1. THEORIES OF BUSINESS CYCLES
NON-MONETARY THORIES OF BUSINESS CYCLE
MONETARY THORIES OF BUSINESS CYCLE

2. I. SUNSPOT THEORY
This is the oldest theory of business cycle. It is associated with the name of W. Stanley Javons, that variations in the atmosphere of the sun. This affected the agricultural crops which in their turn influenced the level of business activity in the economy.
Agricultural crops
Production
Rainfall
industries

3. Ii. Psychological THEORY
This is associated with the name of prof. A.C. Pigou, who developed it in his well known work industrial fluctuations. According to this theory ,business fluctuations are the result of the waves of optimist and pessimist among businessmen and industrialists. In this way, the entire business community becomes optimistic-minded.
CRITICISM:
This is not a theory of business cycles in the true sense because it fails to explain the different phase of a business cycle.
It is fail to explain the period of a business cycle.
It neglects the role of various monetary factors which influence business expectorations
The theory does not explain full cause.

4. Iii. Overproduction THEORY
This theory is also known as the competition theory of business cycles. It has been put forward by socialistic-minded economists. This means there will be overproduction and the market will be flooded with large stocks of the commodity. The price of the commodity will fall in such a situation of overproduction. The same thing happens in the case of other commodity.

5. Iv. Over saving THEORY
It is known as the underconsumption theory of business cycle. It was propounded by socialistic-minded economists like major Douglas and J.A. Hobson. According to this theory, is the inequality of income that prevails in a capitalistic society. Thus, too much saving and too little consumption is the cause of business depression according to this theory.
Criticism:
It cannot just be explained in terms of a single cause – oversaving and underconsumption.
The saving of the rich automatically find their way into investment in industrial equipments

6. v. Innovation THEORY
The innovation theory is mainly the work of Joseph Schumpeter, a brilliant economist of the USA. By innovation theory he means the introduction of something new that changes the existing method of production. An innovation may consist of:
The introduction of a new product
The introduction of a new method of production
The opening of a new market
New source of a raw material

7. Criticism: Innovator not necessary for innovation
Innovations not the only cause of cycle
Full employment assumption unrealistic
Bank credit not the only source of funds

8. vi. cobweb Theorem
The cobweb theory of business cycles was propounded in 1930 independently by prof. H. Schultz of America. The cobweb theory is used to explain the demand , supply and price over long period of time.
Assumption:
Current demand
Current price
The commodity can be stored only for one year
Both demand and supply

9. Criticism: Not realistic Output not determined by price Not a theory
Continuous impractical

10. Ii. Monetary business cycles

11. I. hawtreys’ THEORY
According to Hawtrey the business cycle is a “purely monetary phenomenon”, according to this theory , is the basic cause of the operation of this business cycle.
Criticism:
Credit not the cause of cycle
Traders do not depend only on bank credit
Traders do not react to changes in interest rates
Do not explain period of cycle

12. Ii. Dr. Hayek‘s THEORY
F.A.Hayeks formulated his monetary over-investment theory of trade cycle. According to Hayek when the prices of factors are rising continuously, the rise in production costs bring fall in profits of producers.
Criticism:
Narrow assumption of full employment
Unrealistic assumption of equilibrium
Interest rate not the only determinant
Incomplete theory

13. iii. Keynesian THEORY
Keynes maintained that trade cycles are essentially caused by variations in the rate of investment due to the fluctuations in the efficiency of capital.
The keynesian effeciecny of capital depended mainly upon two factors:
Investment in the new assets
The supply price of the new assets
These two factors are based upon the psychology of investors.

14. Criticism:
Half of explanation
Psychological theory
No explanation of the trend of growth with business cycles
Neglects the theory of capital