Business Cycle Theory: Idea That Wouldn't Die

By Samuelson, Robert J. | American Banker, April 18, 1984 | Go to article overview

Business Cycle Theory: Idea That Wouldn't Die


Samuelson, Robert J., American Banker


Something subtle may be happening in this economic recovery. We may be slowly accepting the old idea that business cycles are inevitable. People do not say this explicitly, but they talk about the recovery in a way that betrays their mood. Nobody, it seems, believes the recovery cna last, even though (against most predictions) it has been remarkably strong.

Every batch of economic statistics produces a new imagined threat to its resilience. In December, when some statistics indicated a slowdown, the economy was "faltering." By February, when the same statistics showed rapid expansion, the danger was "overheating": high inflation would burn out recovery. As yet, neither threat seems grave. Inflation remains in the 4%-5% range; jobs have increased 5.1 million in 15 months.

But the skittishness emphasizes the sense that, sooner or later, the recovery must end. It will, of course. This does not mean the business cycle has suddenly reappeared. In fact, it never vanished. But the 1960s promoted the idea -- which still dominates political rhetoric -- that government could eliminate cycles. If this illusion is passing, no one should mourn its loss.

The vision was not so much undesirable as impossible, and by creating unrealistic expectations, it fostered inflationary behavior that caused recessions. We now need a more sober assessment of busines cycles and how far government can -- and should -- go in treating them.

In some respects, it is difficult to improve upon the analysis of the dean of business cycle economists, Wesley Clair Mitchell (1874-1948). Mr. Mitchell saw prosperity breeding destructive pressures that would produce a downturn: prices, wages, and interest rates would rise, making business less profitable; some industries would invest excessively in inventories or plants, creative gluts; and high demand would promote inefficiency. 1913 Analysis Still Relevant

Mr. Mitchell did his analysis in 1913, but it hardly seems dated. Not that the business cycle is unchanging. Downturns before World War II depressed jobs and production far more than after the war. And they lasted longer, 20 months on average before 1945 compared with 11 months after. Economic expansions averaged 30 months before the war compared with 45 months since 1945.

The following table -- by economists Geoffrey Moore and Victor Zarnowitz -- shows the violence of prewar slumps, as measured by the average drops in industrial production and nonfarm jobs during slumps. The table also shows canges in wholesale prices.

Economists have attributed the mildness of postwar slumps to various changes. The unstable farm sector (where prices and farmers' incomes fluctuate sharply) has shrun.; it absorbed a quarter of the population in 1930 and only 2.6% in 1981. The fedeal government (25% of gross national product today against 3% in 1929) remains a large source of stable spending. And it creates "automatic stabilizers": in recession, unemployment and welfare payments rise, while taxes fall.

Financial changes have reinforced stability. The advent of federal deposit insurance in the 1930s ended banking panics. Depositors no longer demand their funds -- forcing banks to cut lending -- at any hint of economic trouble. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Business Cycle Theory: Idea That Wouldn't Die
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.