Economic recession: concept, causes and consequences

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

The economy of any, even the most developed country, is not static. Her scores are constantly changing. The economic downturn gives way to an upturn, the crisis – to peak growth values. The cyclical nature of development is characteristic of the market type of management. A change in the level of employment affects the purchasing power of consumers, which in turn leads to a decrease or increase in the price of products. And this is just one example of the relationship between indicators. Since most countries today are capitalist, economic concepts such as recession and recovery are suitable for describing and developing the world economy.

History of the study of business cycles

If you plot the GDP curve of any country, you will notice that the growth of this indicator is not constant. Each economic cycle consists of a period of decline in social production and its rise. However, its duration is not clearly defined. Fluctuations in business activity are poorly predictable and irregular. However, there are several concepts that explain the cyclical development of the economy and the time frame of these processes. Jean Sismondi was the first to draw attention to periodic crises. The "classics" denied the existence of cycles. They often associated the period of economic recession with external factors, such as war. Sismondi drew attention to the so-called "panic of 1825", the first international crisis that occurred in peacetime. Robert Owen came to similar conclusions. He believed that economic decline was due to overproduction and underconsumption due to inequality in income distribution. Owen advocated government intervention and a socialist way of doing business. The periodic crises characteristic of capitalism became the basis of the work of Karl Marx, who called for a communist revolution.

Unemployment, economic recession and the role of government in solving these problems are the subject of study by John Maynard Keynes and his followers. It was this economic school that systematized ideas about crises and proposed the first consistent steps to eliminate their negative consequences. Keynes even put them to the test in the United States during the Great Depression of 1930-1933.

Main phases

The economic cycle can be divided into four periods. Among them:

• Economic recovery (revival). This period is characterized by the growthproductivity and employment. The inflation rate is low. Shoppers are eager to make purchases that were put off during the crisis. All innovative projects quickly pay off.
• Peak. This period is characterized by maximum business activity. The unemployment rate at this stage is extremely low. Production capacities are loaded to the maximum. However, negative aspects are also beginning to appear: inflation and competition are intensifying, and the payback period of projects is increasing.
• Economic recession (crisis, recession). This period is characterized by a decrease in entrepreneurial activity. The volume of production and investment is falling, and unemployment is rising. A depression is a deep and prolonged recession.
• Dno. This period is characterized by minimal business activity. During this stage, the lowest unemployment and production rates are observed. During this period, the excess of goods that was formed during peak business activity is spent. Capital flows from trade to banks. This leads to lower interest rates on loans. Usually this phase does not last long. However, there are exceptions. For example, the Great Depression lasted ten years.

Thus the business cycle can be characterized as the period between two identical states of business activity. You need to understand that despite the cyclicality, in the long run, GDP tends to grow. Such economic concepts as recession, depression and crisis do not disappear anywhere, but each time these points are located higher and higher.

Cycle properties

The economic fluctuations under consideration vary both in nature and duration. However, they have several common features. Among them:

• Cyclicality is typical for all countries with a market type of economy.
• Crises are inevitable and necessary. They stimulate the economy, forcing it to reach higher and higher levels of development.
• Any cycle consists of four phases.
• Recurrence is caused not by one, but by many different reasons.
• Due to globalization, today's crisis in one country will inevitably affect the economic situation in another.

Classification of periods

The modern economy distinguishes over a thousand different business cycles. Among them:

• Short-term cycles by Joseph Kitchin. They last about 2-4 years. Named after the scientist who discovered them. Kitchin initially explained the existence of these cycles by changes in gold reserves. However, today it is believed that they are due to delays in obtaining the necessary commercial information for firms to make decisions. For example, consider the saturation of the market with a product. In this situation, manufacturers should reduce production volumes. However, information about the saturation of the market does not come immediately, but with a delay. This leads to a crisis due to the appearance of surpluses of goods.
• Mid-term cycles of Clément Juglar. They were also named after the economist who discovered them. Themexistence is explained by the delay between the decision-making on the volume of investments in fixed capital and the direct creation of production capacities. The duration of Juglar cycles is about 7-10 years.
• The rhythms of Simon Kuznets. They are named after the Nobel laureate who discovered them in 1930. The scientist explained their existence by demographic processes and fluctuations in the construction industry. However, modern economists believe that the main reason for Kuznets' rhythms is the renewal of technology. Their duration is about 15-20 years.
• Long waves of Nikolai Kondratiev. They were discovered by the scientist, after whom they are named, in the 1920s. Their duration is about 40-60 years. The existence of K-waves is due to important discoveries and related changes in the structure of social production.
• Forrester cycles lasting 200 years. Their existence is explained by the change in the materials and energy resources used.
• Toffler cycles lasting 1000-2000 years. Their existence is associated with fundamental changes in the development of civilization.

Reasons

Economic recession is an integral part of economic development. Cyclicity is due to the following factors:

• External and internal shocks. Sometimes they are called impulse effects on the economy. These are technological breakthroughs that can change the nature of farming, the discovery of new energy sources, armed conflicts and wars.
• Unplanned increase in investments in the maincapital and stocks of goods and raw materials, for example, due to changes in legislation.
• Change in factor prices.
• Seasonal nature of harvesting in agriculture.
• The growth of the influence of trade unions, and hence the increase in wages, and the increase in job security.

Recession in economic growth: concept and essence

Among modern scientists there is still no consensus on what is considered a crisis. In the domestic literature of the times of the USSR, the point of view dominated, according to which economic recessions are typical only for capitalist countries, and under the socialist type of management, only “difficulties in growth” are possible. To date, there is a discussion among economists as to whether crises are characteristic of the micro level. The essence of the economic crisis is manifested in the excess of supply compared to aggregate demand. The decline is manifested in mass bankruptcies, rising unemployment and a decrease in the purchasing power of the population. A crisis is a violation of the balance of the system. Therefore, it is accompanied by a number of socio-economic upheavals. And to resolve them, real internal and external changes are needed.

Crisis functions

Business cycle downturns are progressive in nature. It performs the following functions:

• Removal or qualitative transformation of obsolete parts of the existing system.
• Approval of initially weak new elements.
• Testing the system forstrength.

Dynamics

During its development, the crisis goes through several stages:

• Latent. At this stage, the prerequisites are only maturing, they have not yet broken through.
• Collapse period. At this stage, the contradictions are gaining strength, the old and new elements of the system come into conflict.
• Crisis mitigation period. At this stage, the system becomes more stable, the preconditions for a revival in the economy are created.

Recession conditions and consequences

All crises have an impact on social relations. During a recession, state structures become much more competitive than commercial ones in the labor market. Many institutions are becoming more corrupt, further exacerbating the situation. The popularity of military service is also increasing due to the fact that it is becoming harder for young people to find themselves in civilian life. The number of religious people is also growing. The popularity of bars, restaurants and cafes is falling during the crisis. However, people are starting to buy more cheap alcohol. The crisis has a negative impact on leisure and culture, which is associated with a sharp drop in the purchasing power of the population.

Coping with recessions

The main task of the state in a crisis is to resolve the existing socio-economic contradictions and help the least protected segments of the population. Keynesians advocate active intervention in the economy. They believe that economic activity can berestored through government orders. Monetarists advocate a more market-based approach. They regulate the money supply. However, you need to understand that all these are temporary measures. Despite the fact that crises are an integral part of development, each company and the state as a whole must have a developed long-term program.