Wesley Mitchell and the American institutionalist theory of business cycles

Wesley Mitchell: The Intellectual Founder of the Modern Business Cycle

Brief Biography

Wesley Mitchell is one of the intellectual founders of the American Institutionalist School, a theory of economics that developed the late 1880s in the United States, and one of the first schools of thought to challenge some of the core assumptions of classical capitalist market theory. The classical school stressed that economics was a universal and exact science, applicable to all historical contexts. In contrast, American Institutionalists such as Mitchell "stressed the importance of historical, social and institutional factors" in economics. (Institutionalists, 2006, New School of Social Research) There were no hard and fast laws of economics. Rather markets were contingent on variable historical factors over which individual people had little direct control. "Much of everything in the economic world, they argued, was not immutable but rather conditioned by the influence of an always changing history -- whether acting on the individual directly, or indirectly through the institutions and society which surround him," or her. (Institutionalists, 2006, New School of Social Research)

Wesley Clair Mitchell was instrumental in focusing this new school of thought around a revamping of business cycle analysis, while he was a professor at Columbia, and later one of the first directors of the New School of Social Research. He also founded the National Bureau on Economic Research (NBER) in 1920 one of the first independent organizations to regularly conduct quantitative studies of the U.S. business cycle. (Wesley Mitchell, 2006, New School of Social Research)

Final Thoughts

One question that arises about the business cycle is whether the theory creates the cycle. In other words, if people are expecting a recession, or a downturn in the seasonal business cycle, do they create the recession by refusing to spend money, contracting economic production, and thus causing a downturn in unemployment? One argument against this that Mitchell would point to is that downturns occurred in the business cycle even before people believed they exist. However, the existence of organizations such as the National Bureau of Economic Research, which market analysts and businesspeople consult to know whether they should buy or sell stock, increase or decrease production, might make shifts in the business cycle appreciably more catastrophic, as the belief helps generate the cycle. In short, although Mitchell did not discover business cycle, and although the data compiled by the organization he founded may be helpful, it may also exacerbate some of the tendencies he hoped to guard against, through prediction and planning.