economy, with the workers considered only as a means of production. An inadequate distribution of income did not provide sufficient purchasing power to working classes. The large share of income, which was received by capitalists in the form of profits, had no immediate link to consumption and entailed a possible risk of crises. However, arguing against the theories which base the explanation of business cycles on underconsump­tion (Sismondi etc.), and using Marxian reproduction schemes, Tugan-Baranovsky showed that consumption does not set a limit on production because the driving force of capitalist production is not consumption but the accumulation of capital.

Crises are inevitable under capitalism because of the lack of any mechanism for coordi­nating different industries. This issue the author called “disproportionality”.

Another issue investigated by Tugan-Baranovsky in his theory of cycles was the interaction between two processes: the accumulation of real capital, mainly in industry and construction, and the movement of finance capital, primarily of the part he called free money capital or free loanable capital, stored in banks in the form of short-term or demand deposits. The sources of this capital, he believed, were the profits of those entre­preneurs who did not invest their capital in the areas where these profits were generated, but mostly the savings of those whose earnings were not directly associated with the busi­ness cycle. This meant that its accumulation was relatively stable. In the expansion phase of the business cycle these accumulated funds were spent for financing industrial projects and became exhausted raising the interest rates. However, during the contraction phase a large amount of liquid assets seeking profitable investment was accumulated. Because of the chaotic nature of the capitalist economy free loanable capital could not initially find profitable use, but when it became abundant enough to “break the resistance of industry” it was invested in industry. This ushered in the upward phase of the cycle.