The policies of the business cycle are monetary theories designed to eliminate, elevate or minimize the fluctuations found in economic activity. These microeconomics policies control or minimize the recession phases within the business cycle. Economists believe that certain monetary theories can help governments control the expansion and retraction periods within the business cycle by controlling monetary government and banking policies. The most common business cycle theories used are Keynesian, Marxist and Austrian.
Many nations utilize Keynesian Theory to stabilize fluctuations in their business cycles. Economist John Maynard Keynes developed the Keynesian microeconomic theory. In his 1936 book, "The General Theory of Employment, Interest and Money", Keynes put forth the theory that recessions and expansions of the economy are caused by the fluctuations in the demand for products and services.
Keynes theorized that when a recession occurs, governments could minimize the length or damage caused from the downturns by increasing the supply of money, increasing government spending or by cutting taxes to control consumer demand and positively manipulate fluctuations in the business cycle.
Karl Marx was a philosopher who believed that fluctuations within the business cycle were an organic part of a capitalistic economy caused by worker exploitation. Marx published a number of manuscripts outlining these beliefs in a series now called “The Economic and Philosophic Manuscripts of 1844”. Marx’s theories became the foundations for socialist theory that later became the governmental model of communism.
Marxist economists believe that fluctuations in the business cycle end by eliminating the pursuit of business profits. Marxists remove the need for profit by prohibiting privately held businesses and replacing them with government held companies. Marxist’s economies collect all of the monetary supply and then redistributing the money based upon a centralized plan.
The Austrian Theory
The Austrian Theory uses supply-side monetary controls to level the fluctuations in the business cycle. The theory believes that fluctuations in the business cycle result from bank interest rate fluctuations combined with cash reserve banking policies. For example, low interest rates encourage borrowers, causing banks to use large portions of their liquid assets for credit lending, thereby making themselves vulnerable to defaults.
Noble Prize-winning economist Friedrich von Hayek was a primary proponent of this theory, but it did not become a popular way to control business cycles until the mid-1970s when inflationary pressures caused the U.S. government to remove the dollar from the gold standard to lower inflation rates and move the business cycle out of recession.