10 Класичний приватний університет

UDC 330.33/330.83(043.3)(100)

Gaidey D.A. Assistant of the International Department, Donetsk National University

CRITICAL ANALYSES OF ECONOMIC CYCLES THEORIES

КРИТИЧНИЙ АНАЛІЗ ТЕОРІЙ ЕКОНОМІЧНИХ ЦИКЛІВ

ANNOTATION Statement of the problem. The increas- This paper provides analyses of economic cycles ing frequency and severity of financial theories. It examines into economic cycles according to and economic crises over the past three their periodicity, explores the theoretical background and formulates the basics of the mechanism of the Kitchin decades have raised important questions inventory cycles of 3-5 years, the Juglar fixed investment about background of such emergencies. cycles of 7-11 years, the Kuznets infrastructural invest- Explanation the externalities of upturns ment cycles of 15-25 years), the Kondratiev long tech- and downturns in could be nological cycles of 45-60 years. It studies different clas- provided with understanding the nature sifications of economic cycles and covers main causes, of cyclic economic transformations. Rep- which drive periodical fluctuations in business activity. Keywords: the Kitchin inventory cycle, the Juglar resentation the mechanism of cyclic fluc- fixed investment cycle, the Kuznets infrastructural in- tuation of economy is important tool for vestment cycle , the Kondratiev wave or long technolog- effective economic policy, which enables ical cycle, expansion, stagnation, , economic government to forecast possible scenarios growth, economic fluctuation. for economic development and work out АНОТАЦІЯ efficient managerial strategy. У статті запропоновано аналіз теорій економічних Analyses of latest studies and publi- циклів. У роботі розглянуто економічні цикли різної тривалості, досліджено теоретичні засади та базові cations.The foundation of cycles theories механізми циклів Китчина тривалістю 3-5 років, was settled by Joseph Kitchin, Simon циклів Жюгляра тривалістю 7-11 років, циклів Kuznets, , Joseph Кузнеця тривалістю 15-25 років, довгих хвиль Shumpeter, Clément Juglar. Today the Кондратьєва тривалістю в 45-60 років. У дослідженні attempts to analyze the nature of business запропоновано різні класифікації економічних циклів . . і вивчено основні причини, які їх призводять до cycles represented in works of A V Koro- ...... періодичних коливань ділової активності. taev, S V Tsirel, A F Burns, W C Mitchell, Ключові слова: короткостроковий цикл Китчина, A. Sullivan, S. M. Sheffrin, J. W. Forrester, середньостроковий цикл Жюгляра, ритм Кузнеця, M. Bormotov, A. Telecote and others. At хвиля або довгий технологічний цикл Кондратьєва, the same time despite the intense attempts поширення, стагнація, спад, економічне зростання, коливання в економіці. of economist to give proper explanation to mechanisms of cyclic development this АННОТАЦИЯ В статье представлен анализ теорий экономических question is still in need for scientific con- циклов. В работе рассмотрены экономические циклы sideration. разной длительности, исследованы теоретические ос- The objective of the article is to explore новы и базовые механизмы циклов Китчина длительно- the theoretical background and formulates стью 3-5 лет, циклов Жюгляра длительностью 7-11 лет, the basics of the mechanism of economic циклов Кузнеца длительностью 15-25 лет, длинных волн Кондратьева периодичностью в 45-60 лет. В исследова- cycles. нии предложены различные классификации экономиче- Unsolved aspects of the problem. Due ских циклов и изучены основные причины, которые при- to significant variability of display areas, водят к периодическим колебаниям деловой активности. scope and duration of economic cycles Ключевые слова: краткосрочный цикл Китчина, there is consistent approach to under- среднесрочный цикл Жюгляра, ритм Кузнеца, волна standing the nature periodical economic или длинный технологический цикл Кондратьева, распространение, стагнация, спад, экономический fluctuations. In addition, there is no sin-

ЕКОНОМІЧНА ТЕОРІЯ ТА ІСТОРІЯ ЕКОНОМІЧНОЇ ДУМКИ рост, колебания в экономике. gle concept of views on the problems of

Випуск 1(01) 2017 Приазовський економічний вісник 11 the interaction between dynamic fluctua- In the mid-20th century, J. Schumpeter tions in economic activity with the inno- proposed a typology of business cycles vative development of the world economic according to their periodicity, so that a system, which explains the need for fur- number of particular cycles were named ther study of the issue. after their discoverers or proposers: Presentation of the basic materials. – the Kitchin inventory cycle of Severe economic fluctuations which had 3-5 years; recently hit the entire world economy – the Juglar fixed investment cycle of after relatively prosperous decades despite 7-11 years (often identified as ‘the’ busi- numerous institutional efforts to control ness cycle); them have recalled an interest to the the- – the Kuznets infrastructural invest- ory of economic cycles. Historical data on ment cycle of 15-25 years (after Simon main economic indexes and academic evi- Kuznets also called building cycle); dence show that recurrent fluctuations in – the Kondratiev wave or long techno- the pace of are consist- logical cycle of 45-60 years (after Nikolai ent over time. Technological revolutions Kondratiev) [3, 106]. and worldwide implementation of basic Kitchin cycle is a short inventions are necessarily accompanied by of about 40 months discovered in the the processes of or – 1920s by Joseph Kitchin. sanitation of the economy, which cause This cycle is believed to be accounted long term economic cycles which appear to for by time lags in information move- be predictable but practically unavoidable. ments affecting the decision making of The term business cycle (or economic commercial firms. Firms react to the cycle) refers to economy-wide fluctuations improvement of commercial situation in production or economic activity over through the increase in output through several months or years. These fluctu- the full employment of the extent fixed ations occur around a long-term growth capital assets. As a result, within a cer- trend, and typically involve shifts over tain period of time (ranging between a time between periods of relatively rapid few months and two years) the market economic growth (expansion or boom), and gets ‘flooded’ with commodities whose periods of relative stagnation or decline quantity becomes gradually excessive. (contraction or recession) [1, 15]. The demand declines, drop, the These fluctuations in economic activity produced commodities get accumulated are usually measured by the growth rate in inventories, which informs entrepre- of real gross domestic product and despite neurs of the necessity to reduce output. being recurrent they do not follow any However, this process takes some time. strict harmonic pattern. It takes some time for the information The widely accepted definition of busi- that supply significantly exceeds demand ness cycles refers to Arthur F. Burns’ and to get to the businesspeople. As it takes Wesley C. Mitchell’s definition: «Business entrepreneurs time to check this infor- cycles are a type of fluctuation found in mation and to make the decision to the aggregate economic activity of nations reduce production, time is also necessary that organize their work mainly in busi- to materialize this decision (these are ness enterprises; a cycle consists of expan- the time lags that generate the Kitchin sions occurring at about the same time cycles). Another relevant time lag is the in many economic activities, followed by lag between the materialization of the similarly general , contractions, afore mentioned decision (causing the and revivals which merge into the expan- capital assets to work well below the level sion phase of the next cycle; in duration, of their full employment) and the decrease business cycles vary from more than one of the excessive amounts of commodities year to ten or twelve years; they are not accumulated in inventories. Yet, after divisible into shorter cycles of similar this decrease takes place one can observe characteristics with amplitudes approxi- the conditions for a new phase of growth mating their own» [2, 8]. of demand, prices, output, etc. [4, 10]. 12 Класичний приватний університет

Juglar cycle is a fixed investment cycle According to the theory, of 7 to 11 years identified in 1862 by Kondratiev waves arise from the bunch- Clement Juglar. Within the Juglar cycle ing of basic that launch tech- one can observe oscillations of invest- nological revolutions that in turn create ments into fixed capital and not just leading industrial or commercial sectors. changes in the level of employment of the Kondratiev’s ideas were taken up by fixed capital (and respective changes in in the 1930s. The the- inventories), as is observed with respect to ory hypothesized the existence of very Kitchin cycles. 2010 research employing long-run macroeconomic and cycles, spectral analysis confirmed the presence originally estimated to last 50-54 years. of Juglar cycles in world GDP dynamics There are several modern timing ver- [4, 11]. sions of the cycle although most are based Kuznets swing is a claimed medi- on either of two causes: one on um-range economic wave with a period and the other on the . of 15–25 years found in 1930 by Simon Additionally, there are several versions Kuznets [5, 207]. Kuznets connected these of the technological cycles, and they are waves with demographic processes, in par- best interpreted using diffusion curves of ticular with immigrant inflows/outflows leading industries. For example, railways and the changes in construction intensity only started in the 1830s, with steady that they caused, that is why he denoted growth for the next 45 years. It was after them as «demographic» or «building» Bessemer steel was introduced that rail- cycles/swings. Kuznets swings have been roads had their highest growth rates; also interpreted as infrastructural invest- however, this period is usually labeled the ment cycles [6, 109]. «age of steel». In economics, Kondratiev waves (also The technological cycles can be labeled called supercycles, great surges, long as follows: waves, K-waves or the long economic • The Industrial Revolution – 1771; cycle) are supposedly cycle-like phenom- • The Age of Steam and Railways – ena in the modern . Averaging fifty and 1829; ranging from approximately forty to sixty • The Age of Steel and Heavy Engi- years, the cycles consist of alternating neering – 1875; periods between high sectoral growth and • The Age of Oil, Electricity, the periods of relatively slow growth [4, 13]. Automobile and Mass Production – 1908; Kondratiev identified three phases in • The Age of Information and Tele- the cycle: expansion, stagnation, recession. – 1971. More common today is the division into According to Schumpeter, one of the four periods with a turning point (collapse) reasons why the economic crisis of 1929- between the first and second phases. Writ- 33 was so severe is a coincidence of ing in the 1920s, Kondratiev proposed to troughs of Kitchin, Juglar and Kuznets apply the theory to the 19th century: cycles. The downturn in each cycle rein- – 1790-1849 with a turning point in forced the downturn in the other cycles. 1815. However, most of the time, according to – 1850-1896 with a turning point in Schumpeter, the various cycles cross one 1873. another—a peak in one might correspond Kondratiev supposed that, in 1896, a to a trough in another, thereby creating new cycle had started. business conditions that are somewhere The long cycle supposedly affects all between all-out boom on one hand and the sectors of an economy. Kondratiev focused extreme crisis conditions on the other [8]. on prices and interest rates, seeing the Economic cycles may be categorized ascendant phase as characterized by an according to five attributes of classifi- increase in prices and low interest rates, cation: duration, severity, the nature of while the other phase consists of a decrease underlying techno-economic processes, in prices and high interest rates. Subse- manageability and preventability by insti- quent analysis concentrated on output. tutions [8].

Випуск 1(01) 2017 Приазовський економічний вісник 13

By duration from through to through - moderate, less than 3 sequential or from peak to peak there are recognized years. four typical time frames of economic By the nature of underlying tech- cycles: no-economic processes economic cycles are - cycles, with duration 50-60 years; divided in five groups: - cycles with duration 25-30 years; - economic cycles caused by technolog- - cycles with duration 10-12 years; ical revolutions which affect the funda- - cycles with duration 5-7 years. mentals of economic system; Economic cycles are categorized here - economic cycles driven by major basic by a magnitude of severity which is rec- inventions that cause structural changes ognized as a continuance of recession and create a base for upcoming basic (significant decline in economic activity inventions; visible in real GDP), in three groups: - economic cycles driven by basic inven- - extra severe, over 5 sequential years; tions that cause surge of consequent minor - severe, 3-5 sequential years; inventions and innovations;

steam engine railway electrical petrochemicals information cottons steel engineering automobiles technology chemistry

P R D E

1800 1850e 1900ev 1950 1990…

1800 1850 1900 1950 1990

P: prosperity R: recession D: depression E: improvement

Pic. 1. Simplified Kondratieff Wave Pattern [8]

Table 1 Techno-Economic mechanism of economic cycles [9] Type of cycle Underlying Techno Economic mechanism Overshoots and undershoots of business inventories: recovery from recession left firms short of stocks which they then strove to rebuild. Suddenly they Kitchin found they have succeeded all too well, and were obliged to cut back orders and output accordingly; which depressed the economy, and by doing so caused a further involuntary pile-up of stocks. Assets reallocation inside sectors of economy. Investment in fixed assets over- shoots at the peak, giving excess capacity, and undershoots at the through. Juglar The longer period between peaks and through reflects the slower process of adjustment involved. Assets reallocation between existent sectors of economy and territories, that Kuznets requires substantial investment in infrastructure, particular in building Fundamental assets reallocation due to new sectors creating and structural Kondratiev reconstruction of entire economy on new generation technological base 14 Класичний приватний університет

- economic cycles caused involuntary able recourses scarcity – oil, coil etc.), by inadequate institutional, entrepreneur slow manageable causes (knowledge) and and customers behaviour leading to infla- manageable causes (taxes, money supply, tion and overshoots or undershoots of interest, government spending, subsides, business inventories. wages, prices and import regulation, etc.). - economic cycles occurring due to force The manageability of economy is limited; major: nature cataclysms, wars, pandem- hence either overdrive or poor drive causes ics, etc. unwanted economic fluctuations. The real rate of manageability and pre- Economic cycles are basically driven ventability, or at least ability to smooth by complex of natural, technological, the severity of economic cycles, is float- economical, financial and political causes ing somewhere between the classical eco- and it is very difficult to mark out sep- nomics concept of laisser passé and the arate, specific reasons which cause peri- communist concept of planned economy. odic economy-wide fluctuations in pro- Since the economy is considered to be par- duction or economic activity. The crucial tially manageable, economic cycles are not economical problem is so complicated completely avoidable, but are subject of and complex itself, that it pools out an smoothing regulations. Therefore in this adequate multifaceted explication. All paper economic cycles are categorized as and every schools possess and deliver a the following: true judgment, but not a comprehensive - preventable economic cycles; in that or final one. A permanent evolution is category fall all cycles caused by human an attributive characteristic of an eco- (institutions, entrepreneur and custom- nomic system, therefore the mentioned ers) behaviour; economics theories, by influencing each - unpreventable but partially manage- other, are hopefully moving to some kind able economic cycles; cycles of all other of positive diffusion and convergence. nature fall in that category. Every economic school of thought (Classic, Neo-Classic, Keynesian, REFERENCES: Neo-Keynesian, Austrian, Endogenous, 1. Sullivan A. Economics: Principles in action / A. Sullivan, and Techno-Economical) provides its own S. M. Sheffrin. – Upper Saddle River, New Jersey : explication on how economic cycles are Pearson Prentice Hall, 2003. – Pp. 502. driven. Sometimes it appears to be a tau- 2. Burns A. F. What happens during business cycles: A tology in argumentation. Low demand progress report / A. F. Burns, W. C. Mitchell. – New induces low supply, that leads to unem- York : National Bureau of Economic, 1951. – Pp.34. ployment growth, that causes monetary 3. Schumpeter J. A. History of Economic Analysis / injections, that induce inflation and make J. A. Schumpeter. – London : George Allen & Unwin, the investment bubble arise, that causes 1954. – Pp. 968. a financial system crisis, that requires 4. Korotayev A. V. Spectral Analysis of World GDP sanitation, that leads to re-allocation of Dynamics: Kondratieff Waves, Kuznets Swings, resources, that pushes economic activity, Juglar and Kitchin Cycles in Global Economic that induces a rise in employment, that Development, and the 2008–2009 Economic Crisis / leads to a rise in demand growth, that A. V. Korotaev, S. V. Tsirel. – Structure and Dynamics. leads to a rise in prices, that leads to real 2010. Vol.4 (1). – Pp. 57. demand fall, etc. This is a circle chain. 5. Kuznets S. Secular Movements in Production and One can start pooling from any link and Prices. Their Nature and their Bearing upon Cyclical turns over the entire chain [8]. Fluctuations / S. Kuznets. – Boston : Houghton Joseph Kitchin, , Nikolai Mifflin, 1930 – Pp. 536. Kondratiev, Clément Juglar provided their 6. Forrester J. W. New Perspectives on Economic own explication on how economic cycles are Growth. Alternatives to Growth – A Search for driven (table 1). Sustainable Futures / Ed. by D. L. Meadows. – Findings. There are three groups of Cambridge : MA: Ballinger, 1977. – Pp. 107-121. causes that drive economic cycles: directly 7. Tanning T. Kondratiev wave: overview of unmanageable causes (natural non-renew- world economic cycles / T. Tanning, M. Saat,

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