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108-433: The buildings may actually be completed after the onset of the recession or later, when another business cycle pulls the economy up, or even cancelled. Unlike earlier instances of similar reasoning ("height is a barometer of boom"), Lawrence used skyscraper projects as a predictor of economic crisis, not boom. One statistical study found that the height of buildings is not an accurate predictor of recessions or other aspects of

216-410: A Juglar cycle has four stages: Schumpeter's Juglar model associates recovery and prosperity with increases in productivity, consumer confidence , aggregate demand , and prices. In the 20th century, Schumpeter and others proposed a typology of business cycles according to their periodicity, so that a number of particular cycles were named after their discoverers or proposers: Some say interest in

324-664: A communist revolution . Though only passing references in Das Kapital (1867) refer to crises, they were extensively discussed in Marx's posthumously published books, particularly in Theories of Surplus Value . In Progress and Poverty (1879), Henry George focused on land 's role in crises – particularly land speculation – and proposed a single tax on land as a solution. Statistical or econometric modelling and theory of business cycle movements can also be used. In this case

432-458: A self-fulfilling prophecy . Investment managers, such as stock mutual fund managers, are compensated and retained in part due to their performance relative to peers. Taking a conservative or contrarian position as a bubble builds results in performance unfavorable to peers. This may cause customers to go elsewhere and can affect the investment manager's own employment or compensation. The typical short-term focus of U.S. equity markets exacerbates

540-411: A Bayesian framework – see e.g. [Harvey, Trimbur, and van Dijk, 2007, Journal of Econometrics ] – can incorporate such a range explicitly by setting up priors that concentrate around say 6 to 12 years, such flexible knowledge about the frequency of business cycles can actually be included in their mathematical study, using a Bayesian statistical paradigm. Later , economist Joseph Schumpeter argued that

648-595: A business cycle. The simplest defines recessions as two consecutive quarters of negative GDP growth. More satisfactory classifications are provided by, first including more economic indicators and second by looking for more data patterns than the two quarter definition. In the United States , the National Bureau of Economic Research oversees a Business Cycle Dating Committee that defines a recession as "a significant decline in economic activity spread across

756-462: A central bank may attribute an 'expansionary monetary policy' to that bank and (should one exist) a governing body or institution; others who believe that the money supply is created endogenously by the banking sector may attribute such a 'policy' to the behavior of the financial sector itself, and view the state as a passive or reactive factor. This may determine how central or relatively minor/inconsequential policies like fractional reserve banking and

864-462: A company stock's current earnings. Intellectual capital contributes to a stock's return growth. Unlike long-term trends, medium-term data fluctuations are connected to the monetary policy transmission mechanism and its role in regulating inflation during an economic cycle. At the same time, the presence of nominal restrictions in price setting behavior might impact the short-term course of inflation. In recent years economic theory has moved towards

972-430: A contraction is a hotly debated perennial topic of political economy. Greater fool theory states that bubbles are driven by the behavior of perennially optimistic market participants (the fools) who buy overvalued assets in anticipation of selling it to other speculators (the greater fools) at a much higher price. According to this explanation, the bubbles continue as long as the fools can find greater fools to pay up for

1080-545: A correlation between skyscraper height and economic growth. The study looks at two types of data. First, the paper looks at the announcement and completion dates of the world's tallest buildings and the peaks and troughs of the United States business cycle, as measured by the National Bureau of Economic Research. They find that there is virtually no relationship between the timing of record-breaking buildings and

1188-622: A crisis of consumer (and investor) confidence that may result in a financial panic and/or financial crisis. If there is a monetary authority like a central bank, it may take measures to soak up the liquidity in the financial system in an attempt to prevent a collapse of its currency. This may involve actions like bailouts of the financial system, but also others that reverse the trend of monetary accommodation, commonly termed forms of 'contractionary monetary policy'. These measures may include raising interest rates, which tends to make investors become more risk averse and thus avoid leveraged capital because

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1296-404: A cycle that needed to be explained and instead viewing their apparently cyclical nature as a methodological artefact. This means that what appear to be cyclical phenomena can actually be explained as just random events that are fed into a simple linear model. Thus business cycles are essentially random shocks that average out over time. Mainstream economists have built models of business cycles based

1404-418: A feeling of reduced wealth and tend to cut discretionary spending at the same time, hindering economic growth or, worse, exacerbating the economic slowdown. In an economy with a central bank, the bank may therefore attempt to keep an eye on asset price appreciation and take measures to curb high levels of speculative activity in financial assets. This is usually done by increasing the interest rate (that is,

1512-488: A form of fluctuation. In economic activities, a cycle of expansions happening, followed by recessions, contractions, and revivals. All of which combine to form the next cycle's expansion phase; this sequence of change is repeated but not periodic. The explanation of fluctuations in aggregate economic activity is one of the primary concerns of macroeconomics and a variety of theories have been proposed to explain them. Within economics, it has been debated as to whether or not

1620-431: A market bubble by investing heavily in a given asset, creating a relative scarcity which drives up that asset's price. Because of the signaling power of the large firm or group of colluding firms, the firm's smaller competitors will follow suit, similarly investing in the asset due to its price gains. However, in relation to the party instigating the bubble, these smaller competitors are insufficiently leveraged to withstand

1728-484: A minority, and they too leased space to tenants. Speculative real estate markets cycle between the two different behavior patterns. In normal times when the value of resources is predictable, performance of a building project can be estimated reliably through well-tested formulae. In boom times, rational pricing gives way to irrational buyers' behavior; buyers bet on ever-increasing demand and rents and are willing to pay more than they would normally. Willis said that "height

1836-407: A network of free enterprises searching for profit. The problem of how business cycles come about is therefore inseparable from the problem of how a capitalist economy functions. In the United States, it is generally accepted that the National Bureau of Economic Research (NBER) is the final arbiter of the dates of the peaks and troughs of the business cycle. An expansion is the period from a trough to

1944-423: A peak and a recession as the period from a peak to a trough. The NBER identifies a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production". There is often a close timing relationship between the upper turning points of the business cycle, commodity prices, and freight rates, which

2052-418: A recession or depression. This debate has important policy consequences: proponents of exogenous causes of crises such as neoclassicals largely argue for minimal government policy or regulation ( laissez faire ), as absent these external shocks, the market functions, while proponents of endogenous causes of crises such as Keynesians largely argue for larger government policy and regulation, as absent regulation,

2160-459: A result of either excess liquidity in markets, and/or changed investor psychology. Large multi-asset bubbles (e.g. 1980s Japanese asset bubble and the 2020–21 Everything bubble ), are attributed to central banking liquidity (e.g. overuse of the Fed put ). In the early stages of a bubble, many investors do not recognise the bubble for what it is. People notice the prices are going up and often think it

2268-448: A similarly rapid decline in the asset's price. When the large firm, cartel or de facto collusive body perceives a maximal peak has been reached in the traded asset's price, it can then proceed to rapidly sell or "dump" its holdings of this asset on the market, precipitating a price decline that forces its competitors into insolvency, bankruptcy or foreclosure. The large firm or cartel – which has intentionally leveraged itself to withstand

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2376-407: A solid alternative even for rather complex economic theory. In 1860 French economist Clément Juglar first identified economic cycles 7 to 11 years long, although he cautiously did not claim any rigid regularity. This interval of periodicity is also commonplace, as an empirical finding, in time series models for stochastic cycles in economic data. Furthermore, methods like statistical modelling in

2484-476: A time series analysis is used to capture the regularities and the stochastic signals and noise in economic time series such as Real GDP or Investment. [Harvey and Trimbur, 2003, Review of Economics and Statistics ] developed models for describing stochastic or pseudo- cycles, of which business cycles represent a leading case. As well-formed and compact – and easy to implement – statistical methods may outperform macroeconomic approaches in numerous cases, they provide

2592-697: A type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; in duration, business cycles vary from more than one year to ten or twelve years; they are not divisible into shorter cycles of similar characteristics with amplitudes approximating their own. According to A. F. Burns: Business cycles are not merely fluctuations in aggregate economic activity. The critical feature that distinguishes them from

2700-649: A war was the Panic of 1825 . Business cycles in OECD countries after World War II were generally more restrained than the earlier business cycles. This was particularly true during the Golden Age of Capitalism (1945/50–1970s), and the period 1945–2008 did not experience a global downturn until the Late-2000s recession . Economic stabilization policy using fiscal policy and monetary policy appeared to have dampened

2808-422: Is a barometer of boom", "the tallest buildings generally appear before the end of a boom, their height driven up by the speculative fever that affects both developers and lenders", citing cyclically inflated land values as the principal factor for increases in building height, but did not elevate this fact to become an "index". A related concept, Skyscraper Indicator , was popularized by Ralph Nelson Elliott in

2916-654: Is a period when current asset prices greatly exceed their intrinsic valuation , being the valuation that the underlying long-term fundamentals justify. Bubbles can be caused by overly optimistic projections about the scale and sustainability of growth (e.g. dot-com bubble ), and/or by the belief that intrinsic valuation is no longer relevant when making an investment (e.g. Tulip mania ). They have appeared in most asset classes, including equities (e.g. Roaring Twenties ), commodities (e.g. Uranium bubble ), real estate (e.g. 2000s US housing bubble ), and even esoteric assets (e.g. Cryptocurrency bubble ). Bubbles usually form as

3024-452: Is chasing too few investment opportunities. Paul Krugman Economic bubbles often occur when too much money is chasing too few assets, causing both good assets and bad assets to appreciate excessively beyond their fundamentals to an unsustainable level. Once the bubble bursts, the fall in prices causes the collapse of unsustainable investment schemes (especially speculative and/or Ponzi investments, but not exclusively so), which leads to

3132-462: Is eliminated and market participants should be able to calculate the intrinsic value of the assets simply by examining the expected stream of dividends. Nevertheless, bubbles have been observed repeatedly in experimental markets, even with participants such as business students, managers, and professional traders. Experimental bubbles have proven robust to a variety of conditions, including short-selling, margin buying, and insider trading. While there

3240-575: Is interfered with, often via government policy . A recent example is the Troubled Asset Relief Program (TARP), signed into law by U.S. President George W. Bush on 3 October 2008 to provide a government bailout for many financial and non-financial institutions who speculated in high-risk financial instruments during the housing boom condemned by a 2005 story in The Economist titled "The worldwide rise in house prices

3348-479: Is justified. Therefore bubbles are often conclusively identified only in retrospect, after the bubble has already "popped" and prices have crashed. The term "bubble", in reference to financial crisis , originated in the 1711–1720 British South Sea Bubble , and originally referred to the companies themselves, and their inflated stock, rather than to the crisis itself. This was one of the earliest modern financial crises; other episodes were referred to as "manias", as in

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3456-402: Is no clear agreement on what causes bubbles, there is evidence to suggest that they are not caused by bounded rationality or assumptions about the irrationality of others, as assumed by greater fool theory . It has also been shown that bubbles appear even when market participants are well capable of pricing assets correctly. Further, it has been shown that bubbles appear even when speculation

3564-467: Is not possible or when over-confidence is absent. More recent theories of asset bubble formation suggest that they are likely sociologically-driven events, thus explanations that merely involve fundamental factors or snippets of human behavior are incomplete at best. For instance, qualitative researchers Preston Teeter and Jorgen Sandberg argue that market speculation is driven by culturally-situated narratives that are deeply embedded in and supported by

3672-409: Is not stable over different time periods because of economic shocks , random fluctuations and development in financial systems . Ludvigson believes consumer confidence index is a coincident indicator as it relates to consumer's current situations. Winton & Ralph state that retail trade index is a benchmark for the current economic level because its aggregate value counts up for two-thirds of

3780-458: Is often relegated to “noise”; an example is a worker strike or an isolated period of severe weather. The individual episodes of expansion/recession occur with changing duration and intensity over time. Typically their periodicity has a wide range from around 2 to 10 years. There are many sources of business cycle movements such as rapid and significant changes in the price of oil or variation in consumer sentiment that affects overall spending in

3888-641: Is particularly associated with the debt-deflation theory of Irving Fisher , and elaborated within Post-Keynesian economics . A protracted period of low risk premiums can simply prolong the downturn in asset price deflation, as was the case of the Great Depression in the 1930s for much of the world and the 1990s for Japan . Not only can the aftermath of a crash devastate the economy of a nation, but its effects can also reverberate beyond its borders. Another important aspect of economic bubbles

3996-519: Is projecting historical data into the future on the same basis; if prices have risen at a certain rate in the past, they will continue to rise at that rate forever. The argument is that investors tend to extrapolate past extraordinary returns on investment of certain assets into the future, causing them to overbid those risky assets in order to attempt to continue to capture those same rates of return. Overbidding on certain assets will at some point result in uneconomic rates of return for investors; only then

4104-472: Is shown to be particularly tight in the grand peak years of 1873, 1889, 1900 and 1912. Hamilton expressed that in the post war era, a majority of recessions are connected to an increase in oil price. Commodity price shocks are considered to be a significant driving force of the US business cycle. Along these lines, the research in [Trimbur, 2010, International Journal of Forecasting ] shows empirical results for

4212-416: Is supposed to account for business cycles thanks to the multiplier and the accelerator. The amplitude of the variations in economic output depends on the level of the investment, for investment determines the level of aggregate output (multiplier), and is determined by aggregate demand (accelerator). Speculative fever An economic bubble (also called a speculative bubble or a financial bubble )

4320-550: Is the biggest bubble in history". A historical example was intervention by the Dutch Parliament during the great Tulip Mania of 1637 . Other causes of perceived insulation from risk may derive from a given entity's predominance in a market relative to other players, and not from state intervention or market regulation. A firm – or several large firms acting in concert (see cartel , oligopoly and collusion ) – with very large holdings and capital reserves could instigate

4428-462: Is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. A person's belief that they are responsible for the consequences of their own actions is an essential aspect of rational behavior. An investor must balance the possibility of making a return on their investment with the risk of making a loss – the risk-return relationship. A moral hazard can occur when this relationship

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4536-490: Is their impact on spending habits. Market participants with overvalued assets tend to spend more because they "feel" richer (the wealth effect ). Many observers quote the housing market in the United Kingdom , Australia , New Zealand , Spain and parts of the United States in recent times, as an example of this effect. When the bubble inevitably bursts, those who hold on to these overvalued assets usually experience

4644-653: Is to say, the tallest building completed each year in these countries does not systematically move away from the underlying income of the country, which provides evidence that, in general, skyscraper height is not fundamentally based on height competition among builders. Finally, the vector autoregression methods allow the authors to see if skyscraper height can predict changes in gross domestic product (GDP) (i.e., if heights predict recessions). The authors find that height cannot, in fact, be used to predict changes in GDP. However, GDP can be used to predict changes in height. In other words,

4752-527: The Financial Instability Hypothesis suggest instead that bubbles burst progressively, with the most vulnerable (most highly- leveraged ) assets failing first, and then the collapse spreading throughout the economy . There are different types of bubbles, with economists primarily interested in two major types of bubbles: The equity bubble and the debt bubble. An equity bubble is characterised by tangible investments and

4860-791: The Wall Street Crash of 1929 . The next record holders, the World Trade Center towers and the Sears Tower , opened in 1973, during the 1973–1974 stock market crash and the 1973 oil crisis . The last example available to Lawrence, the Petronas Twin Towers , opened in the wake of the 1997 Asian Financial Crisis and held the world height record for five years. Lawrence linked the phenomenon to overinvestment , speculation , and monetary expansion but did not elaborate on these underlying issues. The concept

4968-503: The banks , which makes markets vulnerable to volatile asset price inflation caused by short-term, leveraged speculation. For example, Axel A. Weber , the former president of the Deutsche Bundesbank , has argued that "The past has shown that an overly generous provision of liquidity in global financial markets in connection with a very low level of interest rates promotes the formation of asset-price bubbles." According to

5076-448: The business cycle , but that GDP can predict the height of building construction. Lawrence started his paper, The Skyscraper Index: Faulty Towers , as a joke (emphasized by a title referencing a comedy show ) and based his index on a comparison of historical data, primarily from the United States' experience. He dismissed overall construction and investment statistics, focusing only on record-breaking projects. The first notable example

5184-429: The dot-com bubble . A debt bubble is characterised by intangible or credit based investments with little ability to satisfy growing demand in a non-existent market. These bubbles are not backed by real assets and are based on frivolous lending in the hope of returning a profit or security. These bubbles usually end in debt deflation causing bank runs or a currency crisis when the government can no longer maintain

5292-426: The post-Keynesian branch. It has also been variously suggested that bubbles may be rational, intrinsic, and contagious. To date, there is no widely accepted theory to explain their occurrence. Recent computer-generated agency models suggest excessive leverage could be a key factor in causing financial bubbles. Puzzlingly for some, bubbles occur even in highly predictable experimental markets, where uncertainty

5400-565: The 1930s. In some ways this appears to be an elaboration of C. Northcote Parkinson 's theory that only organizations in decline have sleek, well-planned buildings. His favorite example was not a skyscraper, but the city of New Delhi (particularly the area now referred to as Lutyen's Delhi) – built shortly before India became independent of the British builders. The construction of the Burj Khalifa may follow this pattern. In October 2009,

5508-413: The 1930s. Sismondi's theory of periodic crises was developed into a theory of alternating cycles by Charles Dunoyer , and similar theories, showing signs of influence by Sismondi, were developed by Johann Karl Rodbertus . Periodic crises in capitalism formed the basis of the theory of Karl Marx , who further claimed that these crises were increasing in severity and, on the basis of which, he predicted

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5616-566: The 19th and first half of the 20th century, specifically the period 1815–1939. This period started from the end of the Napoleonic wars in 1815, which was immediately followed by the Post-Napoleonic depression in the United Kingdom (1815–1830), and culminated in the Great Depression of 1929–1939, which led into World War II . See Financial crisis: 19th century for listing and details. The first of these crises not associated with

5724-545: The 19th century. ( See: Productivity improving technologies (historical) .) A table of innovations and long cycles can be seen at: Kondratiev wave § Modern modifications of Kondratiev theory . Since surprising news in the economy, which has a random aspect, impact the state of the business cycle, any corresponding descriptions must have a random part at its root that motivates the use of statistical frameworks in this area. There were frequent crises in Europe and America in

5832-503: The Dutch tulip mania . The metaphor indicated that the prices of the stock were inflated and fragile – expanded based on nothing but air, and vulnerable to a sudden burst, as in fact occurred. Some later commentators have extended the metaphor to emphasize the suddenness, suggesting that economic bubbles end "All at once, and nothing first, / Just as bubbles do when they burst," though theories of financial crises such as debt deflation and

5940-632: The Relief of the Manufacturing Poor, both identified the cause of economic cycles as overproduction and underconsumption , caused in particular by wealth inequality . They advocated government intervention and socialism , respectively, as the solution. This work did not generate interest among classical economists, though underconsumption theory developed as a heterodox branch in economics until being systematized in Keynesian economics in

6048-657: The Woolworth Building was followed by a third-worst-ever quarterly decline in gross domestic product , thus it should not be considered an exception from the rule (as Lawrence himself did). Cyclical patterns in real estate have been thoroughly studied before Lawrence, notably by Homer Hoyt in the 1930s. A 1995 analysis of New York and Chicago's experience by Carol Willis estimated that historically, two-thirds to three-quarters of skyscrapers were conceived for rent alone; corporate "edifices" imposing their owners' brand name (including most historical record-holders) were

6156-494: The asset price deflation will begin. When investors feel that they are no longer well compensated for holding those risky assets, they will start to demand higher rates of return on their investments. Another related explanation used in behavioral finance lies in herd behavior , the fact that investors tend to buy or sell in the direction of the market trend. This is sometimes helped by technical analysis that tries precisely to detect those trends and follow them, which creates

6264-465: The bubble may cause financial crisis , and that instead authorities should wait for bubbles to burst of their own accord, dealing with the aftermath via monetary policy and fiscal policy . Political economist Robert E. Wright argues that bubbles can be identified before the fact with high confidence. In addition, the crash which usually follows an economic bubble can destroy a large amount of wealth and cause continuing economic malaise; this view

6372-707: The business cycle, notably the paradox of thrift , and today this previously heterodox school has entered the mainstream in the form of Keynesian economics via the Keynesian revolution. Mainstream economics views business cycles as essentially "the random summation of random causes". In 1927, Eugen Slutzky observed that summing random numbers, such as the last digits of the Russian state lottery, could generate patterns akin to that we see in business cycles, an observation that has since been repeated many times. This caused economists to move away from viewing business cycles as

6480-484: The business cycle. For almost 30 years, these economic data series are considered as "the leading index" or "the leading indicators"-were compiled and published by the U.S. Department of Commerce . A prominent coincident, or real-time, business cycle indicator is the Aruoba-Diebold-Scotti Index . Recent research employing spectral analysis has confirmed the presence of Kondratiev waves in

6588-453: The business cycle. Second, the authors investigate height and economic growth using the time series techniques of vector autoregression and cointegration tests. They investigate the time series relationship between the tallest building completed each year and the level of per capita GDP for the United States, Canada, China, and Hong Kong. The authors find that the two series are co-integrated, which means that they move together over time. That

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6696-534: The causes of inflation are also the causes of bubbles. Others take the view that there is a "fundamental value" to an asset , and that bubbles represent a rise over that fundamental value, which must eventually return to that fundamental value. There are chaotic theories of bubbles which assert that bubbles come from particular "critical" states in the market based on the communication of economic factors. Finally, others regard bubbles as necessary consequences of irrationally valuing assets solely based upon their returns in

6804-499: The central bank's efforts to raise or lower short-term interest rates are to one's view on the creation, inflation and ultimate implosion of an economic bubble. Explanations focusing on interest rates tend to take on a common form, however: when interest rates are set excessively low (regardless of the mechanism by which that is accomplished) investors tend to avoid putting their capital into savings accounts. Instead, investors tend to leverage their capital by borrowing from banks and invest

6912-430: The commercial convulsions of earlier centuries or from the seasonal and other short term variations of our own age is that the fluctuations are widely diffused over the economy – its industry, its commercial dealings, and its tangles of finance. The economy of the western world is a system of closely interrelated parts. He who would understand business cycles must master the workings of an economic system organized largely in

7020-489: The construction company Emaar announced that it had completed the exterior of the building; within two months, the Dubai government came close to defaulting on its loans. Stephen Bayley from The Daily Telegraph commented, "For all the ambition of its construction, Dubai's new Khalifa Tower is a frightening, purposeless monument to the subprime era". A study by Barr , Mizrach and Mundra (2015) aims to see if there is, in fact,

7128-518: The cost of borrowing money). Historically, this is not the only approach taken by central banks. It has been argued that they should stay out of it and let the bubble, if it is one, take its course. Economic philosopher George Soros , influenced by ideas put forward by his tutor, Karl Popper (1957), has been an active promoter of the relevance of reflexivity to economics, first propounding it publicly in his 1987 book The alchemy of finance . He regards his insights into market behaviour from applying

7236-426: The costs of borrowing may become too expensive. There may also be countermeasures taken pre-emptively during periods of strong economic growth, such as increasing capital reserve requirements and implementing regulation that checks and/or prevents processes leading to over-expansion and excessive leveraging of debt. Ideally, such countermeasures lessen the impact of a downturn by strengthening financial institutions while

7344-694: The crash of 2008, with academic journals, economists, and investors discussing his theories. Economist and former columnist of the Financial Times, Anatole Kaletsky , argued that Soros' concept of reflexivity is useful in understanding China's economy and how the Chinese government manages it. In 2009, Soros funded the launch of the Institute for New Economic Thinking with the hope that it would develop reflexivity further. The Institute works with several types of heterodox economics , particularly

7452-659: The cycling of monetary systems. Since 1960, World GDP has increased by fifty-nine times, and these multiples have not even kept up with annual inflation over the same period. Social Contract (freedoms and absence of social problems) collapses may be observed in nations where incomes are not kept in balance with cost-of-living over the timeline of the monetary system cycle. The Bible (760 BCE) and Hammurabi 's Code (1763 BCE) both explain economic remediations for cyclic sixty-year recurring great depressions, via fiftieth-year Jubilee (biblical) debt and wealth resets . Thirty major debt forgiveness events are recorded in history including

7560-665: The debt forgiveness given to most European nations in the 1930s to 1954. There were great increases in productivity , industrial production and real per capita product throughout the period from 1870 to 1890 that included the Long Depression and two other recessions. There were also significant increases in productivity in the years leading up to the Great Depression. Both the Long and Great Depressions were characterized by overcapacity and market saturation. Over

7668-453: The different typologies of cycles has waned since the development of modern macroeconomics , which gives little support to the idea of regular periodic cycles. Further econometric studies such as the two works in 2003 and 2007 cited above demonstrate a clear tendency for cyclical components in macroeconomic times to behave in a stochastic rather than deterministic way. Others, such as Dmitry Orlov , argue that simple compound interest mandates

7776-478: The economic crisis in former Eastern Bloc countries following the end of the Soviet Union in 1991. For several of these countries the period 1989–2010 has been an ongoing depression, with real income still lower than in 1989. In 1946, economists Arthur F. Burns and Wesley C. Mitchell provided the now standard definition of business cycles in their book Measuring Business Cycles : Business cycles are

7884-435: The economic cycle is framed in terms of refuting or supporting Say's law; this is also referred to as the " general glut " (supply in relation to demand) debate. Until the Keynesian revolution in mainstream economics in the wake of the Great Depression , classical and neoclassical explanations (exogenous causes) were the mainstream explanation of economic cycles; following the Keynesian revolution, neoclassical macroeconomics

7992-449: The economy is strong. Advocates of perspectives stressing the role of credit money in an economy often refer to (such) bubbles as "credit bubbles", and look at such measures of financial leverage as debt-to-GDP ratios to identify bubbles. Typically the collapse of any economic bubble results in an economic contraction termed (if less severe) a recession or (if more severe) a depression; what economic policies to follow in reaction to such

8100-445: The economy to come to short run equilibrium at levels that are different from the full employment rate of output. These fluctuations express themselves as the observed business cycles. Keynesian models do not necessarily imply periodic business cycles. However, simple Keynesian models involving the interaction of the Keynesian multiplier and accelerator give rise to cyclical responses to initial shocks. Paul Samuelson 's "oscillator model"

8208-699: The economy. However, this was followed by stagflation in the 1970s, which discredited the theory. The second declaration was in the early 2000s, following the stability and growth in the 1980s and 1990s in what came to be known as the Great Moderation . Notably, in 2003, Robert Lucas Jr. , in his presidential address to the American Economic Association , declared that the "central problem of depression-prevention [has] been solved, for all practical purposes." Various regions have experienced prolonged depressions , most dramatically

8316-521: The existence of business cycles, blamed them on external factors, notably war, or only studied the long term. Sismondi found vindication in the Panic of 1825 , which was the first unarguably international economic crisis, occurring in peacetime. Sismondi and his contemporary Robert Owen , who expressed similar but less systematic thoughts in 1817 Report to the Committee of the Association for

8424-415: The explanation, excessive monetary liquidity (easy credit, large disposable incomes) potentially occurs while fractional reserve banks are implementing expansionary monetary policy (i.e. lowering of interest rates and flushing the financial system with money supply); this explanation may differ in certain details according to economic philosophy. Those who believe the money supply is controlled exogenously by

8532-433: The familiar pattern of boom and bust cycles. An example Soros cites is the procyclical nature of lending, that is, the willingness of banks to ease lending standards for real estate loans when prices are rising, then raising standards when real estate prices are falling, reinforcing the boom and bust cycle. He further suggests that property price inflation is essentially a reflexive phenomenon: house prices are influenced by

8640-673: The fiat currency. Examples are the Roaring Twenties stock market bubble (which caused the Great Depression ) and the United States housing bubble (which caused the Great Recession ). The impact of economic bubbles is debated within and between schools of economic thought ; they are not generally considered beneficial, but it is debated how harmful their formation and bursting is. Within mainstream economics , many believe that bubbles cannot be identified in advance, cannot be prevented from forming, that attempts to "prick"

8748-698: The fluctuations of a business cycle are attributable to external (exogenous) versus internal (endogenous) causes. In the first case shocks are stochastic, in the second case shocks are deterministically chaotic and embedded in the economic system. The classical school (now neo-classical) argues for exogenous causes and the underconsumptionist (now Keynesian) school argues for endogenous causes. These may also broadly be classed as "supply-side" and "demand-side" explanations: supply-side explanations may be styled, following Say's law , as arguing that " supply creates its own demand ", while demand-side explanations argue that effective demand may fall short of supply, yielding

8856-426: The fundamentals and that these newly influenced sets of fundamentals then proceed to change expectations, thus influencing prices; the process continues in a self-reinforcing pattern. Because the pattern is self-reinforcing, markets tend towards disequilibrium. Sooner or later they reach a point where the sentiment is reversed and negative expectations become self-reinforcing in the downward direction, thereby explaining

8964-488: The idea that they are caused by random shocks. Due to this inherent randomness, recessions can sometimes not occur for decades; for example, Australia did not experience any recession between 1991 and 2020. While economists have found it difficult to forecast recessions or determine their likely severity, research indicates that longer expansions do not cause following recessions to be more severe. According to Keynesian economics , fluctuations in aggregate demand cause

9072-422: The leveraged capital in financial assets such as stocks and real estate . Risky leveraged behavior like speculation and Ponzi schemes can lead to an increasingly fragile economy, and may also be part of what pushes asset prices artificially upward until the bubble pops. But these [ongoing economic crises] aren’t just a series of unrelated accidents. Instead, what we’re seeing is what happens when too much money

9180-581: The macroeconomy and thus investment and firms' profits. Usually such sources are unpredictable in advance and can be viewed as random "shocks" to the cyclical pattern, as happened during the 2007–2008 financial crises or the COVID-19 pandemic . The first systematic exposition of economic crises , in opposition to the existing theory of economic equilibrium , was the 1819 Nouveaux Principes d'économie politique by Jean Charles Léonard de Sismondi . Prior to that point classical economics had either denied

9288-514: The market economy as due to exogenous influences, such as the State or its regulations, labor unions, business monopolies, or shocks due to technology or natural causes. Contrarily, in the heterodox tradition of Jean Charles Léonard de Sismondi , Clément Juglar , and Marx the recurrent upturns and downturns of the market system are an endogenous characteristic of it. The 19th-century school of under consumptionism also posited endogenous causes for

9396-486: The market will move from crisis to crisis. This division is not absolute – some classicals (including Say) argued for government policy to mitigate the damage of economic cycles, despite believing in external causes, while Austrian School economists argue against government involvement as only worsening crises, despite believing in internal causes. The view of the economic cycle as caused exogenously dates to Say's law, and much debate on endogeneity or exogeneity of causes of

9504-412: The market, lasting more than a few months, normally visible in real GDP , real income, employment, industrial production, and wholesale-retail sales." Business cycles are usually thought of as medium term evolution. They are less related to long-term trends, coming from slowly-changing factors like technological advances. Further, a one period change, that is unusual over the course of one or two years,

9612-574: The overall GDP and reflects the real state of the economy. According to Stock and Watson, unemployment claim can predict when the business cycle is entering a downward phase. Banbura and Rüstler argue that industry production's GDP information can be delayed as it measures real activity with real number, but it provides an accurate prediction of GDP. Series used to infer the underlying business cycle fall into three categories: lagging , coincident , and leading . They are described as main elements of an analytic system to forecast peaks and troughs in

9720-444: The overvalued asset. The bubbles will end only when the greater fool becomes the greatest fool who pays the top price for the overvalued asset and can no longer find another buyer to pay for it at a higher price. This theory is popular among laity but has not yet been fully confirmed by empirical research. The term "bubble" should indicate a price that no reasonable future outcome can justify. Clifford Asness Extrapolation

9828-550: The period since the Industrial Revolution, technological progress has had a much larger effect on the economy than any fluctuations in credit or debt, the primary exception being the Great Depression, which caused a multi-year steep economic decline. The effect of technological progress can be seen by the purchasing power of an average hour's work, which has grown from $ 3 in 1900 to $ 22 in 1990, measured in 2010 dollars. There were similar increases in real wages during

9936-411: The prevailing institutions of the time. They cite factors such as bubbles forming during periods of innovation, easy credit, loose regulations, and internationalized investment as reasons why narratives play such an influential role in the growth of asset bubbles. One possible cause of bubbles is excessive monetary liquidity in the financial system, inducing lax or inappropriate standards of lending by

10044-567: The price decline it engineered – can then acquire the capital of its failing or devalued competitors at a low price as well as capture a greater market share (e.g., via a merger or acquisition which expands the dominant firm's distribution chain). If the bubble-instigating party is itself a lending institution, it can combine its knowledge of its borrowers' leveraging positions with publicly available information on their stock holdings, and strategically shield or expose them to default. Some regard bubbles as related to inflation and thus believe that

10152-476: The principle as a major factor in the success of his financial career. Reflexivity is inconsistent with general equilibrium theory , which stipulates that markets move towards equilibrium and that non-equilibrium fluctuations are merely random noise that will soon be corrected. In equilibrium theory, prices in the long run at equilibrium reflect the underlying economic fundamentals , which are unaffected by prices. Reflexivity asserts that prices do in fact influence

10260-498: The relation between oil-prices and real GDP. The methodology uses a statistical model that incorporate level shifts in the price of crude oil; hence the approach describes the possibility of oil price shocks and forecasts the likelihood of such events. Economic indicators are used to measure the business cycle: consumer confidence index , retail trade index , unemployment and industry/service production index . Stock and Watson claim that financial indicators' predictive ability

10368-407: The risk for investment managers that do not participate during the building phase of a bubble, particularly one that builds over a longer period of time. In attempting to maximize returns for clients and maintain their employment, they may rationally participate in a bubble they believe to be forming, as the likely shorter-term benefits of doing so outweigh the likely longer-term risks. Moral hazard

10476-606: The skyscraper index as an unreliable tool: the post-World War I recession , the recession of 1937 , and the early 1980s recession were not marked by any record-breaking projects. Construction of the Woolworth Building (world height record 1913–1930) was marked by a local overbuilding crisis in New York City in 1913–1915 concurrent with a record construction boom in Chicago. Thornton argues that completion of

10584-431: The skyscraper index valid. First, a decline in interest rates at the onset of a boom drives land prices. Second, a decline in interest rates allows the average size of a firm to increase, creating demand for larger office spaces. Third, low interest rates provide investment to construction technologies that enable developers to break earlier records. All three factors peak at the end of the growth period. Critics dismissed

10692-864: The so-called recurrence quantification correlation index to test correlations of RQA on a sample signal and then investigated the application to business time series. The said index has been proven to detect hidden changes in time series. Further, Orlando et al., over an extensive dataset, shown that recurrence quantification analysis may help in anticipating transitions from laminar (i.e. regular) to turbulent (i.e. chaotic) phases such as USA GDP in 1949, 1953, etc. Last but not least, it has been demonstrated that recurrence quantification analysis can detect differences between macroeconomic variables and highlight hidden features of economic dynamics. The Business Cycle follows changes in stock prices which are mostly caused by external factors such as socioeconomic conditions, inflation, exchange rates. Intellectual capital does not affect

10800-500: The study finds that extreme height is driven by rapid economic growth, but that height cannot be used as an indicator of recessions. Business cycle Heterodox Business cycles are intervals of general expansion followed by recession in economic performance. The changes in economic activity that characterize business cycles have important implications for the welfare of the general population, government institutions, and private sector firms. There are many definitions of

10908-482: The study of economic fluctuation rather than a "business cycle" – though some economists use the phrase 'business cycle' as a convenient shorthand. For example, Milton Friedman said that calling the business cycle a "cycle" is a misnomer , because of its non-cyclical nature. Friedman believed that for the most part, excluding very large supply shocks, business declines are more of a monetary phenomenon. Arthur F. Burns and Wesley C. Mitchell define business cycle as

11016-505: The sums that banks are prepared to advance for their purchase, and these sums are determined by the banks' estimation of the prices that the property would command. Soros has often claimed that his grasp of the principle of reflexivity is what has given him his "edge" and that it is the major factor contributing to his successes as a trader. For several decades there was little sign of the principle being accepted in mainstream economic circles, but there has been an increase of interest following

11124-481: The unsustainable desire to satisfy a legitimate market in high demand. These kind of bubbles are characterised by easy liquidity, tangible and real assets, and an actual innovation that boosts confidence. The injection of funds into the business cycle is capable of accelerating the innovation process and propelling faster productivity growth. Three instances of an equity bubble are the Tulip Mania , Bitcoin , and

11232-580: The world GDP dynamics at an acceptable level of statistical significance. Korotayev & Tsirel also detected shorter business cycles, dating the Kuznets to about 17 years and calling it the third sub-harmonic of the Kondratiev, meaning that there are three Kuznets cycles per Kondratiev. Recurrence quantification analysis has been employed to detect the characteristic of business cycles and economic development . To this end, Orlando et al. developed

11340-458: The worst excesses of business cycles, and automatic stabilization due to the aspects of the government 's budget also helped mitigate the cycle even without conscious action by policy-makers. In this period, the economic cycle – at least the problem of depressions – was twice declared dead. The first declaration was in the late 1960s, when the Phillips curve was seen as being able to steer

11448-403: Was largely rejected. There has been some resurgence of neoclassical approaches in the form of real business cycle (RBC) theory. The debate between Keynesians and neo-classical advocates was reawakened following the recession of 2007. Mainstream economists working in the neoclassical tradition, as opposed to the Keynesian tradition, have usually viewed the departures of the harmonic working of

11556-723: Was revived in 2005, when Fortune warily observed five media corporations investing in new skyscrapers in Manhattan (none of them, including the tallest, the New York Times Building , broke any records). The intuitively simple concept, publicized by the business press in 1999, has been cross-checked within the framework of the Austrian Business Cycle Theory , itself borrowing on Richard Cantillon 's eighteenth-century theories. Mark Thornton (2005) listed three Cantillon effects that make

11664-778: Was the Panic of 1907 . Two record-breaking skyscrapers, the Singer Building and the Metropolitan Life Insurance Company Tower , were launched in New York before the panic and completed in 1908 and 1909, respectively. Met Life remained the world's tallest building until 1913. Another string of supertall towers – 40 Wall Street , the Chrysler Building , the Empire State Building – was launched shortly before

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