In the 19th century, business cycles were not thought of as cycles at all but rather as spells of crises interrupting the smooth development of the economy. In later years, economists and non- economists alike began believing in the regularity of such crises, analyzing how they were spaced apart and associated with changing economic structures.
Schumpeter (1939) suggested that the economic development proceeds cyclically rather than evenly because innovations are not evenly distributed through time, but appear, if at all, discontinuously in groups or swarms. Entrepreneurs, financed by bank credit, make innovative investments embodying new technologies, resource discoveries, and so on. If these innovative investments are successful, imitators follow, in the original industry and elsewhere. For example, successful innovations in the automobile industry encourage secondary innovations and investment in petroleum, rubber tires, glass, and so on, and the economy embarks upon a dramatic upward surge towards prosperity. Eventually, innovations are completed and investment subside; an flood of consumer goods pours onto the market with dampening effects on prices; rising costs and interest rates squeeze profit margins; and the economy contracts leading to recession.
In this perspective, economic growth emerges from and as a consequence of cyclical development. ...Show more