Entrepreneurship, knowledge and employment

Balance mechanics and business cycles

Johannes Schmidt, Karlsruhe University of Applied Sciences

The concept of balance mechanics – developed by the German economist Wolfgang Stützel – is important for understanding important logical relations within an economy. Furthermore, although balance mechanics itself does not constitute a complete economic model it can also be used as a framework to compare seemingly quite different models of business cycles. Stützel has sketched some thoughts about how to develop a theory of business cycles by enriching balance mechanics with assumptions about economic behavior and about economic situations: He developed four “model cases” of business cycles: (I) a process of mutually self-financing (investment) expenditures; (II) a purely monetary explanation of business cycles via application of the (naïve) quantity theory; (III) business cycles resulting from (sectoral) surpluses and deficits that influence entrepreneurial profits; (IV) the importance of liquidity changes for business cycles when certain categories of expenditures are interest-sensitive. According to Stützel’s considerations, the different developments of a business cycle result from the interplay of two factors: do revenues and expenditures of economic subjects change in a synchronous manner? Do receipts and payments of economic actors change in a synchronous manner? This paper works out Stützel’s rather rudimentary considerations more systematically and shows how the theories of the business cycle Stützel had in mind are related to theories discussed today. It is shown that modern business cycle theories are examples of only two of his model cases – e.g. RBC as an example of model case (I) and New Keynesian Economics as an example of model case (IV) – whereas the financial crisis has shown that situations that are described by the model case (III) were crucial for the development and the severity of the crisis but were disregarded in many mainstream models. Therefore Stützel’s system points to a blind spot in macroeconomic models used before the crisis.

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Keywords: balance mechanics; business cycles; Wolfgang Stützel; model comparison

Paper file