What’s Real about Real Business Cycles Theory?

In the nineteenth and twentieth centuries economists usually thought they could perceive a pattern of cyclical movements in overall economic activity. These observed patterns of regularity came to be called “business cycles”.

When I began my economics studies in the 1970s a large part of the curricula were still devoted to teaching students elementa of these recurrent phases of macroeconomic processes.

Today – although we still often talk about “business cycles” – mainstream macromodels of “business cycles” do not really contain anything of what we used to mean by the unfolding of repetitive, periodic phases in the development of economies over time. Business cycles theory in academia today is rather about economicfluctuations set within microfounded macromodels where hyperrational representative actors optimize over time – and where the dividing line between more traditional growth theory and short-run economic ups and downs is more or less imperceivable

So, something rather drastic has happened on the way. I think one of the main reasons for the turn in focus and aspiration levels when it comes to business cycles theory has to do with the advent of the Real Business Cycles Theory in the 1980s. 

Real business cycles theory (RBC) basically says that economic cycles are caused by technology-induced changes in productivity. It says that employment goes up or down because people choose to work more when productivity is high and less when it’s low. This is of course nothing but pure nonsense – and how on earth those guys that promoted this theory could be awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is really beyond comprehension.

In yours truly’s History of Economic Theories (4th ed, 2007, p. 405) it was concluded that