Veblen’s and Mitchell’s Profit Theory of Business Cycles

Abstract

The work of Thorstein Veblen and Wesley Mitchell has a prominent position in business cycle theory. Veblen developed a theory of firms’ life cycle to explain market fluctuations; Mitchell devised empirical tools to study their inner motion and to monitor them. Both stressed economy-wide institutions in explaining the self-generating nature of fluctuations. To understand Veblen’s and Mitchell’s unique contributions, it is important to examine the state of business cycle theory in the first decades of the twentieth century, and the similarities and differences between Veblen’s and Mitchell’s tenets. The role of firms’ expected profits in the generation of business cycles is a crucial linking principle. This paper explores the evolution of business cycle theories from early studies of exogenous shocks in economic performance to syntheses of endogenous explanations by Veblen and Mitchell. Special emphasis is placed on the split among business cycle theorists into real variable theorists and monetarists, and the existence of the profit theory within the monetary school.