Business Forecasting and the Development of Business Cycle Theory

Abstract

This article makes the point that business practitioners' forecasting of the business cycle was ahead of business cycle theorizing for many years. Theorists of the 1930s and 1940s were not yet ready to incorporate into their theories the business forecasting methods that had become widespread entrepreneurial practice. Instead, theorists either speculated on business psychology or built tractable dynamic mathematical models with accelerator type investment. However, by the 1940s, a model of the cycle with forward-looking investors might actually have been developed. I present and analyze such a model and discuss how economic theory and economic policy might have developed if the notion of perfect foresight had been incorporated into business cycle theorizing along these lines.

Keywords: Business cycle forecasting, investment modeling, perfect foresight

JEL Classification: B1, B22, E32