Business Cycle


Business cycle - Austrian School



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Business cycle - Austrian School

  • Austrian business cycle theory



Business cycle - Austrian School

  • Economists of the heterodox Austrian School argue that business cycles are primarily caused by excessive creation of bank credit – or fiduciary media – which is encouraged by central banks when they set interest rates too low, especially when combined with the practice of fractional reserve banking



Business cycle - Austrian School

  • Adherents, such as the historian Thomas Woods argue that these earlier financial crises were prompted by government and bankers' efforts to expand credit despite restraints imposed by the prevailing gold standard, and are thus consistent with Austrian Business Cycle Theory.



Business cycle - Georgism

  • Henry George identifies land price fluctuations as the primary cause of most business cycles. The theory is generally ignored in most of today's discussions of the subject despite the fact that the two great economic contractions of the last 100 years (1929–1933 and 2008–2009) both involved speculative real estate bubbles.



Business cycle - Georgism

  • Because housing and commercial real estate provide collateral for a large portion of lending, there is a tendency for real estate prices to rise faster than the rate of inflation in business cycle upswings.



Business cycle - Georgism

  • Speculation in land concentrates profits in landholders and diverts economic resources to speculation in land, squeezing profits away from production that has to occur on this land.



Business cycle - Georgism

  • This shock to the economy occurs as long as there is land speculation, creating an underlying tendency toward inflation and recession late in the growth phase of the business cycle



Business cycle - Georgism

  • Land speculation slows the economy in two ways. It increases production costs by making land in general more expensive (shifting the Aggregate supply (AS) curve upward) as well as decreasing productivity by denying access to the best locations, shifting the AS curve to the left and lowering "potential output".



Business cycle - Georgism

  • The Wisconsin Business School publishes an on line database with building cost and land values for 46 U.S. metro areas.



Business cycle - Mitigating an economic downturn

  • Since the 1940s, following the Keynesian revolution, most governments of developed nations have seen the mitigation of the business cycle as part of the responsibility of government, under the rubric of stabilization policy.



Business cycle - Mitigating an economic downturn

  • Since in the Keynesian view, recessions are caused by inadequate aggregate demand, when a recession occurs the government should increase the amount of aggregate demand and bring the economy back into equilibrium. This the government can do in two ways, firstly by increasing the money supply (expansionary monetary policy) and secondly by increasing government spending or cutting taxes (expansionary fiscal policy).



Business cycle - Mitigating an economic downturn

  • By contrast, some economists, notably New classical economist Robert Lucas, argue that the welfare cost of business cycles are very small to negligible, and that governments should focus on long-term growth instead of stabilization.



Business cycle - Mitigating an economic downturn



Business cycle - Mitigating an economic downturn

  • Additionally, since the 1960s neoclassical economists have played down the ability of Keynesian policies to manage an economy



Business cycle - Notes



Business cycle - Notes

  • Jump up ^ Madhani, P. M. (2010).Rebalancing Fixed and Variable Pay in a Sales Organization: A Business Cycle Perspective. Compensation & Benefits Review 42(3), pp. 179–189



Business cycle - Notes



Business cycle - Notes

  • Jump up ^ Batra, R. (2002). "Economics in Crisis: Severe and Logical Contradictions of Classical, Keynesian, and Popular Trade Models".



Business cycle - Notes

  • Jump up ^ http://www.thefreemanonline.org/featured/classical-economists-good-or-bad/



Business cycle - Notes

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