Business Cycle

The business cycle (or economic cycle) characterizes the dynamics of capitalist economy in time. In general, the business cycle is defined as a fluctuation in the level of economic activity around a longer-term trend. The business cycle is usually described in terms of the general pattern of prosperity, recession, depression, and recovery. Thus, the business cycle is considered to be complete when the level of output returns to the trend level after a period of cycling above then below the trend level.

Being rather descriptive in nature, the concept of business cycle is associated with a group of explanations of economic fluctuation. In contrast to neoclassical approaches to economics that conceive of recessions as the result of external interventions or disturbances leading an economy to deviate from a normal path of steady growth, continuous optimization of economic actors, and adjustment of prices to supply and demand, theories of business cycle claim that the succession of economic expansion and downturn is an intrinsic feature of the capitalist economy. Accordingly, periods of profitable accumulation give rise to factors that tend to undermine the basis of profitability. These factors are not considered as external disturbances, but rather as expressing contradictions of the process of capitalist reproduction or resulting from market failure. A downturn in the business cycle is seen as an adjustment mechanism by which the tensions and imbalances that emerge in the economic expansion are eliminated. Crisis or recession thus creates the basis for a new period of growth.

Mainly (post-)Keynesian and (post-)Marxist schools of thought theorize business cycle. There are four underlying explanations of business cycle in these theories. First, the profit-squeeze position argues that the economic expansion allows workers to push up their wages, which leads to decline in profitability. Second, the underconsumptionist positions refer to the problem of realization because of inadequate demand. Third, there are explanations associating business cycle with the tendency of the profit rate to fall. Finally, the disproportionality position refers to the problem of imbalance between different branches of economy as they expand at different rates. The existing explanations usually combine some of these factors.

Keynesian economists focus on the possibility of managing timing and shape of business cycles. They believe that the state can ameliorate the adverse effects of the business cycle by its monetary and fiscal policies. Thus, they attempt to sustain full or near-full employment over the duration of the business cycle by managing aggregate demand. Monetarist economists, on the other hand, largely discount the business cycle. Thus, the monetarist policies may be considered as [Page 64]orchestrating the business cycle. Accordingly, social and economic policies can be assessed with respect to their effects on the business cycle: They can be procyclical or anticyclical.