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Sismondi and his contemporary Robert Owen, who expressed similar but less systematic thoughts in 1817 Report to the Committee of the Association for the Relief of
the Manufacturing Poor, both identied the cause of economic cycles as overproduction and underconsumption,
caused in particular by wealth inequality. They advocated
government intervention and socialism, respectively, as
the solution. This work did not generate interest among
classical economists, though underconsumption theory
developed as a heterodox branch in economics until being
systematized in Keynesian economics in the 1930s.
1
1.1
History
Theory
HISTORY
Joseph Schumpeter (18831950) argued that a Juglar Cycle has four stages:
1.3
Occurrence
steam engine
cotton
railway
steel
electrical
engineering
chemistry
petrochemicals
automobiles
information
technology
P R D E
1. Kondratiev
1800
2. Kondratiev
1850
3. Kondratiev
1900
4. Kondratiev
1950
5. Kon...
1990
P: prosperity
R: recession
D: depression
E: improvement
2.1
Upper turning points of business cycle, commodity prices and freight rates
Identifying
not divisible into shorter cycles of similar characteristics with amplitudes approximating their
own.
According to A. F. Burns:[19]
2.3
3 PROPOSED EXPLANATIONS
Cycles or uctuations?
for government policy to mitigate the damage of economic cycles, despite believing in external causes, while
In recent years economic theory has moved towards the Austrian School economists argue against government instudy of economic uctuation rather than a 'business volvement as only worsening crises, despite believing in
cycle'[23] though some economists use the phrase 'busi- internal causes.
ness cycle' as a convenient shorthand. For Milton Fried- The view of the economic cycle as caused exogenously
man calling the business cycle a cycle is a misnomer, dates to Says law, and much debate on endogeneity or
because of its non-cyclical nature. Friedman believed exogeneity of causes of the economic cycle is framed in
that for the most part, excluding very large supply shocks, terms of refuting or supporting Says law; this is also rebusiness declines are more of a monetary phenomenon. ferred to as the "general glut" debate.
Proposed explanations
The explanation of uctuations in aggregate economic activity is one of the primary concerns of macroeconomics.
The main framework for explaining such uctuations is
Keynesian economics. In the Keynesian view, business
cycles reect the possibility that the economy may reach
short-run equilibrium at levels below or above full employment. If the economy is operating with less than full
employment, i.e., with high unemployment, Keynesian
theory states that monetary policy and scal policy can
have a positive role to play in smoothing the uctuations
of the business cycle.
Mainstream economists working in the neoclassical tradition, as opposed to the Keynesian tradition, have usually
viewed the departures of the harmonic working of the
market economy as due to exogenous inuences, such as
the State or its regulations, labor unions, business monopThere are a number of alternative heterodox economic olies, or shocks due to technology or natural causes.
theories of business cycles, largely associated with parContrarily, in the heterodox tradition of Jean Charles
ticular schools or theorists. There are also some divisions
Lonard de Sismondi, Clement Juglar, and Marx the reand alternative theories within mainstream economics,
current upturns and downturns of the market system are
notably real business cycle theory and credit-based explaan endogenous characteristic of it.[24]
nations such as debt deation and the nancial instability
The 19th-century school of underconsumptionism also
hypothesis.
posited endogenous causes for the business cycle, notably
the paradox of thrift, and today this previously heterodox school has entered the mainstream in the form of
3.1 Exogenous vs. endogenous
Keynesian economics via the Keynesian revolution.
Within mainstream economics, the debate over external (exogenous) versus internal (endogenous) being the
causes of the economic cycles, with the classical school 3.2 Keynesian
(now neo-classical) arguing for exogenous causes and
the underconsumptionist (now Keynesian) school argu- According to Keynesian economics, uctuations in
ing for endogenous causes. These may also broadly be aggregate demand cause the economy to come to short
classed as supply-side and demand-side explanations: run equilibrium at levels that are dierent from the full
supply-side explanations may be styled, following Says employment rate of output. These uctuations express
law, as arguing that "supply creates its own demand", themselves as the observed business cycles. Keynesian
while demand-side explanations argue that eective de- models do not necessarily imply periodic business cycles.
mand may fall short of supply, yielding a recession or de- However, simple Keynesian models involving the interacpression.
tion of the Keynesian multiplier and accelerator give rise
to initial shocks. Paul Samuelson's
This debate has important policy consequences: propo- to cyclical responses
[25]
is supposed to account for business
oscillator
model
nents of exogenous causes of crises such as neoclassicals
cycles
thanks
to
the
multiplier
and the accelerator. The
largely argue for minimal government policy or regulaamplitude
of
the
variations
in
economic
output depends
tion (laissez faire), as absent these external shocks, the
on
the
level
of
the
investment,
for
investment
determines
market functions, while proponents of endogenous causes
the
level
of
aggregate
output
(multiplier),
and
is deterof crises such as Keynesians largely argue for larger govmined
by
aggregate
demand
(accelerator).
ernment policy and regulation, as absent regulation, the
market will move from crisis to crisis. This division In the Keynesian tradition, Richard Goodwin[26] accounts
is not absolute some classicals (including Say) argued for cycles in output by the distribution of income between
3.5
3.3
Credit/debt cycle
5
Within mainstream economics, Keynesian views have
been challenged by real business cycle models in which
uctuations are due to technology shocks. This theory
is most associated with Finn E. Kydland and Edward C.
Prescott, and more generally the Chicago school of economics (freshwater economics). They consider that economic crisis and uctuations cannot stem from a monetary shock, only from an external shock, such as an innovation.
RBC theory has been categorically rejected by a number of mainstream economists in the Keynesian tradition,
such as (Summers 1986) and Paul Krugman.
3 PROPOSED EXPLANATIONS
maining capital is centralized and concentrated and prof- prompted by government and bankers eorts to expand
itability is recovered. In the long run these crises tend to credit despite restraints imposed by the prevailing gold
be more severe and the system will eventually fail.[30]
standard, and are thus consistent with Austrian Business
[40][41]
Some Marxist authors such as Rosa Luxemburg viewed Cycle Theory.
the lack of purchasing power of workers as a cause of
a tendency of supply to be larger than demand, creating
crisis, in a model that has similarities with the Keynesian one. Indeed, a number of modern authors have tried
to combine Marxs and Keyness views. Henryk Grossman[31] reviewed the debates and the counteracting tendencies and Paul Mattick subsequently emphasized the
basic dierences between the Marxian and the Keynesian perspective: while Keynes saw capitalism as a system
worth maintaining and susceptible to ecient regulation,
Marx viewed capitalism as a historically doomed system
that cannot be put under societal control.[32]
The American mathematician and economist, Richard
M. Goodwin formalised a Marxist model of business cycles, known as the Goodwin Model in which recession
was caused by increased bargaining power of workers
(a result of high employment in boom periods) pushing up the wage share of national income, suppressing
prots and leading to a breakdown in capital accumulation. Later theorists applying variants of the Goodwin
model have identied both short and long period protled growth and distribution cycles in the United States,
and elsewhere.[33][34][35][36][37] David Gordon provided a
Marxist model of long period institutional growth cycles,
in an attempt to explain the Kondratiev wave. This cycle
is due to the periodic breakdown of the 'social structure
of accumulation' a set of institutions which secure and
stabilise capital accumulation.
The Austrian explanation of the business cycle diers signicantly from the mainstream understanding of business cycles and is generally rejected by mainstream
economists. Mainstream economists generally do not
support Austrian school explanations for business cycles, on both theoretical as well as real-world empirical
grounds.[42][43][44][45][46][47]
3.9
Georgism
the government can do in two ways, rstly by increasing the money supply (expansionary monetary policy) and
secondly by increasing government spending or cutting
taxes (expansionary scal policy).
By contrast, some economists, notably New classical
economist Robert Lucas, argue that the welfare cost of
business cycles are very small to negligible, and that governments should focus on long-term growth instead of stabilization.
However, even according to Keynesian theory, managing
economic policy to smooth out the cycle is a dicult task
in a society with a complex economy. Some theorists,
notably those who believe in Marxian economics, believe
that this diculty is insurmountable. Karl Marx claimed
that recurrent business cycle crises were an inevitable result of the operations of the capitalistic system. 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 dierent form, for example as severe ination or a
steadily increasing government decit. Worse, by delaying a crisis, government policy is seen as making it more
dramatic and thus more painful.
Additionally, since the 1960s neoclassical economists
have played down the ability of Keynesian policies to
manage an economy. Since the 1960s, economists like
Nobel Laureates Milton Friedman and Edmund Phelps
have made ground in their arguments that inationary expectations negate the Phillips curve in the long run. The
stagation of the 1970s provided striking support for their
theories, defying the simple Keynesian prediction that recessions and ination cannot occur together. Friedman
has gone so far as to argue that all the central bank of a
country should do is to avoid making large mistakes, as
he believes they did by contracting the money supply very
rapidly in the face of the Wall Street Crash of 1929, in
which they made what would have been a recession into
the Great Depression.
6 NOTES
Market trend
[15] Lebergott, Stanley (1993). Pursuing Happiness: American Consumers in the Twentieth Century. Princeton, NJ:
Princeton University Press. pp. a:Adapted from Fig. 9.1.
ISBN 0-691-04322-1.
Skyscraper Index
Welfare cost of business cycles
World-systems theory
Notes
Homewood, IL,
[30] Henryk Grossmann Das Akkumulations und Zusammenbruchsgesetz des kapitalistischen Systems (Zugleich eine
Krisentheorie), Hirschfeld, Leipzig, 1929
[31] Grossman, Henryk The Law of Accumulation and Breakdown of the Capitalist System. Pluto
[49] Arturo Estrella & Tobias Adrian, FRB of New York Sta
Report No. 397, 2009
[50] Announcement Dates. US Business Cycle Expansions
and Contractions. NBER Business Cycle Dating Committee. Retrieved 1 March 2015.
[51] Arturo Estrella, FRB of New York Sta Report No. 421,
2010
[52] George, Henry. (1881). Progress and Poverty: An Inquiry
into the Cause of Industrial Depressions and of Increase of
Want with Increase of Wealth; The Remedy. Kegan Paul
(reissued by Cambridge University Press, 2009; ISBN
978-1-108-00361-2)
[38] Block, Walter; Garschina, Kenneth. Hayek, Business Cycles and Fractional Reserve Banking: Continuing
the De-Homogenization Process (PDF). www.mises.org.
Ludwig von Mises Institute. Retrieved 28 July 2014.
7 References
10
External links
The Conference Board Business Cycle Indicators
Indicators of Euro Area, United States, Japan, China
and so on.
Historical documents relating to past business cycles, including charts, data publications, speeches,
and analyses
EXTERNAL LINKS
11
9.1
Text
9.2
Images
12
9.3
Content license