Business cycle


Business cycles are intervals of general expansion followed by recession in economic performance. The changes in economic activity that characterize business cycles have important implications for the welfare of the general population, government institutions, and private sector firms.
There are many definitions of a business cycle. The simplest defines recessions as two consecutive quarters of negative GDP growth. More satisfactory classifications are provided first by including more economic indicators and second by looking for more data patterns than the two quarter definition. In the United States, the National Bureau of Economic Research oversees a Business Cycle Dating Committee that defines a recession as "a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
Business cycles are usually thought of as medium-term evolution. They are less related to long-term trends, coming from slowly-changing factors like technological advances. Further, a one period change, that is unusual over the course of one or two years, is often relegated to noise; an example is a worker strike or an isolated period of severe weather.
The individual episodes of expansion/recession occur with changing duration and intensity over time. Typically their periodicity has a wide range from around 2 to 10 years.
There are many sources of business cycle movements such as rapid and significant changes in the price of oil or variation in consumer sentiment that affects overall spending in the macroeconomy and thus investment and firms' profits. Usually such sources are unpredictable in advance and can be viewed as random shocks to the cyclical pattern, as happened during the 2008 financial crisis or the COVID-19 pandemic.

History

Theory

The first systematic exposition of economic crises, in opposition to the existing theory of economic equilibrium, was the 1819 Nouveaux Principes d'économie politique by Jean Charles Léonard de Sismondi. Prior to that point classical economics had either denied the existence of business cycles, blamed them on external factors, notably war, or only studied the long term. Sismondi found vindication in the Panic of 1825, which was the first unarguably international economic crisis, occurring in peacetime.
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 identified 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.
Sismondi's theory of periodic crises was developed into a theory of alternating cycles by Charles Dunoyer, and similar theories, showing signs of influence by Sismondi, were developed by Johann Karl Rodbertus. Periodic crises in capitalism formed the basis of the theory of Karl Marx, who further claimed that these crises were increasing in severity and, on the basis of which, he predicted a communist revolution. Though only passing references in Das Kapital refer to crises, they were extensively discussed in Marx's posthumously published books, particularly in Theories of Surplus Value. In Progress and Poverty, Henry George focused on land's role in crises – particularly land speculation – and proposed a single tax on land as a solution.
Statistical or econometric modelling and theory of business cycle movements can also be used. In this case a time series analysis is used to capture the regularities and the stochastic signals and noise in economic time series such as Real GDP or Investment. developed models for describing stochastic or pseudo- cycles, of which business cycles represent a leading case. As well-formed and compact – and easy to implement – statistical methods may outperform macroeconomic approaches in numerous cases, they provide a solid alternative even for rather complex economic theory.

Classification by periods

In 1860 French economist Clément Juglar first identified economic cycles 7 to 11 years long, although he cautiously did not claim any rigid regularity. This interval of periodicity is also commonplace, as an empirical finding, in time series models for stochastic cycles in economic data. Furthermore, methods like statistical modelling in a Bayesian framework – see e.g. – can incorporate such a range explicitly by setting up priors that concentrate around say 6 to 12 years, such flexible knowledge about the frequency of business cycles can actually be included in their mathematical study, using a Bayesian statistical paradigm.
Later, economist Joseph Schumpeter argued that a Juglar cycle has four stages:
  1. Expansion
  2. Crisis
  3. Recession
  4. Recovery
Schumpeter's Juglar model associates recovery and prosperity with increases in productivity, consumer confidence, aggregate demand, and prices.
In the 20th century, Schumpeter and others proposed a typology of business cycles according to their periodicity, so that a number of particular cycles were named after their discoverers or proposers:
Some say interest in the different typologies of cycles has waned since the development of modern macroeconomics, which gives little support to the idea of regular periodic cycles. Further econometric studies such as the two works in 2003 and 2007 cited above demonstrate a clear tendency for cyclical components in macroeconomic times to behave in a stochastic rather than deterministic way.
Others, such as Dmitry Orlov, argue that simple compound interest mandates the cycling of monetary systems. Since 1960, World GDP has increased by fifty-nine times, and these multiples have not even kept up with annual inflation over the same period. Social Contract collapses may be observed in nations where incomes are not kept in balance with cost-of-living over the timeline of the monetary system cycle.
The Bible and Hammurabi's Code both explain economic remediations for cyclic sixty-year recurring great depressions, via fiftieth-year Jubilee debt and wealth resets. Thirty major debt forgiveness events are recorded in history including the debt forgiveness given to most European nations in the 1930s to 1954.

Occurrence

There were great increases in productivity, industrial production and real per capita product throughout the period from 1870 to 1890 that included the Long Depression and two other recessions. There were also significant increases in productivity in the years leading up to the Great Depression. Both the Long and Great Depressions were characterized by overcapacity and market saturation.
Over the period since the Industrial Revolution, technological progress has had a much larger effect on the economy than any fluctuations in credit or debt, the primary exception being the Great Depression, which caused a multi-year steep economic decline. The effect of technological progress can be seen by the purchasing power of an average hour's work, which has grown from $3 in 1900 to $22 in 1990, measured in 2010 dollars. There were similar increases in real wages during the 19th century. A table of innovations and long cycles can be seen at:. Since surprising news in the economy, which has a random aspect, impact the state of the business cycle, any corresponding descriptions must have a random part at its root that motivates the use of statistical frameworks in this area.
There were frequent crises in Europe and America in the 19th and first half of the 20th century, specifically the period 1815–1939. This period started from the end of the Napoleonic wars in 1815, which was immediately followed by the Post-Napoleonic depression in the United Kingdom, and culminated in the Great Depression of 1929–1939, which led into World War II. See Financial crisis: 19th century for listing and details. The first of these crises not associated with a war was the Panic of 1825.
Business cycles in OECD countries after World War II were generally more restrained than the earlier business cycles. This was particularly true during the Golden Age of Capitalism, and the period 1945–2008 did not experience a global downturn until the Late-2000s recession. Economic stabilization policy using fiscal policy and monetary policy appeared to have dampened the worst excesses of business cycles, and automatic stabilization due to the aspects of the government's budget also helped mitigate the cycle even without conscious action by policy-makers.
In this period, the economic cycle – at least the problem of depressions – was twice declared dead. The first declaration was in the late 1960s, when the Phillips curve was seen as being able to steer 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 in the 1980s and 1990s in what came to be known as the Great Moderation. Notably, in 2003, Robert Lucas Jr., in his presidential address to the American Economic Association, declared that the "central problem of depression-prevention been solved, for all practical purposes."
Various regions have experienced prolonged depressions, most dramatically the economic crisis in former Eastern Bloc countries following the end of the Soviet Union in 1991. For several of these countries the period 1989–2010 has been an ongoing depression, with real income still lower than in 1989.