Simpson (2014) on Methodological Objections to the Real Business Cycle Theory (Post 2 of 2)

I will make one last point on methodology before I start addressing specific RBC theories. RBC theorists, like Keynesians, use perfect competition in their analysis. The difference is that while Keynesians claim that the characteristics of perfect competition are not met (i.e., markets are “imperfect”), RBC theorists claim that they are and that fluctuations are a part of  competitive equilibrium and market clearing economic activity. RBC theorists accept the same false premise as Keynesian economists, they simply claim that the premise holds. RBC theorists, like Keynesians, need to reject the false premise and (among other things) embrace the sound theory of competition.

In a sense, RBC theory is worse than Keynesian “sticky price theory.” The Keynesians are right to claim that the characteristics of perfect competition do not hold in reality because these characteristics have nothing to do with the nature of competition. The RBC theorists are not deterred by this and claim that the business cycle consists of natural fluctuations within a perfectly competitive equilibrium. While it may seem plausible that expansions are consistent with market clearing economic activity, it is more difficult to believe this for contractions. This is the case in particular for severe contractions. Are we to believe that the recession of the early 1980s, the recession of 2008–9, and even the Great Depression were fluctuations in which markets cleared?

—Brian P. Simpson, Remedies and Alternative Theories, vol. 2 of Money, Banking, and the Business Cycle (New York: Palgrave Macmillan, 2014), 81-82.