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The business cycle or economic cycle refers to the fluctuations of economic activity about its long term growth trend. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or recession). These fluctuations are often measured using the real gross domestic product. Despite being named cycles, these fluctuations in economic growth and decline do not follow a purely mechanical or predictable periodic pattern. Image File history File links Emblem-important. ... In macroeconomics, a Recession is a decline in any countrys Gross Domestic Product (GDP), or negative real economic growth, for two or more successive quarters of a year. ... In economics, the distinction between nominal and real numbers is often made. ... GDP redirects here. ...

An abstract business cycle

Graph illustrating business cycle File links The following pages link to this file: Business cycle Image:Business cycle. ... Graph illustrating business cycle File links The following pages link to this file: Business cycle Image:Business cycle. ...

Types of business cycle

Traditional business cycle models

The main types of business cycles enumerated by Joseph Schumpeter and others in this field have been named after their discoverers or proposers: Joseph Schumpeter Joseph Alois Schumpeter (February 8, 1883 – January 8, 1950) was an economist from Austria and an influential political scientist. ...

1. the Kitchin inventory cycle (3–5 years) — after Joseph Kitchin,
2. the Juglar fixed investment cycle (7–11 years) — after Clement Juglar,
3. the Kuznets infrastructural investment cycle (15–25 years) — after Simon Kuznets, Nobel Laureate,
4. the Kondratiev wave or cycle (45–60 years) — after Nikolai Kondratiev.

Even longer cycles are occasionally proposed, often as multiples of the Kondratiev cycle. Fixed investment in economics refers to an increase in the amounts of real capital goods (real means of production) used in production or to the replacement of depreciated capital goods. ... Simon Smith Kuznets (April 30, 1901 – July 8, 1985) was an American economist at Wharton School of the University of Pennsylvania who won the 1971 Nobel Prize in Economics for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic and social... In economics, Kondratiev waves - also called grand supercycles, surges, long waves, or K-waves - are regular S-shaped cycles in the modern (Capitalist) world economy. ... Nikolai Dmitriyevich Kondratiev (1892-1938) was a Russian economist. ...

Juglar cycle

In the Juglar cycle, which is sometimes called "the" business cycle, 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 stabilisation due to the government's budget helped defeat the cycle even without conscious action done by policy-makers; In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ... Combatants Allied powers: China France Great Britain Soviet Union United States and others Axis powers: Germany Italy Japan and others Commanders Chiang Kai-shek Charles de Gaulle Winston Churchill Joseph Stalin Franklin Roosevelt Adolf Hitler Benito Mussolini Hideki Tōjō Casualties Military dead: 17,000,000 Civilian dead: 33,000... For the band, see 1990s (band). ... Politics is the process by which decisions are made within groups. ... Fiscal policy is the economic term that defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Monetary policy is the process by which the government, central bank... For the rental car company, see Budget Rent a Car. ...

Politically based business cycle models

Another set of models tries to derive the business cycle from political decisions.

The partisan business cycle suggests that cycles result from the successive elections of administrations with different policy regimes. Regime A adopts expansionary policies, resulting in growth and inflation, but is voted out of office when inflation becomes unacceptably high. The replacement, Regime B, adopts contractionary policies reducing inflation and growth, and the downwards swing of the cycle. It is voted out of office when unemployment is too high, being replaced by Party A.

The political business cycle is an alternative theory stating that when an administration of any hue is elected, it initially adopts a contractionary policy to reduce inflation and gain a reputation for economic competence. It then adopts an expansionary policy in the lead up to the next election, hoping to achieve simultaneously low inflation and unemployment on election day. The business cycle is the rises and falls of the economy. This maintains neutrality between supply and demand.

Preventing business cycles

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. 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. For other uses, see The Great Depression (disambiguation). ... Herbert Clark Hoover (August 10, 1874 – October 20, 1964), the thirty-first President of the United States (1929–1933), was a world-famous mining engineer and humanitarian administrator. ...

No one argues that managing economic 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. Not to be confused with Political economy. ... Keynesian economics (pronounced ), also called Keynesianism, or Keynesian Theory, is an economic theory based on the ideas of 20th century British economist John Maynard Keynes. ... This article is about the form of society and political movement. ... Karl Heinrich Marx (May 5, 1818 – March 14, 1883) was a 19th century philosopher, political economist, and revolutionary. ... In economics, crisis is an old term in business cycle theory, referring to the sharp transition to a recession. ... For other uses, see Capitalism (disambiguation). ... This article or section does not cite its references or sources. ...

Additionally, Neoclassical economics plays down the ability of Keynesian policies to manage an economy. Challenging the Phillips Curve since the 1960's, economists like Nobel Laureate Milton Friedman or 2006 Nobel Laureate Edmund Phelps have made ground in their arguments that inflationary expectations negate the Phillips Curve in the long run. The stagflation of the 70's supported their theory by flying in the face of Keynesian predictions. Friedman has gone so far as to argue all the Fed can do is to avoid making large mistakes, as he believes they did by contracting the money supply very rapidly in the face of the Stock Market Crash of 1929, in which they made what would have been a recession a great depression. (Friedman calls the Great Depression The Great Contraction because of this). Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ... Phillips curve The Phillips curve is a historical inverse relation and tradeoff between the rate of unemployment and the rate of inflation in an economy. ... Milton Friedman (July 31, 1912 – November 16, 2006) was an American Nobel Laureate economist and public intellectual. ... Edmund Strother Phelps (born July 26, 1933 in Evanston, Illinois) is an American professor of economics at Columbia University, who was awarded the 2006 The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, commonly known as the Nobel Prize in Economics. ... Stagflation, a portmanteau of the words stagnation and inflation, is a term in general use within modern macroeconomics used to describe a period of out-of-control price inflation combined with slow-to-no output growth, rising unemployment, and eventually recession. ... For the protest against the Communications Decency Act, see Black World Wide Web protest. ... For other uses, see The Great Depression (disambiguation). ...

Alternative interpretations of business cycles

Austrian School

The Austrian School of economics rejects the suggestion that the business cycle is an inherent feature of an unregulated economy and argues that it is caused by intervention in the money supply. Austrian School economists, following Ludwig von Mises, point to the role of the interest rate as the price of investment capital, guiding investment decisions. In an unregulated (free-market) economy, it is posited that the interest rate reflects the actual time preference of lenders and borrowers. Some follow Knut Wicksell to call this the "natural" interest rate.[1] Government control of the money supply through central banks and regulations allowing Fractional-reserve banking disturbs this equilibrium such that the interest rate no longer reflects the real supply of and demand for investment capital. Austrian School economists conclude 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 rate is artificially high, the opposite situation will occur. This misinformation leads investors to misallocate capital, borrowing and investing either too much or too little in long-term projects. Periodic recessions, then, are seen as necessary "corrections" following periods of fiat credit expansion, when unprofitable investments are liquidated, freeing capital for new investment. The Austrian School, also known as the “Vienna School” or the “Psychological School”, is a heterodox school of economic thought that advocates adherence to strict methodological individualism. ... Ludwig Heinrich Edler von Mises (September 29, 1881 – October 10, 1973) (pronounced was a notable economist and a major influence on the modern libertarian movement. ... Time preference is the economists assumption that a consumer will place a premium on enjoyment nearer in time over more remote enjoyment. ... Knut Wicksell, Swedish economist Johan Gustaf Knut Wicksell, (December 20, 1851 Stockholm -May 3, 1926 Stocksund ) was a Swedish economist. ... In macroeconomics, money supply (monetary aggregates, money stock) is the quantity of currency and money in bank accounts in the hands of the non-bank public available within the economy to purchase goods, services, and securities. ... Fractional-reserve banking refers to a financial system in which some fraction of the deposits can be used to finance profitable but illiquid investments. ... Fiat money or fiat currency, is money that is current or legal tender as satisfaction for money debts by government fiat, that is by law. ...

The Austrian theory also predicts that the imposition of artificially low interest rates, and the resulting increase in the supply of fiat credit, generates (is) inflation, which obliges the central bank to increase the supply of credit yet further to maintain the artificially low interest rate, thus prolonging the "boom" and worsening the inevitable "correction." In Austrian theory, depressions and recessions are positive forces in-so-much that they are the market's natural mechanism of undoing the misallocation of resources present during the “boom” or inflationary phase. Austrian School economists point to the dot-com investment frenzy as a modern example of artificially abundant credit subsidizing unsustainable overinvestment. Dot-com (also dotcom or redundantly dot. ...

In the Keynesian view, this Austrian theory assumes that the "natural" rate of interest is unique at any given time and cannot be affected by policy. To Keynesian economists, this rate is only unique if the economy is assumed to always be at full employment. If the economy is operating with less than full employment, i.e., with high unemployment above the NAIRU, then in theory monetary policy and fiscal policy can have a positive role to play rather than simply creating booms that necessarily collapse on themselves. It should be noted that, in the Austrian School, the natural interest rate is not affected by the employment rate and the absence of full employment is typically attributed to government interference in the labour markets, such as minimum wage laws, employment regulations, and taxes levied against employers, which prevent the employment market from fully clearing. Keynesian economics (pronounced kainzian, IPA ), also called Keynesianism, or Keynesian Theory, is an economic theory based on the ideas of the 20th-century British economist John Maynard Keynes. ... In economics, full employment has more than one meaning. ... CIA figures for world unemployment rates, 2006 Unemployment is the state in which a person is without work, available to work, and is currently seeking work. ... The term NAIRU is an acronym for Non-Accelerating Inflation Rate of Unemployment. ... The Austrian School, also known as the “Vienna School” or the “Psychological School”, is a heterodox school of economic thought that advocates adherence to strict methodological individualism. ... The minimum wage is the minimum rate a worker can legally be paid (usually per hour) as opposed to wages that are determined by the forces of supply and demand in a free market. ...

Marxist views

Michal Kalecki's [2] 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, which would use direct force to destroy labor's power.) 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. Michał Kalecki (22nd June 1899-18 April 1970) was one of the greatest Polish economist. ... Marxian economics refers to a body of economic thought stemming from the work of Karl Marx. ... In economics, full employment has more than one meaning. ... Fascist redirects here. ...

Ravi Batra's interpretation

In his 1984 book Regular Cycles of Money, Inflation, Regulation and Depressions Ravi Batra presented a calculation of decennial averages for i) money growth, ii) number of new regulatory laws or institutions and iii) inflation in the USA for a period exceeding two hundred years. The cycles were of a regular rise and then decline in the above mentioned variables. While an unrelated prediction for a depression to unfold in the 1990s failed to materialise, the evolution of these variables in the 1990s and 2000s has broadly conformed to the regular decennial pattern. Ravi Batra is a U.S. economist and professor at Southern Methodist University in Dallas, Texas. ...

Milton Friedman's interpretation

Milton Friedman has stated on a number of occasions that calling the business cycle a "cycle" is a misnomer, because of its non-cyclical nature. He thinks that for the most part and excluding very large supply shocks, business declines are more of a monetary phenomenon. Milton Friedman (July 31, 1912 – November 16, 2006) was an American Nobel Laureate economist and public intellectual. ...

Cycles or fluctuations?

In recent years economic theory has moved towards the study of economic fluctuation rather than a 'business cycle' - though some economists use the phrase 'business cycle' as a convenient shorthand.

Rational expectations theory states that no deterministic cycle can persist because it would consistently create arbitrage opportunities. Much economic theory also holds that the economy is usually at or close to equilibrium. Rational expectations is a theory in economics originally proposed by John F. Muth (1961) and later developed by Robert E. Lucas Jr. ... In economics and finance, arbitrage is the practice of taking advantage of a price differential between two or more markets: a combination of matching deals are struck that capitalize upon the imbalance, the profit being the difference between the market prices. ... Price of market balance In economics, economic equilibrium is simply a state of the world where economic forces are balanced and in the abscence of external shocks the (equilibrium) values of economic variables will not change. ...

These views led to the formulation of the idea that observed economic fluctuations can be modelled as shocks to a system.

A moving average of a stochastic stationary variable also bears resemblance to a graph of an economic time-series, such as inflation, unemployment, or investment. Such graphs arguably resemble actual events more closely than deteministic cycle formulae. It has been suggested that this article or section be merged with TWAP and VWAP (Discuss) A moving average, in finance and especially in technical analysis, is one of a family of similar statistical techniques used to analyze time series data. ... Stochastic, from the Greek stochos or goal, means of, relating to, or characterized by conjecture; conjectural; random. ...

These fluctuations can be modelled in terms of fluctuations of aggregate demand. However, the main influence in this direction has been real business cycle models which consider fluctuations in supply (technology shocks). This theory is most associated with Finn E. Kydland and Edward C. Prescott, winners of the 2004 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ... The model of Real Business Cycles (RBCs) is a macroeconomics model formulated principally by Robert Lucas Jr, Finn E. Kydland and Edward C. Prescott, building upon the ideas of John F. Muth. ... Finn E. Kydland (born 1943) is a Norwegian economist. ... Edward C. Prescott (born 26 December 1940) is an American economist. ... The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (in Swedish Sveriges Riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is a prize awarded each year for outstanding intellectual contributions in the field of economics. ...

Why will there not be a prolonged recession?

Firstly, productive capital used by firms will be worn out over time and require replacements. Spending on capital equipment such as machinery is necessary, which increases aggregate expenditure (AE) and causes the economy to slowly climb. Secondly, the low prices characteristic of a trough phase will cause increased demand for them, resulting in inflation which is characteristic of the boom phase. The low interest rates will stimulate increased borrowing. The repayments and interest which need to be paid back will contribute to the rise in AE. Governments also aim to improve the business cycle so as to provide stability, get re-elected and to ease worries about the state of the economy. They also do this to attract foreign investors and improve their international reputation.

Random Walks and chaotic patterns

In 1900 Louis Bachelier proposed that the fluctuations in share prices follow random walks, being complete random with no cyclic properties. While this was a ground breaking work, Bachelier's model failed to account for big fluctuations such as the Great Depression. In the 1960s, Benoît Mandelbrot proposed that fluctuation in cotton prices follow a Lévy flight distribution, which have a fat tail allowing greater probability for large fluctuations.^[1] In 1995, physicists R. Mantegna and G. Stanley analyzed over a million records of stock market indices from the previous five years, and they found that the actual distribution lay between the Gaussian random walks and Lévy flights. They also found that similar distributions were found regardless of the time scale exhibiting self-similarity^[2]. An accurate model is yet to be found. Louis Jean-Baptiste Alphonse Bachelier (March 11, 1870 - April 28, 1946) was a French mathematician at the turn of the 20th century. ... Example of eight random walks in one dimension starting at 0. ... For other uses, see The Great Depression (disambiguation). ... Benoît B. Mandelbrot, PhD, (born November 20, 1924) is a Franco-American mathematician, best known as the father of fractal geometry. Benoît Mandelbrot was born in Poland, but his family moved to France when he was a child; he is a dual French and American citizen and was... A Lévy flight, named after the French mathematician Paul Pierre Lévy, is a type of random walk in which the increments are distributed according to a heavy tail distribution. ... It has been suggested that this article or section be merged with Long-range dependency. ... GAUSSIAN is a computational chemistry software program, first written by John Pople. ... A self-similar object is exactly or approximately similar to a part of itself. ...

Problems of measurement

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 and also generates distortions in the perception of economic growth because the price changes of the various products are disproportional. 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. In economics, the distinction between nominal and real numbers is often made. ... GDP redirects here. ... The well-being or quality of life of a population is an important concern in economics and political science. ... World GDP/capita changed very little for most of human history before the industrial revolution. ...

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. Microeconomics (or price theory) is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources,[1] typically in markets where goods or services are being bought and sold. ... For the Parker Brothers board game, see Risk (game) For other uses, see Risk (disambiguation). ... Invest redirects here. ... Infrastructural capital refers to any physical means of production or means of protection beyond that which can be gathered or found directly in nature, i. ... In mathematics, exponential growth (or geometric growth) occurs when the growth rate of a function is always proportional to the functions current size. ...

References

Philip Ball (born 1962) is a freelance science writer and a Consultant Editor for worlds leading science journal Nature. ...

See also

• World-systems theory
• Information revolution