Cycles of economic dynamics. Sources of cyclical fluctuations in economic conditions.

The cycles of economic dynamics are also called business cycles. The business cycle is 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 definition was given by Arthur Burnes and Wesley Mitchell in 1946 and became the official.

The first systematic description of periodic economic crises, was the 1819 Nouveaux Principes d'économie politique by Jean Charles Léonard de Sismondi. Before that it was believed that economy is always at the equilibrium and even if some fluctuations happened it was explained by external factors (usually war).

In the mid-20th century, Schumpeter and others classified business cycles according to their periodicity. According to that classification a number of particular cycles were named after their discoverers or proposers:

-the Kitchin inventory cycle of 8–9 years (after Joseph Kitchin)

-the Juglarfixed investment cycle of 40 months (often identified as the business cycle);

-the Kuznets infrastructural investment cycle of 15–25 years (after Simon Kuznets, also called building cycle);

-the Kondratiev wave or long technological cycle of 45–60 years (after Nikolai Kondratiev)

The cycles are used to be subdivided for different stages (phases):

1.Initial recovery- is usually a short phase of a few months in which the economy picks up from its slowdown or recession

2.Early upswing-the period of business cycle when economy is out of recession and begins to grow;

3.Late upswing- the period when the economy is growing rapidly and comes to its peak;

4.Slowdown- after reaching the peak of growth the economy starts to slow down, usually because of the rising rates;

5.Recession- is defined as 2 quarterly declines in GDP.

The Sources of this fluctuations are described differently by different schools of business cycle theory.

The classical school believes that the cycles are caused by external factors, while Keynesians arguing for internal causes.

The credit/debit cycle theory explains business cycles by bursting of speculative bubbles and places finance and banks at the center of the business cycle.

The real business cycle a ssumes that there are large fluctuations in the rate of technological change. In response to that fluctuations individuals rationally alter their levels of supply and consumption, business cycle is, according to this theory, the natural and efficient response of the economy to the changes in the available production technology.

Politically-based business cycle theory derives the business cycle from political decisions. The political business cycle is an alternative theory stating that when an administration of any hue is elected, it initially adopts a contractionary policy to reduce inflation and gain a reputation for economic competence. It then adopts an expansionary policy in the lead up to the next election, hoping to achieve simultaneously low inflation and unemployment on election day.

Economists of the heterodoxAustrian School argue that business cycles are primarily caused by excessive creation of bank credit – or fiduciary media – which is encouraged by central banks when they set interest rates too low.

According to Georgism the primary cause of most business cycles are land price fluctuations