Psychological theories of the business cycle: a critique

Arkadiusz Sieroń

Chapter 3 in Rationality, Psychology and Capitalism, 2026, pp 62-76 from Edward Elgar Publishing

Abstract: This chapter examines in detail a particular application of psychology in economics, namely the psychological theories of the business cycle. I point out a number of problems faced by such theories. In particular, I argue that they: violate the proper methodology of economics; ignore important economic factors; appeal to psychological phenomena, but do not adequately explain their genesis, their course, and why they should result in business cycles; assume a causal relationship from mental states to objective market reality, introducing changes in mental states as diabolus ex machina; do not adequately explain all features of business cycles; ignore the concept of the invisible hand and systemic (ecological) rationality; constitute ex post narratives about particular business cycles rather than general theories that allow for predictions; and assume a dubious view of human nature. These issues seriously undermine the validity of the psychological theories of the business cycle, strengthening the argument that economics should not become more psychological.

Keywords: Animal Spirits; Business Cycle; Optimism and Pessimism; Psychological Theories of Business Cycle; Theory of Business Cycle (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035394005
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