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    http://en.wikipedia.org/w/index.php?title=Business_cycle&printable=yes

    Business cycleFrom Wikipedia, the free encyclopedia

    The termbusiness cycle(oreconomic cycleorboom-bust cycle) refers fluctuationsin aggregate production, trade and activity over several months or years in a marketeconomy.[1]

    The business cycle is the upward and downward movements of levels ofgrossdomestic product(GDP) and refers to the period of expansions and contractions in thelevel of economic activities (business fluctuations) around its long-term growthtrend.[2]

    These fluctuations occur around a long-term growth trend, and typically involve shiftsover time between periods of relatively rapid economic growth(anexpansionorboom), and periods of relative stagnation or decline (a contractionorrecession).

    Business cycles are usually measured by considering the growth rate ofrealgrossdomestic product.Despite being termedcycles,these fluctuations in economic activitycan prove unpredictable.

    Contents

    1History 1.1Theory 1.2Classification by periods 1.3Occurrence

    2Identifying 2.1Upper turning points of business cycle, commodity prices and freight

    rates

    2.2Spectral analysis of business cycles

    2.3Cycles or fluctuations? 3Explanations

    3.1Exogenous vs. endogenous 3.2Keynesian 3.3Credit/debt cycle

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    3.4Real business cycle theory 3.5Politically based business cycle 3.6Marxian economics 3.7Austrian School 3.8Georgism

    4Mitigating an economic downturn 5See also 6Notes 7References 8External links

    History

    A basic illustration of economic/business cycles.

    Theory

    The first systematic exposition of periodiceconomic crises,in opposition to theexisting theory ofeconomic equilibrium,was the 1819Nouveaux Principesd'conomie politiquebyJean Charles Lonard de Sismondi.[3]Prior to thatpointclassical economicshad either denied the existence of business cycles,[4]blamed

    them on external factors, notably war,[5]

    or only studied the long term. Sismondi foundvindication in thePanic of 1825,which was the first unarguably internationaleconomic crisis, occurring in peacetime.

    Sismondi and his contemporaryRobert Owen,who expressed similar but lesssystematic thoughts in 1817Report to the Committee of the Association for the Reliefof the Manufacturing Poor,both identified the cause of economic cyclesasoverproductionandunderconsumption,caused in particular bywealth inequality.

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    They advocatedgovernment interventionandsocialism,respectively, as the solution.This work did not generate interest among classical economists, thoughunderconsumption theory developed as a heterodox branch in economics until beingsystematized inKeynesian economicsin the 1930s.

    Sismondi's theory of periodic crises was developed into a theory ofalternatingcyclesbyCharles Dunoyer,[6]and similar theories, showing signs ofinfluence by Sismondi, were developed byJohann Karl Rodbertus.Periodic crises incapitalism formed the basis of the theory ofKarl Marx,who further claimed that thesecrises were increasing in severity and, on the basis of which, he predictedacommunist revolution.He devoted hundreds of pages ofDas Kapital(1867) tocrises. InProgress and Poverty(1879),Henry Georgefocused onland's role in crisesparticularlyland speculationand proposed asingle tax on landas a solution.

    Classification by periods

    In 1860 French economistClement Juglarfirstidentified economic cycles 7 to 11 years long,although he cautiously did not claim any rigidregularity.[7]Later, economistJosephSchumpeter(18831950) argued that a JuglarCycle has four stages:

    1. expansion (increase in production andprices, low interest-rates)

    2. crisis (stock exchanges crash and multiple bankruptcies of firms occur)3. recession (drops in prices and in output, high interest-rates)4. recovery (stocks recover because of the fall in prices and incomes)

    Schumpeter's Juglar model associates recovery and prosperity with increases inproductivity, consumer confidence,aggregate demand,and prices.

    In the mid-20th century, Schumpeter and others proposed a typology of business

    cycles according to their periodicity, so that a number of particular cycles were namedafter their discoverers or proposers:[8]

    theKitchin inventory cycleof 3 to 5 years (afterJoseph Kitchin);[9] theJuglarfixed-investment cycle of 7 to 11 years (often identifiedas "the"

    business cycle)

    Proposed Economic Waves

    Cycle/Wave Name Period

    Kitchin inventory 35

    Juglar fixed investment 711

    Kuznets infrastructural investment 1525

    Kondratiev wave 4560

    Pork cycle

    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yhttp://en.wikipedia.org/wiki/Das_Kapitalhttp://en.wikipedia.org/wiki/Communist_revolutionhttp://en.wikipedia.org/wiki/Karl_Marxhttp://en.wikipedia.org/wiki/Johann_Karl_Rodbertushttp://en.wikipedia.org/w/index.php?title=Business_cycle&printable=yes#cite_note-6http://en.wikipedia.org/wiki/Charles_Dunoyerhttp://en.wikipedia.org/wiki/Keynesian_economicshttp://en.wikipedia.org/wiki/Socialismhttp://en.wikipedia.org/wiki/Government_intervention

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    theKuznets infrastructural investment cycleof 15 to 25 years (afterSimonKuznetsalso called "building cycle")

    theKondratiev waveor long technological cycle of 45 to 60 years (after theSoviet economistNikolai Kondratiev).[10]

    Interest in the different typologies of cycles has waned since the development ofmodernmacroeconomics,which gives little support to the idea of regular periodiccycles.[11]

    Occurrence

    A simplifiedKondratiev wave,with the theory thatproductivityenhancing innovations drive waves of

    economic growth.

    There were frequent crises in Europe and America in the 19th and first half of the 20thcentury, specifically the period 18151939. This period started from the end oftheNapoleonic warsin 1815, which was immediately followed by thePost-Napoleonic depressionin the United Kingdom (181530), and culminated in theGreatDepressionof 192939, which led intoWorld War II.SeeFinancial crisis: 19thcenturyfor listing and details. The first of these crises not associated with a war wasthePanic of 1825.[citation needed]

    Business cycles inOECDcountries after World War II were generally more restrainedthan the earlier business cycles. This was particularly true during theGolden Age of

    Capitalism(1945/501970s), and the period 19452008 did not experience a globaldownturn until theLate-2000s recession.[12]Economic stabilization policy usingfiscalpolicyandmonetary policyappeared to have dampened the worst excesses of businesscycles, andautomatic stabilizationdue to the aspects of thegovernment'sbudgetalsohelped mitigate the cycle even without conscious action by policy-makers.[citation needed]

    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uryhttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Post-Napoleonic_depressionhttp://en.wikipedia.org/wiki/Post-Napoleonic_depressionhttp://en.wikipedia.org/wiki/Napoleonic_warshttp://en.wikipedia.org/wiki/Productivityhttp://en.wikipedia.org/wiki/Kondratiev_wavehttp://en.wikipedia.org/w/index.php?title=Business_cycle&printable=yes#cite_note-11http://en.wikipedia.org/wiki/Macroeconomicshttp://en.wikipedia.org/w/index.php?title=Business_cycle&printable=yes#cite_note-Kondratieff-10http://en.wikipedia.org/wiki/Nikolai_Kondratievhttp://en.wikipedia.org/wiki/Kondratiev_wavehttp://en.wikipedia.org/wiki/Simon_Kuznetshttp://en.wikipedia.org/wiki/Simon_Kuznetshttp://en.wikipedia.org/wiki/Kuznets_swing

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    In this period, the economic cycleat least the problem of depressionswas twicedeclared dead. The first declaration was in the late 1960s, when thePhillips curvewasseen as being able to steer the economy. However, this was followed bystagflationinthe 1970s, which discredited the theory. The second declaration was in the early2000s, following the stability and growth in the 1980s and 1990s in what came to be

    known asThe Great Moderation.Notably, in 2003,Robert Lucas,in his presidentialaddress to theAmerican Economic Association,declared that the "central problem ofdepression-prevention [has] been solved, for all practical purposes."[13]Unfortunately,this was followed by the20082012 global recession.

    Various regions have experienced prolongeddepressions,most dramatically theeconomic crisis in formerEastern Bloccountries following the end of theSovietUnionin 1991. For several of these countries the period 19892010 has been anongoing depression, with real income still lower than in 1989.[citation needed]This hasbeen attributed not to a cyclical pattern, but to a mismanaged transition

    fromcommand economiestomarket economies.

    Identifying

    Economic activity in the US, 19542005.

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    In the United States, it is generally accepted that theNational Bureau of EconomicResearch(NBER) is the final arbiter of the dates of the peaks and troughs of thebusiness cycle. An expansion is the period from a trough to a peak, and a recession asthe period from a peak to a trough. The NBER identifies a recession as "a significantdecline in economic activity spread across the economy, lasting more than a few

    months, normally visible in real GDP, real income, employment, industrialproduction".[16]

    Upper turning points of business cycle, commodity prices and freight rates

    There is often a close timing relationship between the upper turning points of thebusiness cycle, commodity prices and freight rates, which is shown to be particularlytight in the grand peak years of 1873, 1889, 1900 and 1912.[17]

    Spectral analysis of business cycles

    Recent research employingspectral analysishas confirmed the presence ofKondratievwavesin the world GDP dynamics at an acceptable level of statisticalsignificance.[18]Korotayev& Tsirel also detected shorter business cycles, dating theKuznets to about 17 years and calling it the third sub-harmonic of the Kondratiev,meaning that there are three Kuznets cycles per Kondratiev.

    Cycles or fluctuations?

    In recent years economic theory has moved towards the study ofeconomic

    fluctuationrather than a 'business cycle'[19]though some economists use the phrase'business cycle' as a convenient shorthand. ForMilton Friedmancalling the businesscycle a "cycle" is amisnomer,because of its non-cyclical nature. Friedman believedthat for the most part, excluding very large supply shocks, business declines are moreof a monetary phenomenon.[citation needed]

    Explanations

    The explanation of fluctuations in aggregate economic activity is one of the primaryconcerns ofmacroeconomics.The main framework for explaining such fluctuationsisKeynesian economics.In theKeynesianview, business cycles reflect the possibilitythat the economy may reach short-run equilibrium at levels below or abovefullemployment.If the economy is operating with less than full employment, i.e., withhighunemployment,Keynesian theory states that monetary policy and fiscal policycan have a positive role to play in smoothing the fluctuations of the business cycle.

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    There are a number of alternativeheterodox economictheories of business cycles,largely associated with particularschoolsor theorists. There are also some divisionsand alternative theories withinmainstream economics,notablyreal business cycletheoryand credit-based explanations such asdebt deflationand thefinancialinstability hypothesis.

    Exogenous vs. endogenous

    Within mainstream economics, the debate over external (exogenous) versus internal(endogenous) being the causes of the economic cycles, with the classical school (nowneo-classical) arguing for exogenous causes and theunderconsumptionist(nowKeynesian) school arguing for endogenous causes. These may also broadly be classedas "supply-side" and "demand-side" explanations: supply-side explanations may bestyled, followingSay's law,as arguing that "supply creates its own demand", whiledemand-side explanations argue thateffective demandmay fall short of supply,

    yielding a recession or depression.

    This debate has important policy consequences: proponents of exogenous causes ofcrises such as neoclassicals largely argue for minimal government policy or regulation(laissez faire), as absent these external shocks, the market functions, while proponentsof endogenous causes of crises such as Keynesians largely argue for largergovernment policy and regulation, as absent regulation, the market will move fromcrisis to crisis. This division is not absolutesome classicals (including Say) arguedfor government policy to mitigate the damage of economic cycles, despite believing inexternal causes, whileAustrian Schooleconomists argue against government

    involvement as only worsening crises, despite believing in internal causes.

    The view of the economic cycle as caused exogenously dates toSay's law,and muchdebate on endogeneity or exogeneity of causes of the economic cycle is framed interms of refuting or supporting Say's law; this is also referred to as the "general glut"debate.

    Until theKeynesian revolutionin mainstream economics in the wake of theGreatDepression,classical and neoclassical explanations (exogenous causes) were themainstream explanation of economic cycles; following the Keynesian revolution,

    neoclassical macroeconomics was largely rejected. There has been some resurgenceof neoclassical approaches in the form ofreal business cycle(RBC) theory. Thedebate between Keynesians and neo-classical advocates was reawakened followingthe recession of 2007.

    Mainstream economists working in theneoclassicaltradition, as opposed to theKeynesian tradition, have usually viewed the departures of the harmonic working of

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    the market economy as due to exogenous influences, such as the State or itsregulations, labor unions, business monopolies, or shocks due to technology or naturalcauses.

    Contrarily, in the heterodox tradition ofJean Charles Lonard de Sismondi,Clement

    Juglar,andMarxthe recurrent upturns and downturns of the market system are anendogenous characteristic of it.[20]

    The 19th century school ofUnderconsumptionismalso posited endogenous causes forthe business cycle, notably theparadox of thrift,and today this previously heterodoxschool has entered the mainstream in the form ofKeynesian economicsviatheKeynesian revolution.

    Keynesian

    According toKeynesian economics,fluctuations inaggregate demandcause theeconomy to come to short run equilibrium at levels that are different from the fullemployment rate of output. These fluctuations express themselves as the observedbusiness cycles. Keynesian models do not necessarily imply periodic business cycles.However, simple Keynesian models involving the interaction of the Keynesianmultiplier and accelerator give rise to cyclical responses to initial shocks.PaulSamuelson's "oscillator model"[21]is supposed to account for business cycles thanks tothe multiplier and the accelerator. The amplitude of the variations in economic outputdepends on the level of the investment, for investment determines the level ofaggregate output (multiplier), and is determined by aggregate demand (accelerator).

    In the Keynesian tradition,Richard Goodwin[22]accounts for cycles in output by thedistribution of income between business profits and workers wages. The fluctuationsin wages are almost the same as in the level of employment (wage cycle lags oneperiod behind the employment cycle), for when the economy is at high employment,workers are able to demand rises in wages, whereas in periods of high unemployment,wages tend to fall. According to Goodwin, when unemployment and business profitsrise, the output rises.

    Credit/debt cycle

    Main articles:Credit cycleandDebt deflation

    One alternative theory is that the primary cause of economic cycles is due to thecreditcycle:the net expansion of credit (increase in private credit, equivalently debt, as apercentage of GDP) yields economic expansions, while the net contraction causesrecessions, and if it persists, depressions. In particular, the bursting ofspeculative

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    bubblesis seen as the proximate cause of depressions, and this theory places financeand banks at the center of the business cycle.

    A primary theory in this vein is thedebt deflationtheory ofIrving Fisher,which heproposed to explain theGreat Depression.A more recent complementary theory is

    theFinancial Instability HypothesisofHyman Minsky,and the credit theory ofeconomic cycles is often associated withPost-Keynesian economicssuch asSteveKeen.

    Post-KeynesianeconomistHyman Minskyhas proposed an explanation of cyclesfounded on fluctuations in credit, interest rates and financial frailty, calledtheFinancial Instability Hypothesis.In an expansion period, interest rates are low andcompanies easily borrow money from banks to invest. Banks are not reluctant to grantthem loans, because expanding economic activity allows business increasing cashflows and therefore they will be able to easily pay back the loans. This process leads

    to firms becoming excessively indebted, so that they stop investing, and the economygoes into recession.

    While credit causes have not been a primary theory of the economic cycle within themainstream, they have gained occasional mention, such as (Eckstein & Sinai 1986),cited approvingly by (Summers 1986).

    Real business cycle theory

    Main article:Real Business Cycle theory

    Within mainstream economics, Keynesian views have been challenged byrealbusiness cyclemodels in which fluctuations are due to technology shocks. This theoryis most associated withFinn E. KydlandandEdward C. Prescott,and more generallytheChicago school of economics(freshwater economics). They consider thateconomic crisis and fluctuations cannot stem from a monetary shock, only from anexternal shock, such as an innovation.[citation needed]

    There were great increases inproductivity,industrial production and real per capitaproduct throughout period from 1870 to 1890 that included theLong Depressionandtwo other recessions.[23][24]See:Long depression#Myth of the Long DepressionTherewere also significant increases in productivity in the years leading up to the GreatDepression. Both the Long and Great Depressions were characterized by overcapacityand market saturation.[25][26]

    Over the period since the Industrial Revolution, technological progress has had amuch larger effect on the economy than any fluctuations in credit or debt, the primaryexception being the Great Depression, which caused a multi-year steep economic

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ipedia.org/wiki/Edward_C._Prescotthttp://en.wikipedia.org/wiki/Finn_E._Kydlandhttp://en.wikipedia.org/wiki/Real_business_cyclehttp://en.wikipedia.org/wiki/Real_business_cyclehttp://en.wikipedia.org/wiki/Real_Business_Cycle_theoryhttp://en.wikipedia.org/w/index.php?title=Business_cycle&printable=yes#CITEREFSummers1986http://en.wikipedia.org/w/index.php?title=Business_cycle&printable=yes#CITEREFEcksteinSinai1986http://en.wikipedia.org/wiki/Financial_Instability_Hypothesishttp://en.wikipedia.org/wiki/Hyman_Minskyhttp://en.wikipedia.org/wiki/Post-Keynesian_economicshttp://en.wikipedia.org/wiki/Steve_Keenhttp://en.wikipedia.org/wiki/Steve_Keenhttp://en.wikipedia.org/wiki/Post-Keynesian_economicshttp://en.wikipedia.org/wiki/Hyman_Minskyhttp://en.wikipedia.org/wiki/Financial_Instability_Hypothesishttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Irving_Fisherhttp://en.wikipedia.org/wiki/Debt_deflationhttp://en.wikipedia.org/wiki/Speculative_bubble

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    decline. The effect of technological progress can be seen by the purchasing power ofan average hour's work, which has grown from $3 in 1900 to $22 in 1990, measuredin 2010 dollars.[27]There were similar increases in real wages during the 19th century.See:Productivity improving technologies (historical)A table of innovations and longcycles can be seen at:Kondratiev wave#Modern modifications of Kondratiev theory

    Carlota Perez blames "financial capital" for excess speculation, which she claims islikely to occur in the "frenzy" stage of a new technology, such as the 19982000computer, internet, dot.com mania and bust. Perez also says excess speculation islikely to occur in the mature phase of a technological age.[28]

    RBC theory has been categorically rejected by a number of mainstream economists inthe Keynesian tradition, such as (Summers 1986)andPaul Krugman.

    Politically based business cycle

    Another set of models tries to derive the business cycle from political decisions.Thepartisan business cyclesuggests that cycles result from the successive elections ofadministrations with different policy regimes. Regime A adopts expansionarypolicies, resulting in growth and inflation, but is voted out of office when inflationbecomes unacceptably high. The replacement, Regime B, adopts contractionarypolicies reducing inflation and growth, and the downwards swing of the cycle. It isvoted out of office when unemployment is too high, being replaced by Party A.

    The political business cycle is an alternative theory stating that when an

    administration of any hue is elected, it initially adopts a contractionary policy toreduce inflation and gain a reputation for economic competence. It then adopts anexpansionary policy in the lead up to the next election, hoping to achievesimultaneously low inflation and unemployment on election day.[29]

    The political business cycle theory is strongly linked to the name ofMichaKaleckiwho discussed "the reluctance of the 'captains of industry' to acceptgovernment intervention in the matter of employment."[30]Persistentfullemploymentwould mean increasing workers' bargaining power to raise wages and toavoid doing unpaid labor, potentially hurting profitability. (He did not see this theory

    as applying underfascism,which would use direct force to destroy labor's power.) Inrecent years, proponents of the "electoral business cycle" theoryhave argued thatincumbent politicians encourage prosperity before elections in order to ensure re-electionand make the citizens pay for it with recessions afterwards.

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    Marxian economics

    For Marx the economy based on production of commodities to be sold in the market isintrinsically prone tocrisis.In theheterodoxMarxian view profit is the major engineof the market economy, but business (capital) profitability has atendency to fallthat

    recurrently creates crises, in which mass unemployment occurs, businesses fail,remaining capital is centralized and concentrated and profitability is recovered. In thelong run these crises tend to be more severe and the system will eventually fail.[31]

    Some Marxist authors such asRosa Luxemburgviewed the lack of purchasing powerof workers as a cause of a tendency of supply to be larger than demand, creatingcrisis, in a model that has similarities with the Keynesian one. Indeed a number ofmodern authors have tried to combine Marx's and Keynes's views.HenrykGrossman[32]reviewed the debates and the counteracting tendencies andPaulMatticksubsequently emphasized the basic differences between the Marxian and the

    Keynesian perspective: while Keynes saw capitalism as a system worth maintainingand susceptible to efficient regulation, Marx viewed capitalism as a historicallydoomed system that cannot be put under societal control.[33]

    The American mathematician and economist,Richard M. Goodwinformalised aMarxist model of business cycles, known as theGoodwin Modelin which recessionwas caused by increased bargaining power of workers (a result of high employment inboom periods) pushing up the wage share of national income, suppressing profits andleading to a breakdown incapital accumulation.Later theorists applying variants ofthe Goodwin model have identified both short and long period profit-led growth and

    distribution cycles in the United States, and elsewhere.[34]David Gordonprovided aMarxist model of long period institutional growth cycles, in an attempt to explaintheKondratiev wave.This cycle is due to the periodic breakdown of the 'socialstructure of accumulation'a set of institutions which secure and stabilise capitalaccumulation.

    Austrian School

    Main article:Austrian business cycle theory

    Economists of theAustrian Schoolargue that business cycles are caused by excessiveissuance of credit by banks infractional reserve bankingsystems. The excessiveissuance of bank credit may be exacerbated ifcentral bankmonetary policy setsinterest rates too low. The resulting expansion of the money supply causes a "boom"in which resources are misallocated or"malinvested"because of artificially lowinterest rates. Eventually, the boom cannot be sustained and is followed by a "bust" in

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    which the malinvestments are liquidated (sold for less than their original cost) and themoney supply contracts.[citation needed]

    One of the criticisms of theAustrian business cycle theoryis based on the observationthat the United States suffered recurrent economic crises in the 19th century, notably

    thePanic of 1873,which occurred prior to the establishment of a U.S. central bank in1913. Adherents of the Austrian School, such as the historianThomas Woods,arguethat these earlier financial crises were prompted by government and bankers' efforts toexpand credit despite restraints imposed by the prevailing gold standard, and are thusconsistent withAustrian Business Cycle Theory.[citation needed]

    Georgism

    Henry Georgeidentifies land price fluctuations as the primary cause of most businesscycles.[35]The theory is generally ignored in most of today's discussions of the

    subject[36]despite the fact that the two great economic contractions of the last 100years (19291933 and 20082009) both involved speculative real estate bubbles.

    George observed that one of the factors that is absolutely necessary for all productionlandhas an inherent tendency to rise in price on an exponential basis as theeconomy grows. The reason for this is that the quantity of land (the stock of locationsand natural resources) is fixed, while its quality is improved due to improvementssuch as transportation infrastructures and economic development of the surroundings.Investors see this tendency as the economy grows and they buy land ahead of theboom areas, withholding it from use in order to take advantage of its increased value

    in the future. Because housing and commercial real estate provide collateral for alarge portion of lending, there is a tendency for real estate prices to rise faster than therate of inflation in business cycle upswings.

    Speculation in land concentrates profits in landholders and diverts economic resourcesto speculation in land, squeezing profits away from production that has to occur onthis land.

    In effect, land speculation creates a built-in supply shock, that squeezes the economyjust as economic output increases. This is a systemic retardation of the economy,

    placing a sharp brake on further economic expansion. This shock to the economyoccurs as long as there is land speculation, creating an underlying tendency towardinflation and recession late in the growth phase of the business cycle. Landspeculation, according to George, is always the cause of economic downturns. Thereare any number of contributing causes; things like oil price shocks, consumerconfidence crises, international trade fluctuations, natural disastersbut none of thesethings creates the underlying weakness.

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    Land speculation slows the economy in two ways. It increases production costs bymaking land in general more expensive (shifting theAggregate supply(AS) curveupward) as well as decreasing productivity by denying access to the best locations,shifting the AS curve to the left and lowering "potential output".[37]

    The Wisconsin Business School publishes an on line database with building cost andland values for 46 U.S. metro areas.[38]

    Mitigating an economic downturn

    Many social indicators, such as mental health, crimes, and suicides, worsen duringeconomic recessions (though general mortality tends to fall, and it is in expansionswhen it tends to increase).[39]As periods of economic stagnation are painful for themany who lose their jobs, there is often political pressure for governments to mitigaterecessions. Since the 1940s, following theKeynesian revolution,most governments ofdeveloped nations have seen the mitigation of the business cycle as part of theresponsibility of government, under the rubric ofstabilization policy.[citation needed]

    Since in the Keynesian view, recessions are caused by inadequate aggregate demand,when a recession occurs the government should increase the amount of aggregatedemand and bring the economy back into equilibrium. This the government can do intwo ways, firstly by increasing the money supply (expansionarymonetary policy)andsecondly by increasing government spending or cutting taxes (expansionary fiscalpolicy).

    By contrast, some economists, notablyNew classical economistRobert Lucas,arguethat thewelfare cost of business cyclesare very small to negligible, and thatgovernments should focus on long-term growth instead of stabilization.

    However, even according toKeynesian theory,managingeconomic policyto smoothout the cycle is a difficult task in a society with a complex economy. Some theorists,notably those who believe inMarxian economics,believe that this difficulty isinsurmountable.Karl Marxclaimed that recurrentbusiness cycle criseswere aninevitable result of the operations of thecapitalistic system.In this view, all that thegovernment can do is to change thetimingof economic crises. The crisis could also

    show up in a differentform, for example as severeinflationor a steadilyincreasinggovernment deficit.Worse, by delaying a crisis, government policy is seenas making itmore dramaticand thus more painful.

    Additionally, since the 1960sneoclassical economistshave played down the ability ofKeynesian policies to manage an economy. Since the 1960s, economists like NobelLaureatesMilton FriedmanandEdmund Phelpshave made ground in their arguments

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