Business Cycle


Business cycle - Credit/debt cycle



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Business cycle - Credit/debt cycle

  • One alternative theory is that the primary cause of economic cycles is due to the credit cycle: the net expansion of credit (increase in private credit, equivalently debt, as a percentage of GDP) yields economic expansions, while the net contraction causes recessions, and if it persists, depressions. In particular, the bursting of speculative bubbles is seen as the proximate cause of depressions, and this theory places finance and banks at the center of the business cycle.



Business cycle - Credit/debt cycle

  • A primary theory in this vein is the debt deflation theory of Irving Fisher, which he proposed to explain the Great Depression. A more recent complementary theory is the Financial Instability Hypothesis of Hyman Minsky, and the credit theory of economic cycles is often associated with Post-Keynesian economics such as Steve Keen.



Business cycle - Credit/debt cycle

  • Post-Keynesian economist Hyman Minsky has proposed an explanation of cycles founded on fluctuations in credit, interest rates and financial frailty, called the Financial Instability Hypothesis



Business cycle - Credit/debt cycle

  • While credit causes have not been a primary theory of the economic cycle within the mainstream, they have gained occasional mention, such as (Eckstein & Sinai 1986), cited approvingly by (Summers 1986).



Business cycle - Real business cycle theory

  • Within mainstream economics, Keynesian views have been challenged by real business cycle models in which fluctuations are due to technology shocks. This theory is most associated with Finn E. Kydland and Edward C. Prescott, and more generally the Chicago school of economics (freshwater economics). They consider that economic crisis and fluctuations cannot stem from a monetary shock, only from an external shock, such as an innovation.



Business cycle - Real business cycle theory

  • There were great increases in productivity, industrial production and real per capita product throughout period from 1870 to 1890 that included the Long Depression and two other recessions. See:Long depression#Myth of the Long Depression There were also significant increases in productivity in the years leading up to the Great Depression. Both the Long and Great Depressions were characterized by overcapacity and market saturation.



Business cycle - Real business cycle theory

  • Over the period since the Industrial Revolution, technological progress has had a much larger effect on the economy than any fluctuations in credit or debt, the primary exception being the Great Depression, which caused a multi-year steep economic decline



Business cycle - Real business cycle theory

  • Carlota Perez blames "financial capital" for excess speculation, which she claims is likely to occur in the "frenzy" stage of a new technology, such as the 1998–2000 computer, internet, dot.com mania and bust. Perez also says excess speculation is likely to occur in the mature phase of a technological age.



Business cycle - Real business cycle theory

  • RBC theory has been categorically rejected by a number of mainstream economists in the Keynesian tradition, such as (Summers 1986) and Paul Krugman.



Business cycle - Politically based business cycle

  • The partisan business cycle suggests that cycles result from the successive elections of administrations with different policy regimes



Business cycle - Politically based business cycle

  • 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.



Business cycle - Politically based business cycle

  • (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.



Business cycle - Marxian economics

  • For Marx the economy based on production of commodities to be sold in the market is intrinsically prone to crisis



Business cycle - Marxian economics

  • Some Marxist authors such as Rosa Luxemburg viewed the lack of purchasing power of workers as a cause of a tendency of supply to be larger than demand, creating crisis, in a model that has similarities with the Keynesian one



Business cycle - Marxian economics

  • Goodwin formalised a Marxist model of business cycles, known as the Goodwin Model in which recession was caused by increased bargaining power of workers (a result of high employment in boom periods) pushing up the wage share of national income, suppressing profits and leading to a breakdown in capital accumulation






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