Business Cycles

Economists and historians have described a number of different cycles in economic history, patterns that we can see repeated over and over again, from the three-to-five-year Kitchin inventory cycle to the millennia-long cycle of civilization described by futurist Alvin Toffler. These cycles describe fluctuations in various activities or trends; while popular books are often sold on the premise that they are predictable both in frequency and in effect, it's broadly true that the less specific the predictions of such a cycle, the more the data will bear it out.

When we talk about “the business cycle,” for instance, or “a business cycle” as a unit of time in American history, we are generally speaking of the theory put forth by Clement Juglar, a 19th-century French economist who posited a 7–11 year business cycle tied to the credit cycle. The modern notion of the business cycle is not purely Juglar's—far from it—but builds on his suggestions and incorporates the work of Friedrich Hayek, Gustav Cassel, Arthur Spiethoff, and others. The idea of cyclical booms and busts, depressions and periods of prosperity, was especially compelling in the years following the [Page 198]worldwide Great Depression, to which many modern schools of economic thought can date their origins.

The easiest and most common statistic to track in discussing business cycles is real gross domestic product (GDP)—the total output produced by an economy. Since 1820, after the nation got on its feet following the expenses of the War of 1812, the United States has shown steady and significant growth in its real GDP, an average increase of 3.6 percent per year. That upward trend alone does not tell the story, however; it doesn't even accurately describe the plot arc. Within that period there have been many short-term fluctuations, contractions of the economy followed by increases.

Those fluctuations, experienced by every capitalist economy and apparently an unavoidable feature thereof, are our business cycles. The two phases of the business cycle are the expansion and the contraction—at any given time, the economy is doing one or the other, though with respect to business cycles we look not at day-to-day trends but longer-term developments. During the expansion, the real GDP increases until it reaches a peak, at which point it declines during the contraction. The contraction reaches a trough, at which point the economy again expands.

Since the Civil War, there have been 29 business cycles in the United States, of varying lengths. The shortest was 17 months (August 1918 to January 1920) with a 10-month expansion, and the longest was a bit over 10 years (July 1990 to March 2001), with an expansion of exactly a decade. The variability of the cycles' duration undermines the appeal of those popular futurism books that claim to be able to tell us what the economy will be like in 2020 or 2030, and at first glance may seem to leave us with nothing but “the economy will get worse, and then better, and then worse, and then better again.” However, even that simple fact is interesting—while it may seem obvious that every contraction or expansion must stop eventually, the cyclical nature still sheds light on American economic history, and provides an opportunity to investigate the inciting causes of the phases' cycles.

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