Economic Cycles – Concept, phases, types and historical examples

We explain what economic cycles are, their phases, types and why the economy is cyclical. Also, examples of economic crises.

economic cycle
The economy follows a complex circuit of expansion and contraction.

What are business cycles?

It is known as the economic cycle or business cycle to the variations or fluctuations that occur in the economy of a country, specifically in its aspects of production, employment, income and investment, and which largely determine the abundance or scarcity of resources that its population lives in a given historical moment.

The economy is cyclical. This means that it does not always behave in the same way, but rather obeys a complex circuit of expansion and contraction in the availability of resources.

Thus arise moments of abundance and moments of scarcity, which are understood as phases, that is, as momentary stages, whose duration depends on numerous extra-economic factors: politics, climate, international relations, etc., so it is also basically indeterminable.

This does not prevent economic actors from trying to cushion the fall and take advantage of the rise, to try to make the oscillations between boom and bust less pronounced, and allow the economic circuit to perpetuate itself over time. The problem is that the nature of these cycles, as well as the measures necessary to manage them, have been the subject of debate among economists from practically the very beginnings of capitalism.

Thus, the Austrian School of Economics (the so-called “Vienna School”) understands business cycles as an artificial phenomenon resulting from economic expansion not backed by true savings, that is, induced by managing interest rates, distorting the economic running. According to this view, cycles are the product of economic bubbles that inevitably end up bursting.

On the other hand, the doctrine of Keynesianism (proposed by John Maynard Keynes in 1936) understands economic cycles as something inherent to capitalism and completely inevitable, but manageable and manageable through the taking of state measures, such as increasing public spending, for example. .

For his part, the first to describe the cyclical development of the economy was the American Welsey Mitchell (1874-1948), for whom it was a phenomenon typical of economies based on money and commercial activity, and the continuous attempt to companies to maximize their profits.

Phases of the business cycle

The phases that make up every economic cycle are always the same, but they have an incalculable duration, which can range from 6 to 12 years, and that makes it much more difficult to predict the next movement in the cycle. Similarly, there is a discrepancy regarding which indicators to follow to determine the beginning and end of each phase, and even how many there are and what they are called. In any case, the phases are usually the following:

  • Expansion or recovery. The ascending phase of the circuit, in which economic activity multiplies and there are growth indicators. The crisis is overcome and there are more and more resources available.
  • Boom. Peak moment of the ascending curve, in which the economy reaches its highest and most abundant points. There is full use of the factors of production and employment abounds, but at the same time the economy begins to “overheat” due to the overproduction of goods that slowly saturates the market.
  • Recession or contraction. The descending phase of the circuit, in which economic activity contracts or decreases, and there are falls in the production, consumption and employment indices. Usually one speaks of “crisis” to refer to particularly abrupt recessions.
  • Depression. Moment of greatest scarcity of resources, in which economic activity is at its lowest and the living standards of the population are impoverished. There is high unemployment, low consumer demand and price decline or stability.

Types of economic cycle

Depending on their duration, that is, the time it takes to complete the replacement of their phases, the cycles can be classified into three:

  • Short or Kitchin cycles, whose estimated duration is around 40 months of economic activity.
  • Middle or Juggler Cycles, that during about 8 and a half years in general, and that include cyclical crises and booms.
  • Long or Kondraev cycles, whose duration is estimated between 50 and 60 years, and is characterized by prolonged and stronger ascents, mild crises and short recessions, and often lead to general economic depressions.

This classification, however, is highly questioned by different economics scholars, because there is no theory that can explain the time frames of each cycle.

Examples of economic crisis in history

economic cycle crisis examples germany 1923
The German economic crisis of 1923 was one of the causes of the Second World War.

Throughout history, cases of more or less dramatic economic crises abound, in which the standard of living of citizens is impoverished and despair marks the general mood. Some important examples are:

  • The German crisis of 1923. The interwar period of the 20th century was critical for many countries, but few experienced the debacle of their currency as Germany did during the so-called Weimar Republic. It took place between 1921 and 1923, and manifested itself as galloping hyperinflation and an endless devaluation of the Deutsche Mark, the then currency, which led to the abandonment of money as a unit of exchange. The causes of this were strongly tied to the Treaty of Versailles, in which Germany signed its surrender to its enemies and ended the First World War, committing itself to a brutal series of payments and reparations that sank its economy and paved, paradoxically, the road to the advent of fascism and World War II.
  • The “Great Depression” of 1929. Lasting more than a decade, this decline in economic activity in much of the world originated in the United States, a country that tried to alleviate its economic stagnation with new internal measures that brought disastrous consequences. The crisis soon spread to countries with which it had trade agreements, such as Mexico or the European nations, in a devastating domino effect.
  • The 1973 oil crisis. As a result of the Arab-Israeli war (Yom Kippur War), tensions between the oil-exporting Middle Eastern countries and Israel’s western allies reached their peak, with the former deciding to halt their oil exports in retaliation. This brought with it one of the great energy crises in history, which shot up oil prices and significantly impoverished international trade on all fronts.