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Business Cycles - Essay Example

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Business cycles, also known as economic cycles, consist of periodic fluctuations in economic activity concerning its long-term growth trend. A typical business cycle involves periodical shifts between rapid growth of productivity, recovery and prosperity, and periods of stagnation or decline…
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Business Cycles
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Download file to see previous pages Most observers find that the length of a business cycle from peak to peak, or from bottom to bottom vary, so that cycles are not systematic in their regularity. In fact, economic history shows that no two cycles are alike. Some economists dispute the existence of real "cycles" and use the term "fluctuations" instead. Others see enough similarities between shifts in economy and claim that studying business cycles in detail is a powerful tool which can serve us to determine the current state of the economy. The key question concerning business cycles is whether or not similar mechanisms that generate recessions and booms in capitalist economies exist.
Periods of stagnation are a great burden for society. Being painful for large majorities of workers who lose their jobs, they produce pressure on policy makers to try to smooth out the oscillations. A very important goal of Western civilization since the Great Depression has been to limit the dips. However, government intervention in the economy can be a risky business. For example, some of Herbert Hoover's reforms (including tax increases) are widely believed to have deepened the depression.
Managing economic policy in order to reduce the negative side effects of business cycle bottoms is not an easy job in a society with a complex economy, even when the theory of Keynes is applied. According to some nineteenth-century advocates of communism, this is an insurmountable difficulty. For instance, Karl Marx claimed that the business cycle crises of the capitalistic economy were inevitable results of its operations. From this point of view, all that governments can do is to delay the inevitable economic crises and to hope that they will not appear during their stay in power. Even then, crisis could emerge in a different form, for example as severe, unexpected inflation or an increasing government deficit. Worse, by delaying a crisis, western governments are seen as making it more painful for their successors and more dramatic for the whole society.
In addition to the wide-spread left-wing criticism, Neoclassical economists question the ability of Keynesian policies to manage an economy. Challenging the Phillips Curve Nobel Laureates such as Milton Friedman and Edmund Phelps argue that inflationary expectations negate the Phillips Curve in the long run. Their theory was supported by the stagflation of the 70's. Friedman claimed that all the Fed can do is to avoid large mistakes. He believes that the rapid contracting of the money supply in the face of the Stock Market Crash of 1929 was such a big mistake. It turned what would have been a recession into a great depression (Rothbard, 1975). That is why, good forecasts of the cyclical movements of the economy and especially of the turning points of a business cycle are critical to improve policy decisions. The means of monetary and fiscal policy can also help to smooth the cycle out.
The Austrian School of economics does not accept the suggestion that business cycles are inherent features of an unregulated economy and seeks for their origins in governmental intervention in the money supply. Austrian School economists underline the role of interest rates as the price of investment capital, which stays in the base ...Download file to see next pagesRead More
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