Economic Cycles (Meaning and Explanation)

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

What are economic cycles?

It is known as the economic cycle or business cycle. the variations or fluctuations that occur in the economy of a country specifically in its aspects of production, employment, income and investment, and that to a large extent determine the abundance or scarcity of resources experienced by its population at 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, moments of abundance and moments of scarcity arise, which are understood as phasesthat 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 loss 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 a matter of debate among economists since practically the very beginnings of capitalism.

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

Phases of the economic 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 of the cycle. Likewise, there is disagreement 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 more and more resources begin to be available.
Boom. Peak moment of the upward curve, in which the economy reaches its highest points and greatest abundance. 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 falls are recorded in production, consumption and employment indices. We usually speak of “crisis” to refer to particularly abrupt recessions.
Depression Time of greatest scarcity of resources, in which economic activity is at its minimum and the living standards of the population become poorer. There is high unemployment, low consumer demand and decline or stability in prices.

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Types of business 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 Minstrel cycles which for about 8 and a half years in general, and which cover crises and cyclical booms.
Long or Kondraev cycles whose duration is estimated between 50 and 60 years, and is characterized by prolonged and stronger rises, mild crises and short recessions, and usually leads to general economic depressions.

This classification, however, is highly questioned by different economics scholars, because there is no theory that can explain the time margins 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 World War II.

Throughout history, there are many cases of more or less dramatic economic crises, in which the standard of living of citizens impoverishes and hopelessness 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 rampant hyperinflation and an endless devaluation of the German mark, the currency of the time, 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 put an end to the First World War, committing to a brutal series of payments and reparations that sank its economy and paved, paradoxically, the path to the advent of fascism and the Second World War.
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 had disastrous consequences. The crisis soon spread to the countries with which it had trade agreements, such as Mexico or European nations, in a devastating domino effect.
The oil crisis of 1973. As a result of the Arab-Israeli war (Yom Kippur War), tensions between oil-exporting Middle Eastern countries and Israel's Western allies reached a peak, and the former decided to stop their crude oil exports in retaliation. This brought with it one of the great energy crises in history, which skyrocketed crude oil prices and significantly impoverished international trade on all fronts.

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