The economy of any, even the most developed country, is not static. Her performance is constantly changing. The economic downturn gives way to a boom, the crisis to peak growth. The cyclical development is characteristic of the market type of management. A change in the level of employment affects the purchasing power of consumers, which, in turn, leads to a decrease or increase in the price of products. And this is just one example of the relationship of indicators. Since today most of the countries are capitalist, such economic concepts as recession and boom are suitable for describing and developing the world economy.
History of the study of economic cycles
If you build a curve of the GDP of any country, you can see that the growth of this indicator is not constant. Each economic cycle consists of a period of decline in social production and its rise. However, its duration is not clearly defined. Fluctuations in business activity are poorly predictable and irregular. However, there are several concepts that explain the cyclical development of the economy and the time frame of these processes. The first to recurring periodic crises was Jean Sismondi. The "classics" denied the existence of cycles. They often associated a period of economic downturn with external factors, such as war. Sismondi also drew attention to the so-called “panic of 1825,” the first international crisis that occurred in peacetime. Robert Owen came to similar conclusions. He believed that the economic downturn was due to overproduction and underconsumption due to inequality in the distribution of income. Owen advocated government intervention and a socialist way of farming. The periodic crises characteristic of capitalism became the basis of the work of Karl Marx, who called for a communist revolution.
Unemployment, the economic downturn, and the role in addressing these government problems are the subject of study by John Maynard Keynes and his followers. It was this economic school that systematized ideas about crises and proposed the first consecutive steps to eliminate their negative consequences. Keynes even tested them in practice in the United States during the Great Depression of 1930-1933.
Main phases
The business cycle can be divided into four periods. Among them:
- Economic recovery (recovery). This period is characterized by an increase in productivity and employment. The inflation rate is low. Buyers seek to make purchases that were delayed during the crisis. All innovative projects quickly pay off.
- Peak. This period is characterized by maximum business activity. The unemployment rate at this stage is extremely small. Production facilities are as busy as possible. However, negative aspects also begin to appear: inflation and competition intensify, and the payback period of projects increases.
- Economic recession (crisis, recession). This period is characterized by a decrease in entrepreneurial activity. The volume of production and investment is falling, and unemployment is growing. Depression refers to a deep and prolonged decline.
- Bottom. This period is characterized by minimal business activity. At this stage, there is the lowest level of unemployment and production. During this period, the surplus of goods that was formed during peak business activity is consumed. Capital from the sphere of trade flows into banks. This leads to a decrease in interest on loans. Usually this phase is not long. However, there are exceptions. For example, the Great Depression lasted for ten whole years.
Thus, the economic cycle can be characterized as a period between two identical states of business activity. You need to understand that despite the cyclical nature, in the long run, GDP tends to grow. Economic concepts such as recession, depression and crisis do not disappear anywhere, but each time these points are located higher and higher.
Loop Properties
Considered economic fluctuations vary both in nature and in duration. However, they can distinguish several common features. Among them:
- Cyclicity is characteristic of all countries with a market type of management.
- Crises are an inevitable and necessary phenomenon. They stimulate the economy, forcing it to reach ever greater levels of development.
- Any cycle consists of four phases.
- Cyclicity is caused not by one, but by many different reasons.
- Due to globalization, the current crisis in one country will inevitably affect the economic situation in another.
Classification of periods
The modern economy distinguishes more than a thousand different cycles of business activity. Among them:
- Short-term Joseph Kitchin cycles. They last about 2-4 years. Named after the scientist who discovered them. Kitchin initially attributed the existence of these cycles to changes in gold reserves. However, today it is believed that they are caused by delays in the receipt by firms of the commercial information necessary for decision-making. For example, consider the saturation of a market with a product. In this situation, manufacturers must reduce output. However, information about market saturation does not come immediately, but rather late. This leads to a crisis due to the appearance of surplus goods.
- Mid-term cycles of Clement Juglar. They were also named after the economist who discovered them. Their existence is explained by the delay between the decision-making on the volume of investments in fixed assets and the direct creation of production capacities. The duration of the cycles of Juglar is about 7-10 years.
- The rhythms of Simon Smith. They are named after the Nobel laureate who discovered them in 1930. The scientist explained their existence by demographic processes and fluctuations in the construction industry. However, modern economists consider technology updates to be the main reason for the Kuznets rhythms. Their duration is about 15-20 years.
- Long waves of Nikolai Kondratiev. They were discovered by a scientist, in whose honor they are named, in the 1920s. Their duration is about 40-60 years. The existence of K-waves is due to important discoveries and related changes in the structure of social production.
- Forrester cycles lasting 200 years. Their existence is due to changes in the materials and energy used.
- Toffler cycles lasting 1000-2000 years. Their existence is associated with fundamental changes in the development of civilization.
Causes
Economic recession is an integral part of economic development. Cyclicity is due to the following factors:
- External and internal shocks. Sometimes they are called impulse effects on the economy. These are technological breakthroughs that can change the nature of housekeeping, the discovery of new energy, armed conflicts and wars.
- Unplanned increase in investments in fixed assets and stocks of goods and raw materials, for example, due to changes in legislation.
- Change in prices for factors of production.
- Seasonal harvesting in agriculture.
- The growing influence of trade unions, which means an increase in wages, and an increase in guarantees of employment.
Recession of economic growth: concept and essence
There is still no consensus among contemporary scholars as to what constitutes a crisis. In Soviet-era literature, the prevailing point of view was that economic downturns were characteristic only of capitalist countries, and under the socialist type of management only “growth difficulties” were possible. Today, there is a debate among economists as to whether crises are characteristic of the micro level. The essence of the economic crisis is manifested in the excess of supply compared to aggregate demand. The recession is manifested in mass bankruptcies, rising unemployment and a decrease in the purchasing power of the population. A crisis is an imbalance in the system. Therefore, it is accompanied by a number of socio-economic upheavals. And to resolve them, real internal and external changes are needed.
Crisis functions
The recession is progressive in nature. It performs the following functions:
- Elimination or quality conversion of obsolete parts of an existing system.
- Approval of initially weak new elements.
- Strength test of the system.
Dynamics
During its development, the crisis goes through several stages:
- Latent . At this stage, the prerequisites are only brewing, they are not yet breaking out.
- The collapse period. At this stage, the contradictions are gaining strength, old and new elements of the system come into confrontation.
- Crisis mitigation period. At this stage, the system becomes more stable, the prerequisites for revitalization in the economy are created.
The conditions of the economic downturn and its consequences
All crises affect public relations. In a downturn, government structures become much more competitive than commercial ones in the labor market. Many institutions are becoming more corrupt, which further exacerbates the situation. The popularity of military service is also increasing due to the fact that it becomes harder for young people to find themselves in civilian life. The number of religious people is growing. The popularity of bars, restaurants and cafes in a crisis is declining. However, people start buying more cheap alcohol. The crisis negatively affects leisure and culture, which is associated with a sharp drop in the purchasing power of the population.
Ways to Overcome Recessions
The main task of the state in a crisis is to resolve existing socio-economic contradictions and help the least protected sectors of the population. Keynesians advocate active intervention in the economy. They believe that economic activity can be restored through government orders. Monetarists advocate a more market-based approach. They regulate the volume of money supply. However, one must understand that all these are temporary measures. Despite the fact that crises are an integral part of development, each company and the state as a whole should have a developed long-term program.