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An abstract business cycle
The business cycle or economic cycle refers to the ups and downs seen somewhat simultaneously in most parts of an economy. They tend to repeat at fairly regular time intervals. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), alternating with periods of relative stagnation or decline (contraction or recession). These fluctuations are often measured using the real gross domestic product. Most observers find that the lengths of cycles (from peak to peak, or from trough to trough) vary, so that cycles are not mechanical in their regularity. Since no two cycles are alike in their details, some economists dispute the existence of cycles and use the word "fluctuations" (or the like) instead. Others see enough similarities between cycles that the cycle is a valid basis of studying the state of the economy. A key question is whether or not there are similar mechanisms that generate recessions and/or booms that exist in capitalist economies so that the dynamics that appear as a cycle will be seen again and again.
The main types of business cycles enumerated by Joseph Schumpeter and others in this field have been named after their discoverers or proposers:
- the Kitchin inventory cycle (3-5 years) -- after Joseph Kitchin.
- the Juglar fixed investment cycle (7-11 years) -- after Clement Juglar.
- the Kuznets infrastructural investment cycle (15-25 years) -- after Simon Kuznets, Nobel Laureate.
- the Kondratieff wave or cycle (45-60 years) -- after Nikolai Kondratieff.
Ed Dewey who formed The Foundation for the Study of Cycles studied cycles in everything including economic data. Based on Dewey's periods the cycles average periods are Kondratieff 53.3 years, Kuznets 17.75 years, Juglar 8.88 years, Kitchen an interaction of 2.96 years, 4.44 years and 3.39 years.
In the Juglar cycle, which is sometimes called "the" business cycle and is the main focus of this entry, recovery and prosperity are associated with increases in productivity, consumer confidence, aggregate demand, and prices. In the cycles before World War II or that of the late 1990s in the United States, the growth periods usually ended with the failure of speculative investments built on a bubble of confidence that bursts or deflates. In these cycles, the periods of contraction and stagnation reflect a purging of unsuccessful enterprises as resources are transferred by market forces from less productive uses to more productive uses. Cycles between 1945 and the 1990s in the United States were generally more restrained and followed political factors, such as fiscal policy and monetary policy. Automatic stabilization due the government's budget helped moderate the cycle even without conscious action by policy-makers.
Because the periods of stagnation are painful for many who lose their jobs, pressure arises for politicians to try to smooth out the oscillations. An important goal of all Western nations since the Great Depression has been to limit the dips, and until 2001 or so, a comparable period of economic malaise was avoided. Government intervention in the economy can be risky, however. For instance, some of Herbert Hoover's efforts (including tax increases) are widely, though not universally, believed to have deepened the depression. This was perhaps because his ideas were uninformed by Keynesian economics.
No-one argues that managing the money supply and fiscal policy to even out the cycle is an easy job in a society with a complex economy, even when Keynesian theory is applied. According to some theorists, notably nineteenth-century advocates of communism, this difficulty is insurmountable. Karl Marx in particular claimed that the recurrent business cycle crises of capitalism were inevitable results of the system's operations. In this view, all that the government can do is to change the timing of economic crises. The crisis could also show up in a different form, for example as severe inflation or a steadily increasing government deficit. Worse, by delaying a crisis, government policy is seen as making it more dramatic and thus more painful.
At least until the 1990s, many business cycles, including the Great Depression, social-democratic and new liberal forms have been introduced, such as the reforms of Franklin D. Roosevelt (the "New Deal"), in the hopes that they would be empowered to reduce the severity of the next cycle. Keynesian economics has been applied, off and on, by most of the "Western democracies". The result of this has been strong centralization of economic power in all Western democracies, and control of money by their central banks, often in alliance with their politically-powerful banking and financial sectors. It is also unclear whether or not the Marxian theses apply: was the U.S. and Western European stagflation of the 1970s a result of a doomed effort to suppress the crisis tendencies that Marx pointed to? was the dramatic recession of 2001 a re-assertion of tose tendencies?
The Austrian School rejects the suggestion that the business cycle is an inherent feature of an unregulated economy and argue that it is caused by intervention in the economy. They point the role of interest rates, as a price on investment capital, in setting investment decisions. Governmental control of the money supply through central banks means that interest rates are set artificially, and so the price of investment capital does not reflect the real demand for it. That is, the Austrians argue that, if the interest rate is artificially low, then the demand for loans will be higher than the actual supply of willing lenders, and if the interest is artificially high, the opposite situation will occur. The investors' lack of information causes them to misallocate capital, assigning either too much or too little to long-term projects. The business cycle, then, is seen as a periodic correction of this misallocation. The theory also predicts that protracted imposition of low interest rates will eventually lead to high levels of inflation, which prompts the central bank to increase rates, adding to the cyclical effect.
While most business cycle theory follows Keynes to stress the role of fluctuations of aggregate demand, including the multiplier and accelerator effects, the real business cycle models blame fluctuations in supply. While both of the these theories blame the economy for causing cycles, Michal Kalecki (http://cepa.newschool.edu/het/profiles/kalecki.htm)'s Marxian-influenced "political business cycle" theory blames the government: he argued that no democratic government under capitalism would allow the persistence of full employment, so that recessions would be caused by political decisions: persistent full employment would mean increasing workers' bargaining power to raise wages and to avoid doing unpaid labor, potentially hurting profitability. (He did not see this theory as applying under fascism.) In recent years, proponents of the "electoral business cycle" theory have argued that incumbent politicians encourage prosperity before elections in order to ensure re-election -- and make the citizens pay for it with recessions afterwards. Whatever the validity of this theory, the U.S. Federal Reserve seems to have encouraged most of the recessions in the United States between World War II and the year 2000 by raising interest rates.
Some argue that modern business cycle theory often measures growth by using the flawed measure of the economy's aggregate production, i.e., real gross domestic product, which is not useful for measuring well-being. Accordingly, there is a mismatch between the state of economic health as perceived by many individuals and that perceived by the bankers and economists, which most likely drives them further apart politically. However, unlike with issues of long-term economic growth, the economists and bankers may be right to use real GDP when studying business cycles. After all, it is fluctuations in real GDP, not those of measures of well-being, that cause changes in employment, unemployment, interest rates, and inflation, i.e. economic issues which are their main concern of business cycle experts.
Business cycle theory has been most effective in microeconomics where it aids in the preparation of risk management scenarios and timing investment, especially in infrastructural capital that must pay for itself over a long period, and which must fund itself by cashflow in late years. When planning such large investments, it is often useful to use the anticipated business cycle as a baseline, so that unreasonable assumptions, e.g. constant exponential growth, are more easily eliminated.
See also
External links
- Do business cycles really exist? (http://homepage.newschool.edu/het/essays/cycle/empirical.htm)
- Climate-driven cycles (http://homepage.newschool.edu/het/essays/cycle/climate.htm)
- Over-investment cycles (http://homepage.newschool.edu/het/essays/cycle/overinvestment.htm)
- Psychological & lead/lag cycles (http://homepage.newschool.edu/het/essays/cycle/psycho.htm)
- Monetary cycles (http://homepage.newschool.edu/het/essays/cycle/moneycycle.htm)
- Underconsumption theories (http://homepage.newschool.edu/het/essays/cycle/underconsumption.htm)
- Exogenous shock-based cycles (http://homepage.newschool.edu/het/essays/cycle/shock.htm)
- Keynesian theories of the cycle:
- Oxford/Cambridge theories (http://homepage.newschool.edu/het/essays/multacc/oxbridge.htm)
- Accelerator/multiplier theories (http://homepage.newschool.edu/het/essays/multacc/multintro.htm)
- Endogenous theories of the cycle (http://homepage.newschool.edu/het/essays/multacc/endogenous.htm)
de:Konjunktur fr:cycle économique
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