Business Cycle

The business cycle is the historic oscillation of economic activity (usually measured by rise and fall of GrossDomesticProduct? - GDP). In North America it is about every 10 years (82,91,2001, probably 2011-12). In places like Japan they have had prolonged recession. Governments try to dampen using Monetary and Fiscal policy. Severe troughs in the cycle are called Depressions (like the 1930s) and less severe, Recession. Significant or prolonged upturns are called "Booms". Unemployment is high, productivity and inventories low in recession, vice versa during recovery.

See http://pages.stern.nyu.edu/~nroubini/bci/bciintroduction.htm

Alternative

The BusinessCycle is not a natural phenomenon, it is the logical and necessary consequence of the existence central banks.

As central banks lower interest rates, they effectively accelerate the rate at which cash flows into an economy. Setting interest rates below the natural rate causes cash flows into the economy without any corresponding increase in demand. The higher level of cash is first felt at the Treasury, then at treasury markets, large banks, and stock markets, and then made available to businesses and individuals for investments. As the cash moves through the economy, it distorts investment decisions by making some investments seem cheaper than they really are. Investors are then fooled into believing that certain projects are more profitable than they really are. Selling pencils on the Internet is a recent, quintessential example. Without question, this kind of stimulation leads to job and wage growth; oftentimes rapid growth. These upturns are called "booms". As the entrepreneurs discover that their investments aren't truly profitable, they have the choice of either putting more money into the projects or cancelling the project. If money is still cheap, i.e. central banks are accelerating the increase in money supply, many businesses will continue to be fooled that poor projects will ultimately be profitable. This period of time is often called "miracle economies".

Central banks cannot keep interest rates below the natural rate forever because high levels of inflation will ensue. When the interest rates stabilize or rise, businesses realize that investments that once seemed profitable are no longer good ideas. These businesses will divest themselves of projects that are expected to lose money under the new interest rate calculations. The people employed with these projects will lose their jobs and wages will fall. This period of divestiture is called "recession". If the divestiture period is delayed due to unnatural investments in poor projects (such as through price controls or trade protection) or it is prolonged entrepreneurs cannot obtain necessary capital (because of artificially high competing wages or crowding out effects), the economy enters a "depression".

Being monopolists, central banks cannot solve the EconomicCalculationProblem and, therefore, cannot set the interest rates equal to the natural rate. This ensures that the BusinessCycle will continue.

See http://www.mises.org/fullstory.asp?control=672 for an overview of business cycle theory and http://www.mises.org/rothbard/agd.pdf for an application of this theory to the Depression.