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What follows is the most complete ever more explanation for the mysterious phenomenon of capitalism - the Business Cycles. To ensure that the article can be read by any reader well educated, I have minimized the jargon of the economy and have added a short and simple introduction to the structure of the economy. Each of us would like to know why we can not have a heaven on earth. How is it that we are besieged by example often painful downslides of the economy, such as the Great Depression or the nerve wracking periods such as Stagflations? Why can not all be always happy with one hundred percent of all jobs of the time, with all of us working? The following article provides simple and complete Business Cycle explanations for depression before 1930, Recessions after 1940, Stagflations years 70 and continues Booms of 80 and 90.
income that we earn is usually divided into two parts, consumption and savings. We normally consume a large portion of their income we earn our day to day needs, as well as irregular purchases. Regular needs include food, clothing, toothpaste, soap and other daily necessities. Irregular buys include motorcycles, cars, books, movies, music, etc.. After we spend most of our income on consumption, we will receive a small portion of our income and invest in shares, bonds, long-term deposits and other investments.
A direct relationship with our activity mentioned above, our economy is divided into two sectors: consumer sector and investment sector. If we exclude government spending, consumption sector is roughly around 80% of the size of the economy. It includes everything that we buy food, clothing, cars, motorcycles, televisions and other durable goods, books - everything. And about 20 percent of the size of our economy consists of the sector investment. Investment sector mainly includes activities such as the installation of new factories and capacities, and housing. A three sectors model would also include government spending as well. But the liberalization of markets has more to do with these sectors and less to do with government spending, so we exclude governemnt spending. The above figures are estimates only and may vary net of the economy to the economy.
So how are the profits earned by the industry manufacturers consumption? In any economy, the consumer sector still produced in excess of its requirements, it produces surplus. Consumption capitalist sector and households also save a certain portion of their income. The savings for these investors to invest in the field of investment. So these savings turn into revenue sector investment capitalists and workers. Workers and capitalists of investment in the sector and then spend their income on consumer goods. So basically the surplus production in the consumption sector is consumed by the workers and the capitalist sector investment. Therefore, in a circular cash flows economy, the income of the investment sector becomes profit or excess consumption of the corporate sector. There is a small possibility that has been made here, which I refer to the end of the article.
So there are two things we must note here. First, the size of the investment sector decides on the size of profits in the consumption sector. If there are huge investments, the consumer sector capitalists are making enormous surpluses or profits, and if the size of the investment industry is on the lower side, the consumption sector capitalists would lower surpluses or profits. Also all the facts savings should be invested. If savings are made, but are not invested, then it would lead to a decrease in the size of investments and lower profits. Lack of profits could force producers to reduce their production, which would lead directly to rising unemployment and recession! It is a long recognized that economic thinking savings must be made fully invested so that the economy can be in equilibrium. If the savings are not fully invested, it can lead to an imbalance between supply and demand and may lead to piling up of unsold inventories and a subsequent recession.
With the above short introduction to the structure of our economy, we are ready for a little trip into the fascinating world of economic cycles.
Our economies are rarely static. They continue to grow in size each year. Now, in a growing economy, consumption also increases. Every year more cars are purchased, most televisions are bought, the more computers are installed and so forth. It is natural that, if consumption increases to say 6%, suppliers expect their surplus would also be increased by 6% due surplus, which is expected profits in the business jargon, is clearly measured in in percentage terms. However, the surplus production is to be consumed by workers in the sector of investment, which obviously means that even investment is expected to increase by 6%. But it would mean that savings, which is the money for investment, would also have a growth rate of 6%. What would happen if consumption grows by 6%, but the investment or savings do not grow by a percentage equivalent? To the extent of inequality, producers remain unsold surplus and the economy is in imbalance. So steady state of the economy would not be
-Growth periodic percentage of the periodic consumption = percentage of growth in investment periodicals = percentage growth of savings.
Suppose for a certain period, there was a perfect balance in which consumption was C, investment and savings was I was S. Suppose that during the next fiscal C grows X by a certain percentage points. While S and I would also have an increase in the same X percentage points. Suppose I or S does not grow by X percentage points, the economy is in disequilibrium, even if the investment is equal to the discount!
Here is a plan for the different types of business cycles.
normal characteristic of a recession is the presence of huge non-invested savings. Investors hoard money without investing, because of a lack of investor confidence. At trough, or the lowest point of an economic cycle, consumption is relatively low and savings are relatively high, particularly non-invested savings. While economic activity resumed, all savings are invested and producers sector consumption would be able to achieve their expected surpluses. The size of the sector investment is equal to the excess of the consumption sector. Since savings are high and are fully invested, producers of consumption sector would be able to achieve enormous surpluses. Economic activity takes a roar speed.
As economic activity resumed, it starts a battle between producers for market share. For example, every manufacturer wants to sell as many cars as possible. It would not be - I think produce fewer cars now, I would save and invest for later. While the battle for market share picks up, consumption accelerates at the cost of savings that is growing faster than savings. Our conditions above tells us that for the balance to exist, consumption and savings have to grow at an equal pace. Thus, while consumption is growing at a faster rate than savings, it would lead to an imbalance immediately? It may not immediately lead to an imbalance obviously because the producers did not expect to earn unusually high profits of how they earned in the initial phases of the ramp. Their expectations are also oriented comparatively smaller profit or what is known as normal profits that the boom progresses, and therefore lower growth rate of economies towards consumption would not immediately damage their expectations of the surplus. In this way, the boom has increased since the trough of the point for some years.
After a few years of growth in consumption at a faster rate than savings, the percentage of savings income in the fall so low that savings are not enough to meet the expectations of 'surplus producers sector consumption. Even if the savings are fully invested, it does not generate the surplus, as intended by the consumer sector due to the lower size of the investment and lead to an imbalance. The producers saw their stocks unsold inventory rise and profits fall. The situation needs correction. Consumption should be cut and savings must be raised. Since they are not able to sell their products, farmers in the consumption sector would be more than willing to do so. They have reduced their production and increase their savings.
However, the required correction might not materialize! The goal of the capitalist economy is consumption. If consumption is down, we can not expect to increase investment. You can not have fewer motorcycles sold compared to the previous year and at the same time have much higher investment in the sector of bicycles compared to the previous year. A cut could increase in the consumption savings but was not expected to raise investment. Investment follows the path of consumption, and it is embarking on the downward trend. As a result of the increased savings are not invested and the imbalance relatively took a permanent position and we have a recession! There is no automatic forces to ensure the immediate correction. What began as a cut to increase in the consumption savings led to a decline in investment. This decline in investment led to a further decrease in overall demand, prompting producers to reduce their production levels even further. Consumption decreases even further, and the spiral continues until the economy stabilizes to a low yield with a lot of unemployment. This kind of downward spiral has been recognized by the eminent British economist John Maynard Keynes. Finally, after a few years of poor performance, an invention or some enthusiastic entrepreneurs who are attracted by the low interest rates prevailing might trigger investment to reverse its trajectory and begin the enlargement process again. I think most recessions in the United States and Europe after 1940 have taken place in this direction. I would say that these cycles of consumption led Business Cycles.
© 2007 Thotakura R US inscription: TXU 1-256-191
About the author:
Thotakura R is the source of a revolutionary new business model called "Threeway Economics" that demystifies the mysteries of capitalism long to a great level of detail, including Business Cycles, Inverted Yield Curves, Inflations, price / wage rigidities. For more information, visit its website at: threewayeconomics.com |
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