51. Business Cycles

Business Cycles

C.M. Heydenrych

The concept of business cycles conjure up the idea that they are regular and even predictable - they are not.

Noah Smith (2014) in an article titled "Maybe There's No Such Thing as a Business Cycle" says "you need to realize that nobody really knows if a business cycle actually exists." He continues by saying "The word “cycle” conjures up images of waves and seasons, but the business cycle isn’t a regular cycle like that (if it were, it would be easy to predict the next recession). Economists actually think that recessions and booms are random temporary disturbances of a smooth trend of long-term growth." This last point reminds us of the pre-Keynesian view of the Classical economists.

One definition of the business cycle is: It is the movement of gross domestic product (GDP) around the long-term trend. This long term trend has been upward growth trend for most of human history though not really measured since the 1930's WIKIPEDIA: Economists of the Austrian School argue that business cycles are caused by excessive issuance of credit by banks in fractional reserve banking systems. The excessive issuance of bank credit may be exacerbated if central bank monetary policy sets interest rates too low. The resulting expansion of the money supply causes a "boom" in which resources are misallocated or "malinvested" because of artificially low interest rates. Eventually, the boom cannot be sustained and is followed by a "bust" in which the malinvestments are liquidated (sold for less than their original cost) and the money supply contracts.[38][39] One of the criticisms of the Austrian business cycle theory is based on the observation that the United States suffered recurrent economic crises in the 19th century, notably the Panic of 1873, which occurred prior to the establishment of a U.S. central bank in 1913. Adherents of the Austrian School, 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. More to come... (last updated 15 September 2015)

References.

Smith, Noah (2014: Maybe There's No Such Thing as a Business Cycle. http://www.bloombergview.com/articles/2014-12-18/maybe-theres-no-such-thing-as-a-business-cycle [Accessed 15 September 2015].