Business Cycles

Business Cycles:

An important feature of the working of a capitalist economy is the existence of alternating periods of prosperity and Depression generally referred to as the “business cycle”. (British economists call it the “trade cycle”). A business cycle is a very complex economic phenomenon and economists have not been able so far to discover any comprehensive explanation for this phenomenon. The business cycle is associated with sweeping fluctuations in economic activity, such as production, prices, employment, etc.

What is a business cycle? W. C. Mitchell defined business cycles are a species of fluctuations in the economic activities of organized communities. The adjective ‘business’ restricts the concept to fluctuations in activities that are systematically conducted on a commercial basis. The noun ‘cycles’ bars out fluctuations which do not recur with a measure of regularity.” Prof. Mitchell, thus, insists upon a measure of regularity in cyclical fluctuations.

According to Keynes, “A trade cycle is composed of periods of good trade characterized by rising prices and low unemployment percentage, altering with periods of bad trade characterized by falling prices and high unemployment percentages.” Keyness has, thus, specified two indices, namely, prices and unemployment, for measuring the upswing and downswing of the business cycles.

In the words of Frederick Benham, “A trade cycle may be defined rather badly as a period of prosperity followed by a period of depression. It is not surprising that economic progress should be irregular, trade being good at some time and bad at others.”

The business cycle, in short, is an alternate expansion and contraction in overall business activity, as evidenced by fluctuations in measures of aggregate economic activity, such as the gross national product, the index of industrial production, and employment and income.

Generally speaking, cyclical fluctuations have a tendency towards the simultaneous appearance in all the branches of the national economy. But sometimes they may be confined only to individual industries or individual sectors of the economy. Cyclical fluctuations in such cases are referred to as specific cycles.

Classification of Business Cycles:

Prof. James Arthur Estey has classified business cycles under the following heads:

(1) Major and Minor Cycles- Major cycles may be defined as the fluctuations of business activity occurring between successive crises. The term “crisis” may be interpreted here to mean the major “breakdowns” or “downturns” that interrupt from time to time the relatively even tenor of economic activity. So the major cycles constitute the intervals between successive major downturns of business activity or between major recessions. On this basis, Prof. Hansen recognizes twelve major cycles in the U.S.A., during the period from 1837 to 1937, with an average duration of 8.33 years. The major cycles are sometimes referred to as Juglar Cycles, after the name of Clement Juglar, a French economist of the nineteenth century, who on the basis of his investigation, established the crystal nature of business fluctuations.

It has been established from the records of business fluctuations that each major cycle is made up of two or three minor cycles. The upswing of business in the major cycle is often interrupted by minor downswings. Likewise, the downswing of business in the major cycle may be interrupted by minor upswings. These shorter cycles in major cycles are sometimes referred to as minor cycles. The duration of the minor cycles averages close to 40 months. These minor cycles have actually operated both in Great Britain and the U.S.A. Since the distinction ‘between major and minor cycles was observed by Prof. Joseph Kitchin, the minor cycles are sometimes referred to as Kitchin Cycles.

(2) Building cycles– This refers to the cycle of building construction. The duration of the building cycle is longer than that of the business cycle. It has been discovered the building industry is also subject to fluctuations of fairly regular duration. There are upswings and downswings in the building activity. The duration of the building cycle varies between fifteen to twenty years. The average length of the building cycle is 18 years- just twice the length of the business cycle. Between 1830 and 1934, there were six complex building cycles in the U.S.A.

(3) Kondratieff Cycles (or Long Waves)– They are sometimes referred to as “long waves” occurring in a 50 or 60-year cycle. The long waves in economic activity were discovered by the Russian economist, Kondratieff. Hence, these long waves are called Kondratieff Cycles. Kondratieff, on the basis of statistical data pertaining to the period 1780-1920, was able to establish long cycles in England and France each full cycle being duration of 50 years.

 Summing up, the fundamental changes in economic activity include three kinds of cycles-the short or minor or the Kitchen cycles of the duration of 40 months or so, the major or the Juglar cycles, composed of three minor cycles and of a duration of 10 years or so, and finally, the Kondratieff cycles (or, long waves), made up of 6 Juglar cycles and of the duration of 60 years.