CHAPTER II 



GENERATING CYCLES OF PRODUCTS AND PRICES i 



Summary 



The major features of economic cycles are traceable to three 

 primary laws: (1) the law of the generating cycle of raw materials, 

 which is due to a non-economic cause; (2) the law of demand for 

 raw materials, in consequence of which the generating cycle of 

 products originates a derived cycle of prices for raw materials; 

 and (3) the law of competitive price, according to which the prices 

 of finished goods in an open market tend to correspond with the 

 cost of production. 



A TELLING advance was made in the theory of eco- 

 nomic dynamics when crises were proved to be phases 

 of economic cycles. The spectacular features of crises 

 — panics, bankruptcies, collapse of prices, unemploy- 

 ment of labor, and subsequent general depression of 

 business — had for some time attracted attention and 

 ehcited innumerable theories as to their cause. A gen- 

 eral characteristic of these theories was the citing of 

 detached, non-recurring events as the separate cause of 

 each isolated crisis. A war, a failure of some conspicu- 

 ous establishment, an election, or a bad harvest were 

 among the supposed causes. With the development of 

 the theory of cycles the well-marked stages of pros- 

 perity, crisis, decline, and depression were described 

 and shown to be parts of a general rhythm of industry. 

 This more ample view of the vicissitudes of business 



^ This chapter was first published, substantially in its present form, 

 in the Quarterly Journal of Economics, February, 1921. 



