The economic cycle is the fluctuations in the value of gross domestic product in the long run. This decrease or increase in GDP is related to the stage of development. There are several types of such oscillations, which differ in their duration. The shortest is the Kitchin cycle, the duration of which is 3-5 years. Other economists have also studied the issue of fluctuations in gross output. There are also cycles of Juglar, Kuznets and Kondratiev.
Basic terms
In the course of its development, the economy experiences both periods of rapid development and stagnation. The Kitchin cycle explains short-term fluctuations. The Kondratiev waves cover half a century of changes. The concept of a business cycle in a broad sense means a period of time that includes only one period of prosperity and recession, following each other. These two stages are fundamental. The indicator of the beginning and end of the cycle is the percentage of growth in real gross domestic product. Although often these fluctuations in business activity are quite unpredictable.
Study history
The concept of the economic cycle was denied by representatives of the classical school. Their existence onpractice they explained by wars and conflicts. Sismondi was the first to study them. His work focused on the Panic of 1825 in England, which was the first economic crisis to occur in peacetime. Sismondi and his colleague Robert Owen called it the cause of overproduction and underconsumption caused by inequality in the distribution of income among the population. They advocated state intervention in the economy and socialism. In academia, their work did not become instantly popular. However, the well-known Keynesian school will then be built on the notion that underconsumption is the cause of crises. Sismondi's theory was developed by Charles Dunoyer. He put forward the concept of changeable cycles. Karl Marx saw periodic crises as the main problem of any capitalist society and predicted a communist revolution. Henry George called land speculation the main cause of recessions and proposed the introduction of a single tax on this factor of production.
Varieties of cycles
In 1860, French economist Clement Juglar first identified economic fluctuations with a frequency of 7-11 years. Joseph Schumpeter stated that they consist of four stages:
- Expansion. There is an increase in production volumes, prices are rising, interest rates are falling.
- Crisis. At this stage, stock exchanges collapse, and many enterprises and firms become bankrupt.
- Recession. Prices and output continue to fall, while interest rates, on the contrary,growing.
- Restoration. Exchanges are reopening on falling prices and earnings.
Schumpeter associated economic recovery with increased productivity, confidence in the future of consumers, aggregate demand and prices. In the middle of the 20th century, he proposed a typology of cycles according to their duration. Among them:
- Kitchin cycle. Takes 3 to 5 years.
- Juglar cycle. Its duration is 7-11 years.
- The Blacksmith cycle. It has to do with investment in infrastructure. Takes 15 to 25 years.
- Kondratiev waves, or a long-term technological cycle. Occupies 45 to 60 years.
Today, interest in cycles has declined somewhat. This is due to the fact that modern macroeconomics does not support the idea of regular periodic fluctuations.
Kitchin Cycle
It takes about 40 months. These short-term fluctuations were first studied by Josef Kitchin in the 1920s. Its cause is considered to be time lags in the movement of information, which lead to a delay in decision-making by firms. Firms respond to an improvement in the commercial situation by increasing production. This leads to the full use of labor and capital. As a result, after a certain time, the market becomes flooded with goods. Their quality is gradually deteriorating due to the operation of Say's law. Demand falls, prices fall too, goods begin to accumulate in warehouses. After a certain time, firms begin to reduce production volumes. This is how the Kitchin cycle goes.
Causes and consequences
The economic cycles of Kitchin are connected with the lack of the ability to instantly assess the market situation. Firms need time both to start ramping up production and to decide whether to scale back. The delay is due to the fact that entrepreneurs do not immediately understand what is prevailing on the market now - supply or demand. Then they also need to verify this information. It also takes time to put the solution into practice. It is not so easy to immediately find new employees or fire old ones. Thus, short-term Kitchin cycles are associated with a delay in the collection and processing of information.
Josef Kitchin at a Glance
He is a British statistician and businessman. Josef Kitchin worked in the mining industry in South Africa. In 1923, he conducted a study of short-term business cycles in Great Britain and the United States of America from 1890 to 1922. Their duration was about 40 years. He presented the results of his research in a paper en titled "Cycles and Trends in Economic Factors". The author explained the presence of such fluctuations by psychological reactions to capitalist production and time lags in the transmission of information, which affects the decision-making process of firms. In other words, Kitchin cycles characterize the regulation of the supply of goods by enterprises in terms of their need for the market.
Period of 7-11 years
The Juglar cycle is in twotimes longer than Kitchin. But the scientist established its existence in 1862. Among the reasons for the identified fluctuations, Juglar cited changes in fixed investment, and not just the level of employment. In 2010, a study using spectral analysis confirmed the existence of such cycles in the dynamics of the world gross domestic product.
Blacksmith Cycle
These are medium duration fluctuations. They were first investigated by Simon Kuznets in 1930. They take about 15-25 years. The author cited demographic processes as the reason for such cyclicity. He considered the influx of migrants and the associated building booms. Kuznets also characterized them as infrastructural investment cycles. Some modern economists attribute these cycles to an 18-year fluctuation in the value of land as a factor of production. They see a way out in the introduction of a special tax. However, Fred Harrison believes that this will not even help mitigate the cyclicality. In 1968, Howry criticized Kuznets' research. He argued that the data had been analyzed incorrectly. However, Kuznets replied that the cycles he had identified could be seen in the growth of the world's gross domestic product without applying the filter he invented.
Kondratiev Research
The longest business cycles are 45-60 years. The famous Soviet economist Kondratiev believed that fluctuations affect all sectors of the economy. He concentrated on prices, interest rates. In everyKondratiev identified four stages in the cycle. The main indicator he studied was production in terms of value. To date, there are five long waves:
- From 1890 to 1850. Associated with the advent of the steam engine and the beginning of the widespread use of cotton.
- From 1850 to 1900. Railroads and steel production became the main engine.
- From 1900 to 1950. Associated with the spread of electricity and the development of the chemical industry.
- From 1950 to 1990. Propulsion industries were pharmaceuticals and automotive.
- The new wave is associated with information and communication technologies as an engine of progress.
Besides the technological explanation, some scholars have linked long Kondratieff cycles to demographic change, land speculation and debt deflation. There are several modern modifications of the theory of the Soviet economist. They can be roughly divided into two groups. The first focuses on changing technologies. The second examines credit cycles. However, many economists do not accept Kondratieff's theory of long waves. An even greater debate is going on about what years to consider the beginning of each of the cycles. The onset of the global financial crisis fits quite well into Kondratiev's theory, signaling the beginning of a recession period.
