business cycle , also known as economic cycle or trading cycle , is the downward and upward movement of gross domestic product (GDP) around the trend long-term growth. The length of the business cycle is the time period that contains one explosion and contraction in sequence. This fluctuation usually involves a shift from time to time between relatively fast periods of economic growth (expansion or boom), and periods of relative stagnation or decline (contraction or recession).
The business cycle is usually measured by considering the growth rate of real gross domestic product. Although term cycles are often applied, these fluctuations in economic activity do not show uniform or predictable periodicity.
The common or popular use of boom-and-bust cycle refers to fluctuations in which expansions are rapid and heavy contractions.
Video Business cycle
History
Theory
The first systematic exposition of the periodic economic crisis, contrary to the existing theory of economic equilibrium, was 1819 by Jean Charles LÃÆ' Â © onard de Sismondi. Prior to that, the classical economy denied the existence of business cycles, blaming them on external factors, especially war, or just studying the long term. Sismondi found justification in the Panic of 1825, which was the first undeniable international economic crisis, which occurred in peacetime.
Sismondi and his contemporary Robert Owen, who expressed the same but less systematic thinking in 1817 Report to the Association Committee for the Assistance of the Poor Manufacturers, both identified the causes of the economic cycle as overproduction and underconsumption, mainly due to inequality wealth. They advocate government intervention and socialism, respectively, as a solution. This work did not arouse interest among classical economists, although the theory of consumption-less developed as a heterodox branch in the economic field until it was systematized in the Keynesian economy of the 1930s.
The sismondi theory of the periodic crisis developed into a theory of alternating cycles by Charles Dunoyer, and similar theories, which show signs of influence by Sismondi, developed by Johann Karl Rodbertus. The periodic crisis in capitalism forms the basis of Karl Marx's theory, which further states that these crises are increasing in severity and, on what basis, he foresaw the communist revolution. Although it only provides references in the Capital of Capital (1867) referring to the crisis, they are extensively discussed in the books published by Marx posthumously, especially in Surplus Value Theory . In Progress and Poverty (1879), Henry George focuses on the role of land in crisis - especially land speculation - and proposes a single tax on land as a solution.
Classification by period
In 1860, the French economist, Clement Juglar, first identified the economic cycle of 7 to 11 years, although he was careful not to claim rigid order. Later, economist Joseph Schumpeter (1883-1950) argued that the Juglar cycle had four stages:
- expansion (increased production and prices, low interest rates) Crisis
- (stock market stalled and many corporate bankruptcies going on) recession
- (decrease in price and output, high interest rate)
- recovery (stocks recovered due to falling prices and revenues)
The Juglar Schumpeter model links recovery and prosperity with increased productivity, consumer confidence, aggregate demand, and prices.
In the twentieth century, Schumpeter and others proposed a typology of business cycles according to their periodicity, so that certain cycles were named after their inventor or proposer:
- the Kitchin inventory cycle from 3 to 5 years (after Joseph Kitchin);
- the fixed investment cycle of Juglar for 7 to 11 years (often identified as "business cycle")
- Kuznets infrastructure investment cycle of 15 to 25 years (after Simon Kuznets - also called "building cycle")
- Kondratiev wave or technology cycle length of 45 to 60 years (after Soviet economist Nikolai Kondratiev).
Interest in the different typology of cycles has faded since the development of modern macroeconomics, giving little support to the idea of ​​regular periodic cycles.
Accurate business cycle classification
In the 21st century, Ledenyov's discrete-time digital business cycle was invented, making it possible to precisely characterize the oscillations of economic output in space of amplitude, frequency, phase, time and polarization.
Genesis
There was a major increase in productivity, industrial production and per capita real products over the period from 1870 to 1890 including the Long Depression and two other recessions. There was also a significant increase in productivity in the years leading up to the Great Depression. Both Long and Great Depression are characterized by overcapacity and market saturation.
During the period since the Industrial Revolution, technological advances have far greater effects on the economy than the fluctuations in credit or debt, the main exception being the Great Depression, which led to a very sharp economic downturn for several years. The effects of technological advances can be seen by the purchasing power of the average hours work, which has grown from $ 3 in 1900 to $ 22 in 1990, measured in dollars in 2010. There was a similar increase in real wages during the 19th century. (see) Increased technological productivity (historical). .) A table of innovations and long cycles can be seen in: Kondratiev waves Ã,§ Modern modifications to the theory of Kondratiev.
There is often a crisis in Europe and America in the 19th and early 20th centuries, especially the period 1815-1939. This period began from the end of the Napoleonic wars in 1815, which was soon followed by post-Napoleonic depression in England (1815-30), and culminated in the Great Depression of 1929-1939, which led to World War II. See Financial crisis: 19th century for list and details. The first of these crises not related to war is Panic of 1825.
Business cycle in OECD countries after World War II is generally more controllable than the previous business cycle. This is especially true in the Golden Age of Capitalism (1945/50-1970s), and the period 1945-2008 did not experience a global decline until the late 2000s recession. Economic stabilization policies using fiscal policy and monetary policy appear to have reduced the worst excesses of the business cycle, and automatic stabilization as the budget aspect of the government also helps to mitigate cycles even without the conscious action of policymakers.
In this period, the economic cycle - at least the problem of depression - twice declared dead. The first declaration was in the late 1960s, when the Phillips curve seemed capable of controlling the economy. However, this was followed by stagflation in the 1970s, which discredited the theory. The second declaration was in the early 2000s, following the stability and growth of the 1980s and 1990s in what came to be known as the Great Moderation. In particular, in 2003, Robert Lucas, in his presidential address to the American Economic Association, stated that "the main problem of prevention of depression has been solved, for all practical purposes." Unfortunately, this is followed by the 2008-2012 global recession.
Different areas have experienced a depressive, most dramatic economic crisis in the former Eastern Bloc countries after the end of the Soviet Union in 1991. For some of these countries the period 1989-2010 has become an ongoing depression, with real income still lower than in 1989. This was not associated with cycle patterns, but on the mismanaged transition from command economy to market economy.
Maps Business cycle
Identifying
In 1946, economists Arthur F. Burns and Wesley C. Mitchell gave the definition of the current standard business cycle in their book Measuring the Business Cycle :
The business cycle is the kind of fluctuation found in the aggregate economic activity of countries governing their work especially in business firms: the cycle consists of expansion occurring at the same time in many economic activities, followed by the same general recession, contraction, and revival joining the expansion phase of the next cycle; in duration, business cycles vary from over a year to ten or twelve years; they are not divided into shorter cycles of characteristics similar to their own near-amplitude.
Menurut A. F. Burns:
The business cycle is not just a fluctuation in aggregate economic activity. An important feature that sets them apart from commercial convulsions in previous centuries or from other seasonal and short-term variations of our day is that fluctuations are widespread throughout its economies, its commercial transactions, and its financial clutter. The western world economy is a system that is closely interlinked. He who will understand the business cycle must master the workings of a massively organized economic system in a network of free-for-profit businesses. The problem of how business cycles arise is therefore inseparable from the problem of how capitalist economic functions are.
In the United States, it is generally accepted that the National Economic Research Bureau (NBER) is the last referee of the peak date and trough the business cycle. Expansion is the period from trough to peak, and recession as a period from peak to trough. NBER identified the recession as a "significant decline in economic activity spread across the economy, lasting more than a few months, usually seen in real GDP, real income, employment, industrial production".
Turning points on business cycles, commodity prices, and freight rates
There is often a close time relationship between the upper turning point of the business cycle, commodity prices and freight rates, which proved very strict in the great peak years of 1873, 1889, 1900 and 1912.
Spectral analysis of the business cycle
Recent research using spectral analysis has confirmed the existence of Kondratiev waves in the dynamics of world GDP at an acceptable level of statistical significance. Korotayev & amp; Tsirel also detected a shorter business cycle, estimating Kuznets about 17 years and calling it a third sub-harmonic of Kondratiev, which means there are three cycles of Kuznets per Kondratiev.
Cycles or fluctuations?
In recent years economic theories have moved toward the study of economic fluctuations rather than a 'business cycle' - although some economists use the phrase 'business cycle' as a convenient abbreviation. For example, Milton Friedman says that calling the business cycle a "cycle" is wrong, because of its non-cyclical nature. Friedman believes that for the most part, excluding the enormous supply shock, the decline in business is more a monetary phenomenon.
Explanation submitted
The explanation of fluctuations in aggregate economic activity is one of the main concerns of macroeconomics. The main framework for explaining these fluctuations is the Keynesian economy. In Keynesian view, the business cycle reflects the possibility that the economy can achieve short-run equilibrium at the level below or above full employment. If the economy operates with less than full employment, that is, with high unemployment, Keynesian theory states that monetary policy and fiscal policy can have a positive role to play in leveling fluctuations in business cycles.
In addition to the Keynesian explanation there are a number of alternative theories of business cycles, mostly related to certain schools or theorists in a heterodox economy. A common alternative in mainstream economics is the real business cycle theory. Today other important theories are credit-based explanations such as debt deflation and the hypothesis of financial instability. The latter two are interested in being able to explain the subprime mortgage crisis and the financial crisis.
Exogen vs. endogenous
In the mainstream economy, external (exogenous) versus internal (endogenous) debates are the cause of economic cycles, with classical schools (now neo-classics) arguing for exogenous causes and schools lacking consumption (now Keynesian) arguing for endogenous causes. It can also be broadly categorized as the "supply-side" and "demand-side" explanation: the supply-side explanation may be laid out, following Say's law, as it argues that "supply creates its own demand," while demand-side commentaries argue that effective demand may fail supply, resulting in recession or depression.
This debate has important policy consequences: proponents of exogenous causes of crises such as neoclassicals largely argue for minimalist policy or regulation (laissez faire), as there are no external shocks, market functions, while proponents of endogenous crises such as Keynesians largely argue for policy and greater government regulation, because there is no regulation, the market will move from crisis to crisis. This division is not absolute - some classics (including Say) argue for government policy to reduce economic cyclical damage, despite believing in external causes, while Austrian School economists argue against government involvement as only exacerbating the crisis, despite believing in internal causes.
The view of economic cycles as the cause of the exogenous date of the Law of Say, and much of the debate about the endogenous or exogenous causes of the economic cycle is framed in terms of refuting or supporting Say's law; this is also referred to as the "general satiety" (supply in relation to the demand) debate.
Until the Keynesian revolution in the mainstream economy after the Great Depression, classical and neoclassical explanations (exogenous causes) are the main explanations of the economic cycle; following the Keynesian revolution, the neoclassical macro economy was largely rejected. There is some resurgence of the neoclassical approach in the form of real business cycle theory (RBC). The debate between Keynesians and neo-classical supporters bounced back after the 2007 recession.
Mainstream economists working in neoclassical traditions, in opposition to the Keynesian tradition, usually see the departure from harmonious work of the market economy as a result of exogenous influences, such as the State or its regulations, trade unions, business monopolies, or shocks due to technology or natural causes.
By contrast, in the heterodox traditions of Jean Charles LÃÆ'Â © onard de Sismondi, Clement Juglar, and Marx, the progress and decline of a repeating market system is an endogenous characteristic of it.
The 19th century of consumption-less also posited endogenous causes for business cycles, particularly the austerity paradox, and today this heterodox school has entered the mainstream in Keynesian economics through the Keynesian revolution.
Keynesian
According to Keynesian economics, fluctuations in aggregate demand cause the economy to achieve short-term balance at different levels of the rate of full employment creation. These fluctuations express themselves as observed business cycles. Keynesian models do not necessarily mean periodic business cycles. However, a simple Keynesian model involving Keynesian multiplier interactions and accelerators leads to a cyclical response to initial shocks. Paul Samuelson's "Oscillator Model" should take account of the business cycle thanks to multipliers and accelerators. The amplitude of variation in economic output depends on the level of investment, for investment determines the level of aggregate output (multiplier), and is determined by aggregate demand (accelerator).
In the Keynesian tradition, Richard Goodwin describes the cycle in output with the income distribution between business profits and worker wages. Wage fluctuations are similar to employment levels (the wage cycle is one period behind the work cycle), because when the economy is at high employment, workers can demand wage increases, whereas in high unemployment periods, wages tend to fall. According to Goodwin, as unemployment and business profits increase, output increases.
Credit/debt cycle
One alternative theory is that the main cause of the economic cycle is due to the credit cycle: net credit expansion (private credit increase, equivalent to debt, as a percentage of GDP) results in economic expansion, while net contraction leads to a recession, and if it continues, depression. In particular, the explosion of speculative bubbles is seen as a direct cause of depression, and this theory puts finances and banks at the center of the business cycle.
The main theory in this case is the debt deflation theory of Irving Fisher, which he proposes to explain the Great Depression. A newer complementary theory is the Financial Finance Hypothesis of Hyman Minsky, and credit cycle economic theory is often associated with Post-Keynesian economics such as Steve Keen.
The post-Keynesian economist Hyman Minsky has proposed an explanation of cycles based on fluctuations in credit, interest rates, and financial weakness, called Financial Hipstability. In an expansionary period, interest rates are low and companies easily borrow money from banks to invest. Banks do not hesitate to lend to them, because the expansion of economic activity allows businesses to increase cash flow and therefore they can easily repay the loans. This process causes the company to become in debt, so they stop investing, and the economy is in recession.
While the causes of credit have not been the main theories of economic cycles within the mainstream, they have sometimes received attention, such as (Eckstein & Sinai 1986), cited by approving by (Summers 1986).
Carlota Perez blamed "financial capital" for excessive speculation, which he said might occur in the "tumultuous" stage of new technologies, such as computers, the internet, dot.com mania 1998, and bust. Perez also said excessive speculation is likely to occur in the mature phase of the technological age.
Real business cycle theory
In the mainstream economy, the Keynesian view has been challenged by a real business cycle model in which fluctuations are caused by technological shocks. This theory is most closely related to Finn E. Kydland and Edward C. Prescott, and more generally the Chicago economic school (fresh water economy). They consider that the economic crisis and fluctuations can not come from monetary shocks, only from external shocks, such as innovation.
Product-based economic cycle theory
This theory explains the nature and causes of the economic cycle from the point of view of the life cycle of marketable goods. This theory is derived from the work of Raymond Vernon, which describes the development of international trade in terms of product life cycle - a period of time in which the product circulates in the market. Vernon states that some countries specialize in the production and export of new technological products, while others specialize in the production of familiar products. The most developed countries are able to invest large sums of money in technological innovation and produce new products, thus gaining a dynamic comparative advantage over developing countries.
Recent research by Georgiy Revyakin proves Vernon's early theory and shows that the economic cycle in developed countries overcame the economic cycle in the developing world. He also considers that economic cycles with different periodicities can be compared with products with different life cycles. In the case of Kondratiev waves the product is correlated with the fundamental findings that are implemented in production (the invention that forms the technology paradigm: Richard Arkwright engine, steam engine, industrial electricity use, computer invention, etc.); The Kuznets cycle describes products such as infrastructure components (roads, transport, utilities, etc.); The juglar cycle can run parallel to the firm's fixed capital (equipment, machinery, etc.), and the Kitchin cycle is characterized by changes in the people's preferences (tastes) for consumer goods, and the time, necessary to start production.
Simultaneous technological updates by all economic agents (as a result, cyclical formation) will be determined by highly competitive market conditions: in the case that the manufacturing technology of a company does not meet the current technological environment, the firm loses its competitiveness and eventually goes bankrupt.
Political-based business cycle
A bunch of other models try to get the business cycle from political decisions. The partisan business cycle shows that the cycle results from successive elections of administration with different policy regimes. Regime A adopted an expansionary policy, which resulted in growth and inflation, but it was decided out of the office when inflation became too high. His successor, Regime B, adopted a contractionary policy that reduced inflation and growth, and swings the cycle down. Chosen out of office when unemployment is too high, replaced by Party A.
The political business cycle is an alternative theory which states that when the administration of any color is chosen, it initially adopts a contractionary policy to reduce inflation and gain a reputation for economic competence. It then adopted an expansionary policy ahead of the next election, hoping to achieve inflation and low unemployment simultaneously on election day.
Political business cycle theory is closely related to the name of Micha? Kalecki who discussed "industry captain 'aversion' to receiving government intervention on job matters." Continuous ongoing employment will mean improving the bargaining power of workers to raise wages and avoid undertaking unpaid work, potentially hurting profitability. (He does not see this theory as an application under fascism, which would use direct force to destroy the power of labor.) In recent years, proponents of the "election cycle" theory have argued that ruling politicians encourage prosperity before elections to reassure-selection - and make residents pay him with the recession afterwards.
Marxian Economy
For Marx, an economy based on commodity production for sale on the market is intrinsically vulnerable to crises. In the heterodox Marxist view, profit is the main engine of the market economy, but business profitability (capital) tends to fall which sequentially creates a crisis, where mass unemployment occurs, business fails, centralized and concentrated capital remain and profitability recovers.. In the long run, this crisis tends to be more severe and the system will eventually fail.
Some Marxist writers such as Rosa Luxemburg regarded the lack of purchasing power of workers as the cause of supply tendencies being greater than demand, creating crises, in models of similarity to Keynesians. Indeed, a number of modern writers have tried to combine the views of Marx and Keynes. Henryk Grossman reviews the debates and propensity of opposition and Paul Mattick then emphasizes the fundamental difference between Marxian and Keynesian perspectives: while Keynes sees capitalism as a viable and vulnerable system of efficient regulation, Marx sees capitalism as a historically doomed system that can not be placed in under the control of society.
American mathematician and economist Richard M. Goodwin formulated a model of the Marxist business cycle, known as the Goodwin Model in which recession is caused by increased bargaining power (the result of high employment in the boom period) pushing the wage share of national income, suppressing profits and leads to damage to capital accumulation. Then the theorists who applied the variant of the Goodwin model have identified a cycle of growth and distribution of short and long term benefits and growth in the United States, and elsewhere. David Gordon gives the Marxist model a long period of institutional growth cycle, in an attempt to explain Kondratiev waves. This cycle is due to the periodic details of 'accumulated social structure' - a set of institutions that secure and stabilize capital accumulation.
Austrian School
Economists from the heterodox Austrian School argue that the business cycle is caused by the over-issuing of credit by banks in the fractional reserve banking system. According to the Austrian economist, excessive bank credit issuance can be exacerbated if the central bank's monetary policy sets the interest rate too low, and the expansion resulting from the money supply leads to a "boom" in which resources are misused or "invested" because of the low artificiality. interest rate. Finally, the boom can not be sustained and followed by "bust" where malinvestment is liquidated (sold for less than their original cost) and money supply contract.
One critique of Austria's business cycle theory is based on the observation that the United States experienced repeated economic crises in the 19th century, especially Panic of 1873, which occurred before the formation of the US central bank in 1913. Austrian schoolchildren, such as historian Thomas Woods, that the previous financial crisis was driven by the efforts of the government and bankers to expand credit regardless of the restrictions imposed by the prevailing gold standard, and thus consistent with the Austrian Business Cycle Theory.
Austria's explanation of the business cycle differs significantly from the general understanding of the business cycle and is generally rejected by mainstream economists. Mainline economists generally do not support the explanation of Austrian schools for business cycles, both on theoretical and real-world grounds. Austria routinely claims that the boom-and-bust business cycle is almost always caused by government intervention into the economy, but otherwise is a rare and mild phenomenon.
Results curve
The slope of the yield curve is one of the most powerful predictors of economic growth, inflation, and recession in the future. One measure of the slope of the yield curve (ie the difference between the 10-year Treasury bond rate and the 3-month Treasury bond rate) is included in the Financial Stress Index published by St. Louis Fed. Different tilt sizes (ie the difference between the 10-year Treasury bond rate and federal funds rate) are incorporated into the Leading Economic Indicator Index published by The Conference Board.
Reversed reciprocal curves are often a sign of recession. Positive yield curves often signal the growth of inflation. The work by Arturo Estrella and Tobias Adrian has established the predictive power of the reverse yield curve to mark the recession. Their model shows that when the difference between short-term interest rates (they use 3-month T-Bills) and long-term interest rates (10-year Treasury bonds) at the end of the federal reserve binding cycle is negative or less than 93 basis points positive that an increase in unemployment is usually happen. The New York Fed publishes a prediction of the probability of a monthly recession derived from the yield curve and based on Estrella's work.
All recessions in the US since 1970 (until 2017) have been preceded by reversed yield curves (10 years vs. 3 months). Over the same time span, any occurrence of reversed yield curves has been followed by a recession as stated by the NBER business cycle dating committee.
Estrella and others have postulated that the yield curve affects the business cycle through bank balance sheets (or bank-like financial institutions). When the yield curve is reversed the banks often get caught paying more on short-term deposits (or other forms of short-term wholesale funding) than they make on long-term loans that lead to loss of profitability and reluctance to lend to produce credit crunch. When the yield curve tilts upward, the bank can profitably take short term deposits and make long-term loans so they want to give credit to the borrower. This eventually leads to a credit bubble.
Georgisme
Henry George claims land price fluctuations are the main cause of most business cycles. This theory is generally discounted by modern mainstream economists.
Reduce the economic downturn
Many social indicators, such as mental health, crime, and suicide, worsen during an economic recession (although general deaths tend to fall, and that is in expansion when it tends to increase). Because the period of economic stagnation is painful for many people who lose their jobs, there is often political pressure for governments to reduce the recession. Since the 1940s, following the Keynesian revolution, most governments of the developed countries have seen the mitigation of business cycles as part of government responsibility, under the rubric of stabilization policy.
Because in Keynesian view, recession is caused by insufficient aggregate demand, when recession occurs, the government must increase aggregate demand and bring the economy back to equilibrium. This is what the government can do in two ways, first by increasing the money supply (expansionary monetary policy) and secondly by increasing government spending or tax cuts (expansion of fiscal policy).
In contrast, some economists, especially New classical economist Robert Lucas, argue that the business cycle welfare costs are so small that they can be ignored, and that governments should focus on long-term growth rather than stabilization.
However, even according to Keynesian theory, managing economic policy to smooth the cycle is a difficult task in a society with a complex economy. Some theorists, especially those who believe in Marx's economy, believe that this difficulty can not be overcome. Karl Marx states that a recurring business cycle crisis is the inevitable outcome of the operation of the capitalistic system. In this view, all that the government can do is change the time of the economic crisis. Crises can also appear in different forms, such as severe inflation or increasing government deficits. Worse, by delaying the crisis, government policy is perceived to make it more dramatic and thus more painful.
In addition, since 1960 neoclassical economists have discouraged Keynesian policy capability to manage the economy. Since the 1960s, economists such as Nobel Laureates Milton Friedman and Edmund Phelps have made their argument that inflation expectations negate Phillips's long-term curve. Stagflation in the 1970s provided a striking support for their theories while proving a dilemma for Keynesian policies, which seemed to require an expansionary policy to reduce recession and contractionary policies to reduce inflation. Friedman has gone a step further by declaring that all the central banks a country should do is to avoid making a big mistake, as he believes they do so by contracting the money supply very quickly in the face of Wall Street Crash in 1929, where they made what would become recession into the Great Depression.
See also
- Stochastic general equilibrium
- The information revolution
- Inventory investment during the business cycle
- List of commodity booms
- List of financial crises in the United States
- Market trends
- The Skyscraper
- Business cycle welfare costs
- The world system theory
Note
References
- From (2008) New Palgrave Economic Dictionary , 2nd Edition:
- Christopher J. Erceg. "monetary business cycle model (price and rigid wage)." Abstract.
- Christian Hellwig. "Monetary business cycle (imperfect information)." Abstract.
- Ellen R. McGrattan "real business cycle." Abstract.
- Eckstein, Otto; Sinai, Allen (1990). "1. Business Cycle Mechanism in Postwar Period". In Robert J. Gordon. The American Business Cycle: Continuity and Change . University of Chicago Press. ISBN: 978-0226304533.
- Summers, Lawrence H. (1986). "Some Skeptical Observations on the Real Business Cycle Theory" (PDF) . Federal Reserve Bank of Minneapolis Quarterly Review . 10 (Fall): 23-27.
External links
- Business Conference Cycle Indicators - Area Indicators Euro, USA, Japan, China, and so on.
- Historical documents related to previous business cycles, including charts, data publications, speeches, and analyzes
Source of the article : Wikipedia
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