Business cycles

Usually there are four main types of economic cycles:

• Kitchin's short-term cycles (a characteristic period of 2-3 years);
• medium-term cycles of Juglar (characteristic period - 7-11 years);
• Cycles (rhythms) of the Blacksmith (characteristic period - 15-20 years);
• long waves of Kondratiev (characteristic period - 48 - 55 years) ^[1] .

In the cycles of business activity, four relatively clearly distinguishable phases are distinguished: peak, decline, bottom (or “low point”) and rise; but to the greatest extent these phases are characteristic of Juglar cycles ^[2] .

Climb

The rise (revival) occurs after reaching the lowest point of the cycle (bottom). It is characterized by a gradual increase in employment and production . Many economists believe that this stage is characterized by low inflation . Innovations are being introduced in the economy with a short payback period . The demand postponed during the previous recession is realized.

Peak

The peak , or top of the business cycle, is the “highest point” of economic recovery. In this phase, unemployment usually reaches the lowest level or disappears completely, production capacities operate with a maximum or close load, that is, almost all the material and labor resources available in the country are involved in production. Usually, although not always, inflation increases during peaks. The gradual saturation of markets intensifies competition , which reduces the rate of return and increases the average payback period. The need for long-term lending is growing with a gradual decrease in loan repayment opportunities.

Recession

Recession ( recession ) is characterized by a decrease in production volumes and a decrease in business and investment activity . As a result, the increase in unemployment is increasing. Officially, the recession phase, or recession , is considered to be a fall in business activity, lasting over six consecutive months.

Bottom

The bottom ( depression ) of the economic cycle is the “lowest point” of production and employment. It is believed that this phase of the cycle is usually not long. However, history also knows the exceptions to this rule. The great depression of the 1930s, despite periodic fluctuations in business activity, lasted 10 years (1929-1939).

The theory of real business cycles explains the downturns and ups due to real factors. In industrialized countries, this may be the emergence of new technologies, changes in raw material prices. In agricultural countries - crop or crop failure. Also, force majeure situations ( war , revolution , natural disasters ) can become an impetus for changes. Anticipating a change in the economic situation for the better or worse, households and firms massively begin to save or spend more. As a result, aggregate demand is reduced or increased, and retail trade turnover is decreasing or increasing. Firms receive fewer or more orders for the manufacture of products; accordingly, the volume of production, employment changes. Business activity is changing: firms begin to reduce the range of products or, conversely, launch new projects, take loans for their implementation. That is, the whole economy is wavering, trying to come to a balance. In addition to fluctuations in aggregate demand, there are other factors affecting the phases of the economic cycle: changes depending on the changing seasons in agriculture , construction , the automotive industry , retail seasonality, century-old trends in the country's economic development, depending on the resource base, population size and structure proper management.

Jesus Huerta de Soto claims that economic cycles arise due to credit expansion , which is rooted in the banking policy of partial reservation of demand deposits ^[3] . Unsecured money flows into the economy, which lengthens the production chain and thereby creates economic growth mainly due to the fact that consumer goods (first-order goods ^[4] ) increase in value. When credit expansion comes to an end (credit expansion is no longer possible because the reserve limit has been reached), people begin to withdraw deposits from banks, and banks raise interest rates. Loan contraction occurs, which entails a recession , accompanied by deflation (lower prices) for consumer goods and services. An increase in unemployment begins, due to the “ Ricardo effect ” (“accordion effect”), which ultimately leads to an increase in voluntary savings, which, ultimately, can lead the economy out of the crisis, starting the process of economic recovery ^{[5] [6]} .

The existence of the economy, as a combination of resources for steadily growing consumption, has an oscillatory character. Economic fluctuations are expressed in the economic cycle. The “thin” moment of the economic cycle is recession, which, at some scales, can turn into a crisis .

The concentration (monopolization) of capital leads to "erroneous" decisions on the scale of the economy of a country or even the world. Any investor seeks to earn income from his capital. The investor's expectations for the size of this income come from the rise-peak stage, when the income is maximum. At the recession stage, the investor considers it unprofitable for him to invest in projects with a profitability lower than “yesterday's”.

Without such investments (investments), production activity is reduced, as a result, the solvency of workers in this area who are consumers of goods and services of other areas. Thus, the crisis of one or several sectors affects the entire economy as a whole.

Another problem of capital concentration is the withdrawal of money supply (money) from the sphere of consumption and production of consumer goods (also the sphere of production of the means of production of these goods). Money received in the form of dividends (or profits ) is accumulated in the accounts of investors. There is a shortage of money to maintain the required level of production, and as a result, a decrease in the volume of this production. The unemployment rate is growing, the population is saving on consumption, there is a drop in demand.

Of the sectors of the economy, the services and non-durable goods industries are affected to a lesser extent by the destructive consequences of the economic downturn. The recession even contributes to the activation of certain types of activities, in particular, it increases the demand for the services of pawnshops and lawyers specializing in bankruptcies . Firms that manufacture capital goods and consumer durables are most sensitive to cyclical fluctuations.

These firms are not only the hardest hit by the business downturn, but they also benefit most from the recovery in the economy. There are two main reasons: the possibility of putting off purchases and the monopolization of the market. The purchase of capital equipment can most often be delayed for the future; in difficult times for the economy, manufacturers tend to refrain from purchasing new machinery and equipment and building new buildings. During a prolonged recession, firms often prefer to repair or upgrade obsolete equipment rather than spend large sums on new equipment. As a result, investments in manufactured goods during economic downturns are sharply reduced. The same applies to consumer durables. Unlike food and clothing, buying a luxury car or expensive household appliances can be delayed until better times. During periods of economic downturn, people are more likely to repair, rather than change, durable goods. Although food and clothing sales are also generally reduced, this reduction is usually less than the decline in demand for durable goods.

Monopoly power in most industries producing means of production and consumer durables is connected with the fact that few large firms dominate the markets for these goods. The monopoly position allows them to keep prices unchanged during times of economic downturn, reducing production in response to falling demand. Consequently, a drop in demand affects production and employment to a much greater extent than prices. A different situation is typical for industries producing consumer goods. These sectors usually respond to a drop in demand with a general reduction in prices, since none of the firms has significant monopoly power.

Economic cycles are not truly “cyclical” in the sense that the length of a period, say, from one peak to another throughout history has fluctuated significantly. Although economic cycles in the United States lasted an average of about five years, cycles are known from one year to twelve years. The most pronounced peaks (measured as a percentage increase over the economic growth trend) coincided with the great wars of the 20th century. , and the deepest economic recession, excluding the Great Depression, was observed after the end of the First World War . It should be noted that in addition to the described economic cycle, the so-called long cycles. Indeed, at the end of the 20th century. the American economy seems to have entered a period of long recession, as evidenced by some economic indicators, in particular the level of real wages and the volume of net investment. Nevertheless, even with a long-term downward trend, the US economy continues to grow; although a negative GDP growth was recorded in the country in the early 1980s , in all subsequent years, except 1991 , it remained positive. Symptomatic for the long-term recession that began in the 1960s is the fact that, although the growth rate rarely turned out to be negative, the level of economic activity in the United States since 1979 has almost never exceeded the trend growth rate.

• Accelerator Multiplier Model
• A dynamic model of aggregate supply and demand
• Real Business Cycle Model

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