Pioneer in the Scientific Study of Economics
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The work of Wesley Clair Mitchell is remembered because of his effort to make economics as precise as any of the physical sciences. This was no easy task, for unlike chemistry and physics whose natural laws enable us to predict events with some certainty, economics is a social science subject to the whims of individual and group behavior.
At the heart of Mitchell's work lay his effort to gather statistical data to describe and explain economic events. While statistics are an everyday tool for today's economists, this was not the case in the years before World War I when Mitchell began his professional career. The challenge facing him, therefore, was to suggest the kinds of data that ought :o be gathered, and describe how these statistics might be used to further understanding of the economy.
Wesley Mitchell's theories first received public attention in 1913 with the publication of Business Cycles, a book now regarded as a landmark in the history of economic thought because of its use of statistics and statistical models as economic tools.
The book suggests that in free enterprise systems, like the United States, the ups and downs of certain kinds of economic activities reflect trends in the economy as a whole. In other words, Mitchell explained that by studying fluctuations in things like profits, investment and employment economists could understand and predict changes in economic activity more accurately.
In 1920 he and other economists created the National Bureau of Economic Research with Mitchell as its director. Under his leadership, the organization pioneered in the study of national income and the business cycle. Their methods of collecting and using statistical data set a standard by which economic research is still measured.
What Causes Business Cycles?
For many years economists struggled to find a theory that would explain all business cycles. In one widely publicized effort, the 19th-century British economist, W. S. Jevons, linked them to sunspots. (Variations in the sun's atmosphere that may be associated with magnetic storms on the Earth.) According to Jevons' calculations the appearance of sunspots coincided with crop failures and recessions. But Jevons' conclusions were based on faulty astronomical data, and so other explanations had to be found.
In explaining business cycle fluctuations, today's economists often distinguish between external and internal events. External events are those outside the economic system that explain fluctuations in the business cycle. Internal events are those occurring within the economy itself. Let's explore some of these factors.
External Causes. External factors affect the economy much the same way a push sets a rocking horse in motion. Examples would include population changes, inventions and innovations, and wars and other significant political and social events.
· Population changes. Changes in population affect the demand for goods and services. Population increases can lead to increased production and employment levels that trigger expansion and boom. Population decreases are likely to have the opposite effect.
· Inventions and innovations. Major changes in technology, such as the development of the automobile, the airplane and the computer, have led to bursts of business activity and investment. This, in turn, was followed by increased employment opportunities and a period of expansion and boom.
· Wars and political events. Often such events affect the direction of the business cycle. The rise of Nazi Germany and the outbreak of World War II triggered American rearmament. As the nation rebuilt its armed forces, the Great Depression came to an end, and the economy entered a period of expansion and boom. In more recent years, the Arab oil boycott of the 1970's caused a downturn in the economy.
Internal causes. Internal causes of fluctuations are factors the economy likely to start an expansion or contraction of the business cycle. Three of these internal factors have to do with consumption, business investment, and government activity.
· Consumption. Business firms try to provide consumers with the goods and services they want. When consumer spending is on the increase, business firms hire additional help and increase their level of production. As production, employment and sales increase, the business cycle enters a period of expansion and boom. When consumer spending decreases, the opposite occurs. Production is reduced, workers are laid off, and the economy enters a period of contraction and recession.
· Business investment. Investment in capital goods like plant, tools and equipment, creates additional jobs, thereby increasing consumer purchasing power. The increase in spending generated by the initial increase in investment leads to still further investment, consumption and total production. When investment decreases, the opposite occurs and the economy enters a period of contraction.
· Government activity. Governmental policies can give the business cycle an upward or downward nudge. Government does this in two ways. One is through the use of its power to tax and spend. The other is by regulating the supply of money and credit in circulation. Economists describe government's ability to tax and spend as its fiscal powers, and its ability to regulate the supply of money and credit as its monetary powers.
The History of Economic Thought
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