An overview and the pioneers

The traditional business cycle literature deals with economic fluctuations generated by the uncoordinated actions of private agents. During the century from the Napoleonic Wars to World War I many economies fluctuated systematically around their trend growth. Most researchers agree that these classical business cycles were generated by private agents (see Haberler 1937, 1958; Zarnowitz 1985). A large literature discusses how governments can diminish such fluctuations and stabilize the economy by providing coordination and steering.

However, it has often been shown that attempts to steer the economy have failed, sometimes because of mistakes, but more often because of political pressures and the interests of governments. Policies have been either inconsistent or defeated by other agents or exogenous shocks. Some think that the net result of all attempts to steer the economy is to make it less stable. The political business cycle (PBC) literature takes this view. Here the fluctuations are created by the government or by competition between the parties. A PBC is thus a business cycle generated by the political system. We shall cover only PBCs in developed democracies. Section 6.2 discusses the importance of PBCs compared with other business cycles.

The overview

The cycles are either (α) made deliberately or (β) occur because of the way the political system functions. PBCs of the a-type are made by a decisive agent who manipulates the economy to obtain an advantage.