Many generations of researchers have tried to unravel the mystery of the cyclical fluctuations of the market economy. Now, when in Russia the breeding process becomes more and more cyclical, this problem is of interest to a wide range of businessmen, managers and government officials. The purpose of this publication is to reveal the causes of the cycles, their nature, to show the impact of cyclical fluctuations on production and employment.
Many generations of researchers have tried to unravel the mystery of the cyclical fluctuations of the market economy. As a result, at a certain stage of the analysis, some authors concluded that cycles can be eliminated and a good development of the economy can be ensured. This led some politicians, notably US President L. Johnson, to declare in the late 1960s : “We have shaken off the cyclical downturns that for many decades have pushed us against the path of growth and Progress. In the 1960s, we have adopted a new strategy to prevent cyclical fires before they start.”However, this hope was not destined to come true. Objective reality turned out to be stronger than scientific predictions. At present, none of the serious scientist-economists disputes the existence of the cyclical dynamics of the market economy.
Now that the foundations of market relations have been formed in Russia and the reproduction process is becoming more and more cyclical, this issue will be of interest not only to a narrow circle of theoretical specialists, but also to a wide range of workers. practical. and mainly businessmen, heads of state-owned companies, many government figures and entire institutions.
The purpose of this publication is to reveal the objective causes of the cycles, their nature, to show the impact of cyclical fluctuations on national production and employment.
Business (business) cycle: Regular fluctuations in production, employment, and income levels, typically lasting from 2 to 10 years. The reasons are: periodic depletion of autonomous investments; weakening the effect of animation; fluctuations in the volume of the money supply; renewal of fixed capital, etc. Economic development is always associated with an imbalance, with a deviation from the average indicators of economic dynamics. The most striking manifestations of instability are inflation (increase in the level of prices, depreciation of the national currency) and unemployment (low level of production and employment).
Cycles can be caused by a change in aggregate supply. The most famous case is the oil shock of the 1970s, which caused world prices to rise nearly 10-fold. In 1992-1993, a favorable supply shock occurred in the US as a result of unusually large productivity gains, spurred by the unbundling process and the widespread use of information technology.
The cycle can be divided into two periods: descending (falling production) and ascending (growing production). Since economic booms and busts, which are the essence of the business cycle, play a key role in fluctuations in economic (business) activity, economists refer to such cycles as business cycles.
Real GDP can deviate from nominal, and these fluctuations are captured by the GDP deflator. Fluctuations in the actual volume of production around potential GDP are characterized by an indicator called the Gap GDP:
gap GDP = (Y — Y*) / Y*
where Y is the actual production volume; Y* is the potential output.
Potential GDP is the amount of output that is achieved with full employment of resources.
Full employment of resources is possible in the absence of cyclical unemployment, that is, a natural unemployment rate of 5.5-6.5% of the total labor force and an unloaded production capacity of 10-20% is assumed. These figures may vary from country to country, but in all cases, full employment of resources means only structural unemployment.
On closer examination, the business cycle is a single process that successively goes through four phases: surge (expansion), recession (crisis), depression, recovery.
The expansion phase begins with the active start-up of new companies and the modernization of old ones, the growth of production volumes, employment, investment, personal income, demand and prices, and ends with a boom. : a period of overload and ultra-high employment. of production capacities. During a boom, the price level, the wage, and the interest rate are very high. At the highest point of the cycle, called the peak, all of these indicators reach their maximum value.
The inevitable consequence of the boom is a turn in the development of the cycle, when the growth of production is replaced by its decline. This indicates the beginning of a crisis phase. The increase in stocks of unrealizable basic products leads to a decrease in production volumes. Industrial investment is reduced and, consequently, the demand for labor is falling. This means an increase in unemployment, a reduction in the length of the working week. The demand for raw materials falls, and then the supply of raw materials. There is a sharp decline in earnings, demand for credit is weakening, and interest rates are falling.Finally, if the recession is deep and prolonged, there is a decrease or slowdown in the growth of commodity prices.
In the depression phase, the fall in GDP and the increase in unemployment slow down significantly, the volume of investment is close to zero. Thus, during this period, the economy is characterized by stagnant output, slow trade, and the presence of a large mass of free money capital. After a certain time, the economic system overcomes the lowest point of the cycle, called the valley, and the recovery begins. Under it, the movement of all economic indicators changes direction, income and employment begin to grow again. When companies bring the volume of production to the highest point reached in the previous cycle, the economic recovery begins.
What reproductive functions do these phases of the business cycle perform?
The main phase of the cycle is the crisis (decrease in production), since it is a mechanism of destruction of the old proportions, creating conditions for the future development of production. The crisis performs its “cleansing” function with the help of the price mechanism. In the crisis phase, the prices of raw materials for obsolete products fall, interest rates fall, share prices fall, the profits of companies decrease, and many of them suffer losses, which causes a wave of bankruptcies .
But a failing economy does not mean a bad economy. The crisis itself contains the possibility of overcoming it. In the first place, the crisis eliminates its immediate cause: the overaccumulation of capital, since in the crisis phase the economy gets rid of part of the fixed capital by depreciating it and even destroying it. This stimulates the beginning of a massive renewal of productive capital on a new technical basis. In a crisis, no entrepreneur can expect the complete physical deterioration of machinery and equipment: the crisis forces everyone to carry out the widespread replacement of many elements of fixed capital. As a result, the new demand is born automatically.
The crisis, as has already been said, is followed by depression. Outwardly, it manifests itself in a slowdown in the rate of decline, stagnation in bankruptcies, a decrease in stocks of basic products, etc. Its reproductive function is an adaptation to the new built proportions. In the depression phase, the objective faced by companies (maximizing profits) becomes tempting again, since there has been a reduction in production costs.
During a renaissance, when prices, wages, employment, interest rates, etc. gradually rise, massive investments are made that ensure expanded reproduction. Thus, the function of reactivation is to carry out expanded reproduction and reach, through it, the level of production prior to the crisis.
During a boom, when the dynamics of production are completely subordinated to the search for profit (while the dynamics of demand are mainly determined by the dynamics of wages), supply increasingly exceeds demand, creating the preconditions for a future recession. This means that the increase also fulfills a corresponding reproductive function: production strains its forces, exceeding the limits of effective demand, which intensifies the contradictions in the reproductive mechanism.
Characteristics of cycles in modern conditions.
The cyclicality in the development of a market economy has been observed for almost 200 years. The first industrial crisis broke out in England in 1825, then in 1836 in the same place, but it was also observed in the United States. In 1841, the United States again experienced a crisis. In 1847, the crisis engulfed the United States again, as well as England, France, and Germany. The crisis of 1857 was the first world cyclical crisis. Then followed the crises of 1873, 1882, 1890. The most devastating was the crisis of 1900-1901. It started almost simultaneously in Russia and the US and first of all affected the metallurgical industry.Having hit the US metals market, the crisis spread to England and then to Europe, causing a significant drop in production in the textile, construction, chemical and engineering industries. The recession was followed by a significant drop in the prices of the products of these industries.
In 1929-1933. Western economies experienced the most serious crisis in their history: the Great Depression, which caused output to drop by 40-50% and unemployment to rise by 25%. In the ensuing period, market economies have repeatedly faced both economic crises and booms, but the nature of cyclical fluctuations and their duration have changed significantly. Thus, an analysis of 35 cycles observed in the US from 1834 to 1982 shows that, first of all, the duration and structure of the cycles are subject to constant changes.Thus, although business cycles are a constantly repeating phenomenon, they still cannot be represented as business waves of any length, as regular as ocean tides or sunrise and sunset. As noted in the literature, due to their irregularity, business cycles are more likely to resemble changes in the climate than cycles of the rotation of the planets or the pedals of a bicycle. Second, after World War II, the amplitude of fluctuations in economic activity decreased: the phases of economic recession became shorter, while the phases of output growth became longer. If in 1854-1938.the US economy was in a phase of declining output for 45% of all calendar time, then in 1945-1989. recession phases took only 26% of calendar time. At the same time, the amplitude of fluctuations in production volumes also decreased. GDP growth in the recovery phase decreased from 30.1% in 1919-1938. to 20.9% in 1948-1982, and its reduction in the recession phase decreased from 14.1 to 2.5%. The recession of 1990-1991, which lasted almost 9 months, caused a reduction in real GDP of only 1.4%. This recession was shorter and more moderate than the previous two recessions of 1973-1975.
The cyclical development of the economy has a different effect on the state of various industries. The industries that produce capital goods and durable consumer goods (automobiles, furniture, appliances) are the most affected by the recession. This is because, in times of economic hardship, people tend to put off buying such goods in order to save money and use it to meet more pressing needs. In this case, the fall in demand for expensive products leads to a reduction in production and employment in the relevant industries.
Thus, observations of the course of the cycles show that, under modern conditions, the image of the cycle is significantly modified. However, the nature of the modification is not limited to changing the duration of recessions (recessions) and upswings (booms). The very configuration of the cycle, its reproductive functions, are changing, which significantly distinguishes the current cycle from the classic cycle, that is, from the cycle of free competition. In the classic cycle, as has already been pointed out, the initial and key phase is the crisis.It is not only a way of temporary resolution of urgent problems and contradictions in a market economy, but also a condition for the progressive renewal of fixed capital, lower production costs, renewal and improvement of quality, as well as the competitiveness of products. . The classic crisis fulfilled its “cleansing” function mainly through the price mechanism (in the 19th century, during the crisis, prices fell much more than the volume of production). The fall in the prices of goods and factors of production served as the basis for establishing new price ratios. Adaptation to them took place mainly in the course of depreciation of fixed capital.When there was a massive capital renewal process, prices rose again.
What qualitative changes has the modern cycle undergone, especially the crisis phase? Answering this question, it should be noted that a number of factors have a significant influence on the modern cycle, among which a special role is played:
- monopolistic structure of the markets;
- state regulation of the economy;
- scientific and technical progress;
- the process of globalization (internationalization) of production.
The influence of the monopoly is manifested in the fact that when production decreases, its paralysis occurs while the monopoly maintains high prices. Observations show that not a single postwar cycle (except the 1948-1949 cycle) is associated with falling prices. The scale of appreciation grows from crisis to crisis (that is, from cycle to cycle).
Since prices do not fall, companies manage to make a profit even if production is reduced. At the same time, maintaining a high price level complicates the process of a one-time massive capital renewal. Therefore, in modern conditions, the crisis cannot fully fulfill its “cleansing” function, it does not become the starting point for a massive renewal of equipment and technology, and therefore does not contribute to ridding the economy of the old productive apparatus.
The regulatory role of the State is manifested in the fact that for countercyclical purposes it mainly uses budgetary policy. During the crisis, to stimulate the growth of production, government orders to private companies, as well as state construction, are considerably expanded.
The State is also activating fiscal instruments of budget policy to regulate capital investment and consumer demand. In the order of countercyclical fiscal regulation, the legislative reduction of taxes is carried out in periods of crisis and their increase in periods of boom. These methods are called built-in stabilizers because they operate automatically within the economic system. During recessions, tax revenues fall and government spending rises. Taxes go down because sales fall, and spending goes up as unemployment goes up, bankruptcy insurance goes up, etc. During booms, built-in stabilizers work in the opposite direction (taxes go up, transfers go down).
An important countercyclical regulation instrument of the State is the application of credit policy by reducing the interest rate charged by the Central Bank when it grants loans to commercial banks. A decrease in the discount rate leads to a decrease in interest rates on all types of loans, including consumer loans, and thus contributes to an increase in investment and the expansion of credit sales, which stimulates production growth.
The nature of business cycles is significantly influenced by scientific and technological progress (STP). The increasingly accelerated rates of scientific and technical progress cause an acceleration in the renewal of fixed capital, which is observed in all phases of the cycle, including the crisis phase. As a result, the overproduction of goods, as a characteristic feature of the crisis, is replaced by the overproduction of capital and the chronic underloading of production. This leads to the blurring of the classical phase-by-phase dynamics of the cycle and the cyclical nature of reproduction in general.
In the conditions of globalization of production under the influence of the international division of labor and the internationalization of economic relations, the cycle began to acquire a global character. A crisis in one country entails crisis phenomena in other countries, as a result of which the entire world economy is drawn into cyclical fluctuations. So, in 1974-1975. the major Western countries simultaneously entered a global economic crisis of overproduction. In 1987-1989 in all major countries, the cyclical boom also started simultaneously.After a mild recession that lasted less than a year in 1990-1991, the United States and Western European countries moved simultaneously toward economic recovery. This is due to the internationalization of production and the transition of countries to a new technological production base, which further enhances the international character of the markets for factors of production (raw materials,
So, the world economic crisis of 1957-1958. it laid the foundation for the global structural crisis of overproduction of raw materials on the world market in 1958-1963. This was facilitated by technological changes in production, a decrease in the consumption of materials, and the replacement of natural raw materials with synthetic ones. Raw material prices fell 2 times. Low monopoly prices for crude oil supplied by colonial and dependent countries caused a crisis in the coal industry.
Thus, the market economy, despite the changes, is still subject to cyclical fluctuations. At the same time, as observations show, developed countries managed to avoid the depressions that took place in the past, especially in the 1870s, 1890s, and 1930s. This suggests that the market system has become internally more reliable and stable. This, however, did not happen on its own, but because of a better understanding of macroeconomic mechanisms, which allows governments to take monetary and fiscal policy measures that prevent recessions from becoming a long and cumulative process.
Main conclusions
1. The business cycle is one of the key concepts of macroeconomics. It is inherent in all countries with a market economy and characterizes the process of fluctuations in the level of production, investment, employment and income, resulting in a significant expansion or contraction of business activity in most sectors of the economy. .
2. Fluctuations in economic dynamics, its deviations from the equilibrium development line (long-term trend) are carried out for various reasons:
a) economic activity is uneven due to seasonal fluctuations (in summer it fades in various sectors of the economy due to holidays, while in agriculture it increases);
b) demographic fluctuations can have a significant impact on activity, caused, for example, by a notable drop in the birth rate or an increase in mortality, as a result of which “demographic moats” are formed, which implies fluctuations in the dynamics of the population, and consequently, in the level of employment with a period of 20-25 years;
c) the source of fluctuations may be the useful life during the renewal period of various elements of fixed capital: inventories (3-4 years); machines and equipment (8-10 years); buildings and structures (20-25 years). In addition, there are fluctuations that are not of a narrow sectoral nature, but are manifested in all areas of economic activity after long periods (around 50 years). Such fluctuations are known in economics as Kondratiev cycles (named after the Russian economist N. Kondratiev). Long waves can also be associated with the unevenness of the scientific and technological revolution.
3. Despite the differences in duration and intensity of economic cycles, they all have the same phases. Economists distinguish, as a general rule, four phases of the cycle: rise (boom); crisis (recession); depression (bottom); rebirth (expansion). The phase of the crisis, which lasts more than six months, is called an economic recession. Deep and prolonged recessions, accompanied by devastating consequences for the economy, are often called depressions (the Great Depression of the 1930s). Currently, the concept of depression has fallen into disuse in developed countries and is used only in a historical context.
4. Each phase of the economic cycle fulfills an important reproductive function. The crisis, accompanied by a decrease in production, employment, a decrease in income and costs, ultimately leads to a reduction in the cost of the means of production and the subsequent stimulation of investment in new companies, technologies and equipment. In the depression phase, production and employment, having reached their minimum values, gradually begin to revive on the basis of new proportions and innovations. The recovery phase is characterized by the beginning of extended reproduction and the growth of production to the level of the pre-crisis period.In the boom phase, new companies are launched, unemployment is reduced, wages, investments and the volume of real capital grow. Due to the rapid expansion of production, demand for credit, lending interest rates rise to the level of the average rate of profit.
Thus, despite the fact that crises (recessions) bring considerable economic and human costs, the market economy from cycle to cycle reaches higher and higher levels of development, improving not only the material base, but also the organizational forms of production, distribution, exchange. and consumption.
5. In modern conditions, the content and general picture of the business cycle are significantly changed. This is manifested, firstly, in a decrease in the amplitude of fluctuations in economic activity (recession phases have been shortened, recovery phases have been lengthened; moreover, depression has been avoided, so avoid a recession). followed by recovery and recovery); second, in reducing the range of fluctuations in the levels of production and employment; thirdly, in strengthening the impact on the economic cycle of the monopolistic structure of the markets, scientific and technical progress, the globalization of production, state regulation of the economy.
