Key to business cycles
The concept of business cycles is relatively modern phenomenon. In the 19th century business cycle were perceived as temporary economic crises. In the 20th century economists began to chart the regularity with which these crises occurred and to regard them as predictable rather than random.
Different economic cycles have different durations – that is the length from t rough to trough or peak to peak There are four main economic cycles determining business activity:
The Kitchin cycle in consumer goods is a short-term cycle averaging 40 months. The cycle, proposed by Joseph Kitchin in 1923, was deduced from commodity prices and bank clearing interest rates during the period 1890-1922 for the US and the UK.
Since the last war there has been a Kitchin cycle of four years in western Europe and 40 months in the US.
The Juglar cycle in capital formation lasts for seven to 11 years. The cycle is based on fluctuations in prices, interest rates and other financial variables. The cycle was proposed by Clèment Juglar, an economist and statistician, who studied the fluctuations in prices and interest rates in the 1860s. He determined there were boom-and-bust cycles of prosperity, crisis, liquidation and recession
The Kuznets cycle of construction is a cycle of 15 to 20 years. Simon Kuznets, an economist, researched the US real estate cycle, for which he was awarded the Nobel Prize. The Kuznets cycle was derived from analysis of population changes, building construction, capital formation and income.
The Kondratieff cycle or ‘long wave’ of 45 to 60 years is based on studies of price trends and raw material production levels in capitalist countries. Nikolai Kondratieff a Russian economist, hypothesised that capitalist economies fluctuated with peaks every 45 to 60 years.
In Kondratieff’s theory, capitalism regenerated itself after long periods of economic decline Towards the end of the 1920s he used his theory to predict the depression in the US. He also predicted the US recovery, for which he was exiled.