Evolution Of Business Cycle Theory

One of the most controversial questions in macroeconomics is what explains business cycle fluctuations. Economists mostly agree on what are the key facts describing the phenomenon.

However, a unifying explanation for the facts is still debated. According to Burns and Michel (1946), business cycles are:

“ a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises : a cycle consists of expansions occurring at about the same time in many economic activities , followed by similarly general recessions , contractions, and revivals which merge into the expansion phase of the next cycle , this sequence of changes is recurrent but not periodic , in duration

The following list describes the most well known and influential contributions which have survived until today:

Kondratieff cycles : The major inquiry into long- wave cycles is usually attributed to Kondratieff (1892-1930 )who ,among others ,studied British and German iron consumption and arrived at the conclusion that a cycle with a period of about 40-60 years exists .Though several approaches to explain the existence of these long waves have been proposed ,technological innovations and subsequent structural change are usually considered to be the main driving forces of this cycle . The major technological events over the last 200 years , namely the innovation of (i ) steam power (1790 ), (ii) railroads (1830 ), and (iii)industrial electrification and the automobile (1885) correspond with the three distinguished up-and downswings isolated by Kondratieff : a first complete cycle from 1790 to 1844/51 , a second cycle from 1850 to 1890/96 ,and a third one from 1890/96 to 1930

It seemed as if stochastic exogenous influences dominated the evolution of the economy. Variables like inventory stocks temporarily respond to these shocks but eventually return to their equilibrium values. In addition to this list, several other cycles are proposed. The Kuznets cycle with a length of 15-20 years is occasionally included in the list of standard cycles .Table 1.1 summarize the properties of the three major different cycles. Type Wave length Major Topics Kondratieff 40 - 60 years technical progress, structural change Juglar 7- 11 years Investment cycle ; fluctuations in GNP, inflation rate, and employment Kitchin 2-4 years Random shocks; fluctuations in GNP, inflation rate, and employment ;inventory cycle

Table 1-1

Though this classification has become popular, it is not definitely clear whether all of these cycles really exist. For example , Kondratieff was able to isolate only three long wave cycles because reliable data on industrial production only exist for the last 100- 150 years in most industrial countries , and the periodicity of the major historical innovations can be viewed as being purely accidental