Economic and Business History

2017-2018

Lecture 04

Economic fluctuations I

Trend, regular fluctuations and irregular movements

Kondratiev cycles and Juglar cycles

 A typology of economic fluctuations

Statistical analysis of quantitative historical data along modern economic

growth shows that the level of economic activity displays:

• a rising long term trend

• fluctuations showing some regularity of period and amplitude

(economic cycles)

• irregular movements

Remark:

Economic fluctuations is a disputed topic among some authors

 Several cyclical fluctuations along the trend

— trend — trend * K — trend * K * J

 Rising long term trend

= it reflects the sustained increase in the average standard of living =

= it is explained by the epochal innovation of modern economic growth =

Remark:

Short-term fluctuations attract the most attention from the press but over
time the long-term trend is the basic determinant of a nation absolute and
relative wealth
 Phases of cyclical fluctuations

A cyclical fluctuation may be divided into

2 phases:

• one above the trend (phase A)

• one below the trend (phase B)

or 4 phases:

• one above the trend and moving away from it (phase 1 or expansion)

• one above the trend and moving back to it (phase 2 or recession)

• one below the trend and moving away from it (phase 3 or depression)

• one below the trend and moving back to it (phase 4 or revival)

 Phases of a cyclical fluctuation

4
B
3
A 2
1

t
 Types of regular fluctuations (economic cycles)

Kondratiev cycles

= period of approximately 55 years =

= 5 cycles since first take-off of modern economic growth =

Juglar cycles

= period of approximately 9 years =

We must not forget:

• the existence of seasonal fluctuations (a one year fluctuation of the

economic activity)

• the possibility of economic policy to trigger cycles (political cycles)

 Several explanatory hypotheses for economic cycles proposed by
economic theory

Joseph Schumpeter’s hypothesis (the most important from a long

term perspective) I

= regular fluctuations of economic activity have the same cause than the
rising trend – innovations =

• in the long term, innovations expand the production possibility frontier and rise
the level of the quantity of available goods that may be reached

=> rising trend

• in the short term, innovations foster economic activity while consumers

increase the use of the novelties they provide and depress economic activity
when this effect is exhausted

=> economic cycles

 Joseph Schumpeter’s hypothesis II

= Invention —> innovation —> diffusion —> exhaustion =

= the entrepreneur in the theory of Joseph Schumpeter =

Remark:

Innovations with different impact generate cycles of

different periods and amplitudes.
 Irregular movements

• of extra-economic origin (v. g.: wars)

• of extra-social origin (v. g.: natural catastrophes)

Readings

Chris Freeman, Francisco Louçã (2001), As time goes by, Oxford: Oxford
University Press, pp. 139-151.

Ana Bela Nunes, Nuno Valério (2010), European modern economic

growth, Lisboa: GHES/ISEG (Teaching Texts Series no 1), box 1.1.
Based on this lecture and its readings students should be able to:

• Understand the concept of sustained growth, relate it to the long term

rising trend of the level of economic activity and explain its causes

• Understand that sustained growth is not identical to regular

growth and that there are regular short term fluctuations of the level
of economic activity (economic cycles)

•  Explain why cycles of different period and amplitude coexist along

modern economic growth

• Identify Kondratiev cycles and Juglar cycles

•  Understand Joseph Schumpeter’s explanation for the regularity of

economic fluctuations

• Recognize the existence of irregular movements of the level of

economic activity and their causes