How do you explain business cycles?

Todos los aportes son válidos, tal vez hay que agregar estudiar la historia de la economía y del pensamiento económico, ello permite tener una visión más amplia y da cuenta de las decisiones (de lucro o políticas) que han tenido consecuencias en ciclos económicos. Por ejemplo, el comercio internacional lideró el crecimiento mundial hasta que surgieron líderes que se concentran en ideas proteccionistas por razones diversas (para no entrar en detalle)

Expansions can lead to job growth, higher incomes, and increased investment. Contractions can lead to job losses, lower incomes, and decreased investment. During an expansion, AD rises, often driven by low-interest rates or strong consumer confidence. Central banks raise interest rates to slow activity during inflationary periods. AD falls as consumption and investment decline. Lower AD leads to reduced output and higher unemployment.

Business cycles, portray the rhythmic patterns of economic activity. Expansion, peak, contraction and trough. Noteworthy theories guiding these cycles include Keynesian, emphasizing demand; monetarist, centric to money supply; and real business cycle theory, attributing cycles to technological shifts. In my experience trading, an uptrend during expansion signals rising stock prices and profits. However, at the peak, caution arises as the market readies for a potential downturn. As the market embraces a downtrend in contraction, stock values recede, profits dwindle, and economic activity contracts. This phase can stem from factors like unfavorable policies or external shocks, which in-turn influences spending and investment decisions.

Os ciclos econ?micos s?o fen?menos complexos, mas a Teoria Austríaca do Ciclo Econ?mico (TACE) oferece uma perspectiva valiosa. Segundo a TACE, os ciclos econ?micos s?o principalmente resultado de interven??es governamentais no sistema monetário e bancário, que distorcem os sinais de mercado. Expans?es monetárias e crédito artificialmente baixo levam a investimentos excessivos em projetos de longo prazo. Quando a desconex?o entre esses investimentos e a poupan?a real se torna evidente, ocorre uma recess?o. Assim, compreender os ciclos econ?micos requer análise cuidadosa das políticas monetárias e bancárias. Keynesianismo n?o é suficiente para explicar os ciclos econ?micos. Mises, Hayek, Rothbard e Kirzner abordam o tema de forma realista.

Understanding the business cycle via aggregate demand and supply entails grasping the inherent pattern of economic expansion and contraction. I frequently suggest viewing the cycle as propelled by fluctuations in overall spending (AD) and total output (AS). During expansions, boosted consumer confidence and investment drive demand upward, resulting in elevated output levels and minimal unemployment rates. However, this growth is not indefinitely sustainable, as seen during the 2008 financial crisis, where plunging demand triggered layoffs and reduced production. While, in downturns, surplus capacity can induce deflationary pressures. Gaining insights from these dynamics can aid in anticipating business cycle fluctuations more effectively.

RBC theory is a controversial theory, and there is no consensus among economists about its validity. RBC models try to explain empirical facts about cycles, for example recessions often following oil price spikes. RBC theory suggests that recessions are a rational outcome, not a market failure. Cycles are an efficient market response.

Xavier Gabaix's 2011 paper describes how shocks to the outcomes of individual large firms are enough to account for aggregate changes in GDP (about a third). This is because the largest companies are a meaningful share of GDP and these companies are volatile. Changes in products, processes and organization can lead to unique company level surges and retreat. Examples include auto manufacturer strikes and GE medical device surge. Gabaix may disagree, but I view this as a useful empirical framing of Real Business Cycles. Productivity is largely embodied in the largest organizations. Decisions made at Apple, Google, Amazon, GM etc are enough to cause productivity to cycle.

There are many theories and approaches to explain the business cycles. however, all of them can go through the aggregate demand and aggregate supply framework. Business cycles are the results of shifts in either the aggregate demand (consumption, investment, government spending) or aggregate supply (changes in supply with respect to input prices). The theories then are built based on the factors that affect the supply or demand and how elastic these 2 forces are with respect to prices.

Real Business-Cycle theory (RBC theory) is a class of macroeconomic models in which most fluctuations in the business cycle are attributed to real rather than nominal shocks. The theory of real business cycles is a development of the new-classical theory, which, in turn, is an evolution of the original classical economics. In fact, RBC models share many important features with new-classical models and are sometimes referred to as the second generation of new-classical models.[1] Unlike other dominant business cycle theories, RBC theory considers recessions and periods of economic growth as an economically efficient response to exogenous changes in the real economy.

The word Real in Real Business Cycle theory considers money to be "real" like classical economists and plays down the role of monetary forces. Money plays q neutral role and fluctuations are brought about by real fluctuations like in investment, demand, supply etc. Real Business Cycle explains the productivity shocks and the impact of these shocks on the economy.

The key takeaway is that Keynesians see business cycles as being driven by changes in demand, not supply. And they favor active government stabilization policies to mitigate recessions and inflation due to sticky wages and prices. This contrasts with classical and real business cycle theories. To stabilize business cycles, Keynesians advocate fiscal and monetary policies. Expansionary fiscal policy through tax cuts or spending increases can prop up aggregate demand during recessions. Contractionary fiscal policy can reduce demand to fight inflation. Monetary stimulus through interest rate cuts can also stimulate demand during recessions, while rate hikes cool demand to fight inflation.

A fundamental characteristic of Keynesian economics is the role of government in solving market imperfections. Keynesian economists consider demand to be the variable that controls economic activity. They believe government intervention through fiscal and monetary policy can move an economy to its desired level by manipulating the demand in the market.

Real Business Cycle theory that emphasizes the changes in the structures of production And the keynesian theory that emphasizes changes in aggregate demand are both correct And are complementary. Although they are antagonistic , they only emphasize distincts aspects of the fluctuations in the economy. Keynesian theory Focus on the short term And RBC focus on the long term. if one can estimates the natural rate of unemployment (NAIRU) And the potencial GDP of an economy , it will be perceived that due to decreases or increases in aggregate demand ( in the short term) And new technologies or paradigms( in the long term) the economy will fluctuate around the NAIRU with peaks And valleys.

Selon les théories keynésiennes, les cycles économiques sont dus à des fluctuations de la demande globale et sont influencés par les réponses des autorités publiques à ces fluctuations. Ces cycles peuvent se résumer comme suit : Instabilité de la demande globale, Surchauffe et inflation, Réactions des autorités publiques, Récession et ajustements, Politiques de relance.

The pundit description of keynesians emphasizing both monetary and fiscal stimuli is widespread. Pundits refer to modern keynesians or to new keynesians. Keynes and keynesians postulate that the primary tool to fight a recession is fiscal policy, basically government spending (put people to make holes and then filled them back). He wrote (General Theory, 1936) that monetary policy would be ineffective because of a general "liquidity trap", that changes in interest rates would not affect the relative demands of money and other assets. He had the Great Depression as benchmark. Global liquidity traps have not been seen and Gov spending is not the best tool. His legacy (right or wrong) is to advocate active economic policy to stabilize cycles

The key insight of John Maynard Keynes is that recessions -- prolonged drops in economic output -- are a technical problem. He compared it to having a broken alternator on your car. Since it is a technical problem, it lends itself to a technical solution through government action. When the economy is functioning normally, all resources are deployed. If you see workers idled or factories idled when they could be used productively, then we are in a situation where Keynes would advocate for government action. This means his theory is a theory of what to do when a recession hits, and not a theory of what causes recessions.

A more recent theory explaining business dynamics is Clayton Christensen’s theory of disruptive innovation. It suggests that innovative technologies or business models can disrupt established firms by initially targeting niche markets and then expanding to mainstream markets. This theory emphasizes the need for businesses to continually innovate and adapt to remain competitive in markets. As these innovations improve over time, they challenge the notion of stable business environments, eventually capturing mainstream markets and displacing traditional incumbents. This highlights the importance of adaptability and agility. Disruptive innovation has gained significant traction in recent years, particularly in industries like technology.

Monetarism (e.g., Friedman, 1950s and 1960s) advocated passive economic policy due to "long and variable lags" of responses of the economy in a cycle. New classical economics (Lucas and Sargent, 1970s, both Nobel winners) postulated rational expectations in macroeconomics and showed that anticipated policy (monetary or fiscal) would be toothless and only policy surprises would affect the cycle. These gave a fatal blow to old fashioned keynesianism. Some Keynesian followers embraced rational expectations (known as new keynesians) and developed micro foundations models to obtain recessions and unemployment as an outcome still requiring active monetary or fiscal policy: They didn't change policy tools but strengthened their conceptual case.

Business cycles also include recessions, which means that the production of goods and services contracts or is reduced in a period of time. In a recession, all productive factors are affected equally: companies, workers, consumers and clients. Everyone suffers to a greater or lesser extent the consequences of the restrictions or losses caused. In the face of recession, the measures that can be taken to confront the crisis are also difficult; layoffs or reduction of the workforce and reduction of productive programs are clear examples of this. With the recession the balance is lost and the cost increases; Demand rises, but supply is insufficient.

Theories on business cycles have one thing in common…changes in aggregate demand and supply. My favorite way to make sense of all this is to think of as many things as possible that can increase demand and supply. If we can increase both demand and supply together by the right amounts, we can have economic growth without creating inflation. The next step involves asking ourselves if what we are doing is sustainable for our shared planet. If lots of people are starving and angry, that is not sustainable. If lots of people feel they are being treated unfairly, that is not sustainable. If we are seriously damaging our ecosystem, that is not sustainable. If what we are doing is not sustainable, we need some other ideas.

Business cycles result in booms and bust. But periods of booms and busts may be controlled through government policies to an extent. Nobody can accurately predict the rise and fall, and the extent of the business cycle. But certain patterns are often repeated and thus may serve as indicators to manage our investment and savings according to the phase of the business cycle we find ourselves in.