Download The Business Cycle

The Business Cycle
• One of the major problems capitalist nations must
constantly deal with is an economic event known as
the business cycle
• This means that the economy will go through
periods of boom and bust.
The Business Cycle
• A free market economy does not grow at a constant
rate. It goes through a series of booms and busts called
the business cycle.
• The following graph illustrates the business cycle:
The Business Cycle
Explanation
A.
The letter A on the graph represents a decline,
sometimes calls a recession.
During a decline, consumer spending decreases as
consumers and investors become cautious about the
future.
This causes factories to slow production and lay off
workers.
The increased unemployment tends to reduce spending
in the marketplace even further, contributing to the
economy's decline.
The Business Cycle
B.
The letter B on the map represents the lowest
point of the recession.
This is a period of high unemployment and low
prices.
Prices have dropped because there is less
money being circulated in the economy.
The Business Cycle
C.
The letter C on the map represents a boom, sometimes
called prosperity.
A boom is a period of prosperity.
Most people have jobs.
As a result they tend to be buying goods and services.
This keeps the economy strong.
This period will see the highest levels of inflation as
producers try to slowly increase their prices in order to
get a bigger share of the thriving market.
The Business Cycle
D.
The letter D on the map represents a depression.
A depression is a very big decline whereas a recession is
only a small decline. It can be defined as three quarters of
negative growth
During a depression, unemployment is very high and there is
very little money circulating in the marketplace.
A depression is a serious problem for a country.
The most famous depression was the Great Depression in
the 1930's.
The Business Cycle
E.
The letter E represents a recovery.
During a recovery, the economy is improving.
As people begin spending more, producers are
encouraged to increase production.
This means more jobs and, in turn, even more
spending.
A recovery was the intended effect of Franklin Delano
Roosevelt's (FDR) New Deal in the 1930's
Can you spot
the recession,
recovery and
prosperity?
The Business Cycle
• The oil industry is a good example of the
business cycle at work.
• Fluctuating prices for (and production of) oil
have occurred since the beginning of the
industry.
• During Rockefeller's day, the price of oil even
fell below the price of water!
• Nowadays, in Alberta we can see the effect
that changing oil prices have on our economy.
• When prices are low, we tend to have higher
unemployment and a slower economy.
• When they rise again, we are able to increase
spending at all levels.
The Business Cycle
• When an economy has been prosperous for
a long time, raw materials tend to get used
up, skilled labourers become scarce, and
stockpiles of goods in warehouses increase.
• This causes some factories to lay off
workers.
• All these factors will eventually work together
to cause a recession
Classical Liberalism’s
Solution
• Past depressions (like in the 1870s) –let
them work it out for themselves.
• Leave things alone and they will return
to normal because the business cycle is
natural.
• However the US gov’t did intervene to
try to force strikes to end(i.e. the army
killed 70 workers in 1877)
How did classical liberalism
respond to competing
ideologies?
• Socialism, communism, fascism and
other beliefs had reasons for existing.
• If there was no response, revolution or
some other abandonment of capitalism
might occur.
Welfare Capitalism
(US definition)
•
•
In the USA, many industrialists felt the
need to fend off left wing appeal by
improving the lives of their workers.
For example:
•
•
Henry Ford offered his workers a
comparatively high wage- $5/day
George Pullman built a town for his
workers (better housing, sanitation,
etc.)
Look at the following
advertisement
• It’s probably from the 1930s
• It’s aimed at managers or bosses.
The Great
Depression
• It wasn’t that great!
• Seen as a failure of pure capitalist ideas
•
•
•
Keynesian
Economics
John Maynard Keynes
was a British
economist
Wrote General Theory
of Employment,
Interest and Money
Advocated
interventionist policies
to deal with the
adverse effects of the
business cycle
•
•
•
•
Keynesian
Economics
Keynes argued that an economic slump was not a long-run
phenomenon that we should all get depressed about and
leave the markets to sort out.
Keynes felt that a slump (or trough) was a short-run problem
stemming from a lack of demand.
If the private sector was not prepared to spend to boost
demand, then the government should do it instead by
running a budget deficit.
When times were good again and the private sector was
spending again, the government could trim its spending and
pay off the debts they had accumulated during the slump.
Keynes’
Demand Side Economics
More money in
your pockets:
Governments
should spend
money in a
recession to
reduce its
severity. It
should also
reduce taxes.
Less money in
your pockets:
Governments
should spend
less money in
boom times to
soften a boom.
It should also
raise taxes.
Demand-Side
Economics
• How to cool an overheated economy?
• How to warm it up again?
• Influence consumer demand
Heat it up
• Fiscal Policy
• increase government spending
• social assistance
How could these
actions stimulate
• public works
consumer
demand?
• lower taxes
• Monetary Policy
• lower interest rates
Cool it off
•
•
Fiscal Policy
•
•
cut government spending
•
•
cut spending as fewer
people need social
assistance
limit public works
raise taxes
Monetary Policy
•
raise interest rates
How could
these actions
slow consumer
demand?
Welfare State
• Keynes’ theories influence a great
number of liberal democracies.
• In the USA president Roosevelt set up
his “New Deal” which combined
government intervention and freemarket principles.
Economic Responses
Guess what ideas
the monetarists
were responding to.
Review
What did Keynes feel the government
should do during a recession/depression to:
• government spending
• taxes
• interest rates
Why?
Review
What about during periods of strong
economic growth?
• government spending
• taxes
• interest rates
Why?
Questions
Page 212-213
Read FDR’s speech at the conference of
Mobilization for Human Needs and answer
questions 4-7 on page 213.