Business Cycles Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Economists and historians have described a number of different cycles in economic history, patterns that we can see repeated over and over again, from the three-to-five-year Kitchin inventory cycle to the millennia-long cycle of civilization described by futurist Alvin Toffler. These cycles describe fluctuations in various activities or trends; while popular books are often sold on the premise that they are predictable both in frequency and in effect, it’s broadly true that the less specific the predictions of such a cycle, the more the data will bear it out.

When we talk about “the business cycle,” for instance, or “a business cycle” as a unit of time in American history, we are generally speaking of the theory put forth by Clement Juglar, a 19th-century French economist who posited a 7–11 year business cycle tied to the credit cycle. The modern notion of the business cycle is not purely Juglar’s—far from it—but builds on his suggestions and incorporates the work of Friedrich Hayek, Gustav Cassel, Arthur Spiethoff, and others. The idea of cyclical booms and busts, depressions and periods of prosperity, was especially compelling in the years following the worldwide Great Depression, to which many modern schools of economic thought can date their origins.

The easiest and most common statistic to track in discussing business cycles is real gross domestic product (GDP)—the total output produced by an economy. Since 1820, after the nation got on its feet following the expenses of the War of 1812, the United States has shown steady and significant growth in its real GDP, an average increase of 3.6 percent per year. That upward trend alone does not tell the story, however; it doesn’t even accurately describe the plot arc. Within that period there have been many short-term fluctuations, contractions of the economy followed by increases.

Those fluctuations, experienced by every capitalist economy and apparently an unavoidable feature thereof, are our business cycles. The two phases of the business cycle are the expansion and the contraction—at any given time, the economy is doing one or the other, though with respect to business cycles we look not at day-to-day trends but longer-term developments. During the expansion, the real GDP increases until it reaches a peak, at which point it declines during the contraction. The contraction reaches a trough, at which point the economy again expands.

Since the Civil War, there have been 29 business cycles in the United States, of varying lengths. The shortest was 17 months (August 1918 to January 1920) with a 10-month expansion, and the longest was a bit over 10 years (July 1990 to March 2001), with an expansion of exactly a decade. The variability of the cycles’ duration undermines the appeal of those popular futurism books that claim to be able to tell us what the economy will be like in 2020 or 2030, and at first glance may seem to leave us with nothing but “the economy will get worse, and then better, and then worse, and then better again.” However, even that simple fact is interesting—while it may seem obvious that every contraction or expansion must stop eventually, the cyclical nature still sheds light on American economic history, and provides an opportunity to investigate the inciting causes of the phases’ cycles.

Business cycles are characteristic of all capitalist economies, a fact that was highlighted after the Great Depression, when all the major capitalist economies of the world experienced contraction and all saw their real GDPs begin to rise again by the end of the decade. A casual read of a history text sometimes misses this fact, as well as the existence of the cycles themselves, because histories will generally use the language of the time—and the phrases that economists and the public have favored for expansions and especially contractions have shifted over time.

Contractions were originally called panics, as in the banking panics of the 19th century, but because that word implied a root cause in the hysterical actions (and overreactions) of the public, it was replaced by crisis, from which no such things can be inferred. Even crisis, though, implies a drastic situation instead of an ordinary part of the economic cycle—and the word sounds overblown for less severe contractions. The familiar depression took hold, eventually supplanted by the carefully neutral recession, which is the term most commonly used now—ever since the Great Depression, there has been a sense, especially among the public, politicians, and media, that the term depression should be reserved for contractionary phases that are long lasting with a deep impact on the American lifestyle. And there are, of course, always euphemistic phrases to be found, like growth correction (which even usually clear-headed economist John Kenneth Galbraith used) and rolling readjustment. However transparently those terms may be designed to ease the public mind, they are not actually wrong—they do emphasize the cyclical nature of contractions and expansions.

The terms for expansions do not vary nearly as much, because they are not as headline-grabbing, aren’t talked about as much. Usually boom or recovery will suffice, depending on how rapid the expansion is, and how bad the trough of the preceding contraction was. Compatible with the euphemistic tendencies in referring to contractions, though, expansions are often treated as a success, something to be proud of—quite often, expansions are spoken of as something that was accomplished, while contractions were something that happened or were suffered through.

The Great Depression And Beyond

It is not always obvious how to determine the endpoints of a business cycle. The National Bureau of Economic Research defines a recession, for instance, as a period of significant decline in total output, income, employment, and trade, “usually lasting from six months to a year”—but even that definition leaves wiggle room. The most well-known business cycle in American history lasted from August 1929 to May 1937—the Great Depression, minus its last two years (when the economy was expanding, but was still far from recovery). The unemployment rate averaged 18.4 percent and rose as high as 25 percent, while real GDP fell 27 percent and took seven years to recover to its pre-Depression level. Many saw it as the death throes of capitalism, long awaited, long feared. In contrast, more than 50 years after the end of the Depression, the United States experienced its longest expansion, from March 1991 to March 2001, a period of post–Cold War, pre-9/11 stability that was also the nation’s longest business cycle.

Since the Depression—when, whether coincidentally or not, presidential administrations began consulting more closely with economists, and the field of economics itself saw a boom—business cycles have been less severe. In the 10 cycles since the end of World War II, contractions have lasted an average of 10 months, while expansions have averaged 57 months—a figure helped, no doubt, by the steady growth of the Clinton years and the general prosperity of the early Cold War. Even in the most severe recession of that period, July 1981 to November 1982, output fell barely 3 percent (versus 27 percent in the Great Depression) and unemployment reached 11 percent (25 percent in the Great Depression). Before World War II, expansions were about half as long, contractions about twice as long.

Inflation has also been a constant since the Depression. In all but three of the years since—and every year since 1954—prices have increased, regardless of the phase of the business cycle. During expansions, prices rise faster—labor costs increase during expansions, which leads to accelerated price hikes; shortly after the expansion peaks, labor prices tend to fall, putting less pressure on rising prices. The rate of inflation, then, tends to follow a cycle that closely shadows the business cycle, while inflation itself more or less persists as a constant.

Much of the work of economists since the Depression has been the study of recessions and how they might be prevented or minimized. John Maynard Keynes, the foremost economist in the Depression’s aftermath, blamed declines in aggregate demand—declines in the number of goods and services sought—for recessions, because such declines lead to businesses reducing production and possibly jobs. His recommendation, issued while the Depression still raged, was for the government to intervene to increase demand, either by reducing taxes (leaving more money in consumers’ pockets) or increasing government spending to “pump money into the economy,” a prescription that has long since become familiar. This sort of manipulation is called countercyclical fiscal policy, because it is designed not only with business cycles in mind but with the explicit aim of changing them. (For his part, Juglar blamed overinvestment, overextension, and rampant speculation for recessions, essentially arguing that they were as bad as they were because the expansions that preceded them were “false” expansions, booms inflated by irresponsible and unsustainable financial behavior. Juglar was writing well before the Great Depression, but nothing about it contradicts him in the broad points.)

World War II seems to have borne out Keynes’s theories. The prolonged, high-tech, expensive war, fought with massive amounts of manpower and technology, with extraordinary and unheard-of efforts put into research for the war effort, rejuvenated the American economy—and accustomed many women to the workplace, which helped in the coming years by (in essence) providing more available workers. The existence of the war makes it difficult to say what would have happened to the economy without that massive spending and the historically low levels of unemployment caused by the one-two punch of military enlistment and increased domestic labor demand. Some economists believe the Depression would have ended around the same time without those effects. It is a bit like dropping a brick on a spider and then debating whether it would be just as dead had you only dropped a shoe; it’s not that the question is without merit, it’s that circumstance has placed a definitive answer out of reach.

Bibliography:

Samuel Bowles and Richard Edwards, Understanding Capitalism (Harper & Row, 1985);
Bureau of Economic Analysis, Survey of Current Business (v.82/8);
John Kenneth Galbraith, Money: Whence It Came, Where It Went (Houghton Mifflin, 1975);
Angus Maddison, Monitoring the World Economy 1820–1992 (Development Centre of the Organisation for Economic Co-operation and Development, 1995);
S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970 (1975).

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