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Cyclical Economic Developments - Essay Example

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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. Discontinuous bursts of innovative investment are the basic, underlying cause of cyclical fluctuations. The qualitative changes arising from within the system, which comprise innovations are associated with innovative investment and are the fundamental source of economic development. Economic development embodies technological, organizational, and resource changes which, by raising productivity and reducing costs, lay the foundations for economic growth despite, indeed because of, the interruptions of the business cycle and its associated economic contractions.
From this perspective, also, depressions (or, in current language, moderate recessions) are, largely, a normal and healthy process of adaptation to the bunching of innovations during the preceding prosperity. Thus, the fundamental cause of depression is prosperity itself. If we want prosperity, we must accept the depression, which necessarily succeeds it. Moreover, economic contractions yield higher real incomes through innovation; force reorganization of production, greater efficiency, and lower costs; and eliminate inefficient, non-innovating businesses, as new products and methods replace the old in a continuing gales of creative destruction.
Schumpeter also labeled the "four-phases" of a cycle: boom- recession-depression-recovery. Starting from the mean, a boom is a rise which lasts until the peak is reached; a recession is the drop from the peak back to the mean; a depression is the slide from the mean down to the trough; a recovery is the rise from the trough back up to the mean. From the mean, we then move up into another boom and thus the beginning of another four-phase cycle. In a sense, any cycle of whatever duration can be described as going through these four phases - otherwise the fluctuations cannot really be described as "cycles".
In practice, of course, cycles and economic contractions come in different lengths and amplitudes. First, business expansion, though rooted in innovation, may be amplified by such factors as rising incomes, speculative ventures, excess optimism, ...Show more


Economic development is the development of economic wealth of countries or regions for the well being of their inhabitants. There is no generally accepted institutional theory of economic development that a large share of development economists agrees upon.
Author : stiedemannlilli
Cyclical Economic Developments
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