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). A recession is a contraction phase of the Business cycle. The U These fluctuations are often measured using the real gross domestic product. The distinction between real versus nominal value occurs in many fields Despite being named cycles, these fluctuations in economic growth and decline do not follow a purely mechanical or predictable periodic pattern.

Contents 1 Types of business cycle 1.1 Traditional business cycle models 1.1.1 Juglar cycle 1.2 Politically-based business cycle models 2 Preventing business cycles 3 Austrian theory of business cycles 4 Alternative interpretations of business cycles 4.1 Marxist views 4.2 Ravi Batra's interpretation 4.3 Milton Friedman's interpretation 5 Cycles or fluctuations? 5.1 Why will there not be a prolonged recession? 5.2 Random Walks and chaotic patterns 6 Problems of measurement 7 References 8 See also

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:

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 Kondratieff wave or cycle (45–60 years) — after Nikolai Kondratieff. Joseph Alois Schumpeter ( February 8, 1883 &ndash January 8, 1950) was an Economist and Political scientist born in Fixed investment in Economics refers to investment in Fixed capital, i Simon Smith Kuznets ( April 30, 1901 July 8, 1985) was an American Economist at the Wharton School of the University Also widely written as Kondratieff. In Heterodox economics, Kondratiev waves —also called Grand supercycles surges long waves or K-waves—are Nikolai Dmitriyevich Kondratiev, Russian: Николай Дмитриевич Кондратьев ( 4 March 1892 - 17 September 1938
5. the Forrester cycles (200 years) - after Jay Wright Forrester. Jay Wright Forrester (born 14 July 1918, Climax Nebraska) is a pioneer American Computer engineer, Systems scientist
6. the Toffler civilisation cycles (1000-2000 years) - after Alvin Toffler. Alvin Toffler (born October 3, 1928) is an American Writer and futurist, known for his works discussing

Even longer cycles are occasionally proposed, often as multiples of the Kondratiev cycle.

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 Economics, aggregate demand is the total demand for final goods and services in the economy ( Y) at a given time and Price level. 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. World War II, or the Second World War, (often abbreviated WWII) was a global military conflict which involved a majority of the world's nations, including 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. Politics Politics is the process by which groups of people make decisions Fiscal policy, taking the scope of Budgetary policy, refers to government policy that attempts to influence the direction of the economy through changes in government taxes Monetary policy is the process by which the Government, Central bank, or monetary authority of a country controls (i the Supply of Money, Automatic stabilisation due to the government's budget helped defeat the cycle even without conscious action done by policy-makers;

A colloquial term for a crisis of this time scale is a "decennial crisis" (meaning one that occurs after about ten years). In Macroeconomics automatic stabilisers work as a tool to dampen fluctuations in Real GDP without any explicit policy action by the government For the government of parliamentary systems see Executive (government. Budget (from French bougette, purse generally refers to a list of all planned expenses and revenues The phrase was noted during the Great Depression due to the similarity of the coming of the Panic of 1825 in London ten years after the end of the Napoleonic Wars, which had been bankrolled by Britain, with that of Black Monday in New York eleven years after the First World War, which had been similarly paid for by the United States. The Panic of 1825 was a Stock market crash that started in the Bank of England arising in part out of speculation investments in Latin America including The Napoleonic Wars (1803-1815 involved Napoleon's French Empire and a shifting set of European allies and opposing coalitions World War I (abbreviated WWI; also known as the First World War, the Great War, and the War to End All After the Second World War, however, the nearest equivalent in time and intensity was the recession of 1958. World War II, or the Second World War, (often abbreviated WWII) was a global military conflict which involved a majority of the world's nations, including

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. Herbert Clark Hoover (August 10 1874 &ndash October 20 1964 was the thirty-first President of the United States (1929–1933

Managing economic policy to even out the cycle is a difficult task in a society with a complex economy, even when Keynesian theory is applied. Economic policy refers to the actions that Governments take in the economic field. In Economics Keynesian economics (ˈkeɪnziən also Keynesianism and Keynesian Theory) is based on the ideas of twentieth-century British economist According to some theorists, notably nineteenth-century advocates of communism, this difficulty is insurmountable. Communism is a Socioeconomic structure that promotes the establishment of an egalitarian, classless, stateless Society based Karl Marx in particular claimed that the recurrent business cycle crises of capitalism were inevitable results of the system's operations. Capitalism is the Economic system in which the Means of production are owned by private Persons and operated for Profit and where 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. In economics inflation or price inflation is a rise in the general level of prices of goods and services over a period of time Deficit spending is the amount by which a government private company or individual's spending exceeds income over a particular period of time also called simply "deficit" Worse, by delaying a crisis, government policy is seen as making it more dramatic and thus more painful.

Additionally, Neoclassical economics plays down the ability of Keynesian policies to manage an economy. Neoclassical economics is a term variously used for approaches to Economics focusing on the determination of prices outputs and income distributions in markets Challenging the Phillips Curve since the 1960s, 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 Phillips curve is a historical inverse relation 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 Jr (born July 26, 1933) is an American economist and the winner of the 2006 Nobel Memorial Prize in Economic Sciences The stagflation of the 70's supported their theory by flying in the face of Keynesian predictions. Stagflation is an economic situation in which Inflation and Economic stagnation occur simultaneously and remain unchecked for a period of time Friedman has gone so far as to argue, that all the Federal Reserve System 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 into a great depression. The Wall Street Crash of 1929, also known as the ’29 Crash, the Crash of 1929, the Great Crash of 1929, the Great Crash of October 1929 (Friedman calls the Great Depression The Great Contraction because of this).

Austrian theory of business cycles

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. The Austrian School, also known as the “ Vienna School ” or the “ Psychological School ” is a heterodox school of economics that advocates Austrian School economists, following Ludwig von Mises, point to the role of the interest rate as the price of investment capital, guiding investment decisions. Ludwig Heinrich Edler von Mises (ˈluːtvɪç fɔn ˈmiːzəs ( September 29, 1881 – October 10, 1973) was an Austrian In an unregulated (free-market) economy, it is posited that the interest rate reflects the actual time preference of lenders and borrowers. In Economics, time preference (or "discounting" pertains to how large a premium a consumer will place on enjoyment nearer in time over more remote enjoyment Some follow Knut Wicksell to call this the "natural" interest rate. Johan Gustaf Knut Wicksell ( December 20, 1851 in Stockholm &ndash May 3, 1926 in Stocksund) was a Swedish [1] The government's control over money (through banks) destroys the equilibrium of interest rates. 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 terms fiat currency and fiat money relate to types of currency or Money whose usefulness results not from any intrinsic value or guarantee that it can be

The Austrian Business Cycle 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. The Austrian business cycle theory is the Austrian School 's explanation of the phenomenon of Business cycles (or " Credit cycles quot In economics inflation or price inflation is a rise in the general level of prices of goods and services over a period of time " 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.

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. In Economics Keynesian economics (ˈkeɪnziən also Keynesianism and Keynesian Theory) is based on the ideas of twentieth-century British economist To Keynesian economists, this rate is only unique if the economy is assumed to always be at full employment. In Macroeconomics, full employment is when all people looking for employment can find a job 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. Unemployment occurs when a person is available to work and currently seeking work but the person is without work. The term NAIRU is an Acronym for N on- A ccelerating '''I'''nflation R ate of '''U'''nemployment. 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. The Austrian School, also known as the “ Vienna School ” or the “ Psychological School ” is a heterodox school of economics that advocates A minimum wage is the lowest hourly daily or monthly Wage that employers may legally pay to employees or workers

Alternative interpretations of business cycles

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. Michał Kalecki ( June 22, 1899 – April 18, 1970) was a Polish economist who specialized in Macroeconomics Note Marxian economics is not restricted to Marxist economics as it includes the economic thought of those inspired by Marx's works who do not identify with In Macroeconomics, full employment is when all people looking for employment can find a job (He did not see this theory as applying under fascism, which would use direct force to destroy labor's power. Fascism is a totalitarian nationalist and corporatist ideology ) 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.

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. Raveendra N Batra (born 27 June 1943) is a US economist and professor at Southern Methodist University 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.

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. Milton Friedman (July 31 1912 November 16 2006 was an American Nobel Laureate Economist and Public intellectual. He thinks that for the most part and excluding very large supply shocks, business declines are more of a monetary phenomenon.

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. Rational expectations is an assumption used in many contemporary macroeconomic models, and also in other areas of contemporary Economics and Game theory In Economics and Finance, arbitrage is the practice of taking advantage of a price differential between two or more Markets striking a combination of matching Much economic theory also holds that the economy is usually at or close to equilibrium. In Economics, economic equilibrium is simply a state of the world where economic forces are balanced and in the absence of external influences the (equilibrium values of economic

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. In Statistics, a moving average, also called a rolling average and sometimes a running average, refers to a statistical technique used to analyze a Stochastic (from the Greek "Στόχος" for "aim" or "guess" means Random. In the mathematical sciences, a stationary process (or strict(ly stationary process or strong(ly stationary process) is a Stochastic process Such graphs arguably resemble actual events more closely than deteministic cycle formulae.

These fluctuations can be modelled in terms of fluctuations of aggregate demand. In Economics, aggregate demand is the total demand for final goods and services in the economy ( Y) at a given time and Price level. However, the main influence in this direction has been real business cycle models which consider fluctuations in supply (technology shocks). Real Business Cycle Theory (or RBC Theory is a class of Macroeconomic models in which Business cycle fluctuations to a large extent can be accounted for 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. Finn Erling Kydland (born 1 December[[ 943]] is a Norwegian economist. Edward Christian Prescott (born December 26, 1940) is an American Economist. The Nobel Memorial Prize in Economic Sciences, officially named The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (Sveriges riksbanks pris i ekonomisk

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. Louis Jean-Baptiste Alphonse Bachelier ( March 11, 1870 - April 28, 1946) was a French Mathematician at the turn of the 20th century A random walk, sometimes denoted RW, is a Mathematical formalization of a trajectory that consists of taking successive Random steps 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. Benoît B Mandelbrot (born 20 November 1924 is a French mathematician, best known as the father of fractal geometry. 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 " A fat tail is a property of some Probability distributions (alternatively referred to as Heavy-tailed distributions exhibiting extremely large Kurtosis particularly ^[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. Carl Friedrich Gauss (1777 &ndash 1855 is the Eponym of all of the topics listed below They also found that similar distributions were found regardless of the time scale exhibiting self-similarity^[2]. In Mathematics, a self-similar object is exactly or approximately similar to a part of itself (i An accurate model is yet to be found.

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. The distinction between real versus nominal value occurs in many fields Quality of life is the degree of well-being felt by an individual or group of people 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. Economic growth is the increase in the amount of the goods and services produced by an economy over time 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. Microeconomics is a branch of Economics that studies how individuals households and firms and some states make decisions to allocate limited resources typically in markets Risk is a Concept that denotes the precise probability of specific eventualities Investment or investing is a term with several closely-related meanings in Business management, Finance and Economics, related to saving Infrastructural capital refers to any physical Means of production or Means of protection beyond that which can be gathered or found directly in nature 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. Exponential growth (including Exponential decay) occurs when the growth rate of a mathematical function is proportional to the function's current value

References

See also

• World-systems theory
• Information revolution

H Eugene Stanley (born in Oklahoma City, 1941) is an American Physicist and University Professor at Boston University World system approach is a Post-Marxist view of world affairs one of several historical and current applications of Marxism to International relations. The term information revolution (sometimes called also the "information al revolution" describes current economic social and technological trends

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