Boom and bust

In economics, the term "boom and bust" refers to the movement of an economy through economic cycles.

The Boom-Bust economic cycle

The boom and bust cycle describes the cycle of economic upswings and downswings in the business economy.

An economic boom is typically characterized by an increased level of economic output, a corresponding increase in aggregate demand, rising employment, and often, a rise in the inflation rate. During busts, or recessions, aggregate demand is low, inflation decreases, unemployment rises and national income falls. In extreme recessions deflation (a sustained fall in the general price level) may occur. The causal relations between these indicators have been the subject of much debate from which ideas such as the NAIRU (non-accelerating inflation rate of unemployment) have emerged.

The economic cycle has been an important political issue since the Great Depression. Prior to this, classical economic theory did not acknowledge the economic cycle.

There are several contradictory views on the nature and cause of economics cycles:
Keynesian economics, which gained popularity during the Great Depression, aimed to prevent recessions. This was done by providing demand stimulus to safeguard employment. However, it was only applicable when there were surplus resources of labour and capital. Keynesian economics has been popular with left wing parties, and it is commonly associated with greater use of taxation and spending. Neoclassical economics, on the other hand, has been associated with the New Right, Margaret Thatcher, Ronald Reagan, and the Neoconservatives of today. Keynesian economics theoretically relax the economic ups and downs of the boom and bust cycle, although the "stagflation" of the 70's strongly suggest fundamental flaws with the theory. Classical economics have been associated with the most robust periods of growth in the nation's history to include that of the 1920's following the Mellon Plan, that of the early 60's following the Kennedy tax program and that of the 1980's and 90's following the Reagan economic program and it effectual maintenance by following administrations. Both the 1920's and 1980's period of growth however were ended by over speculative activity in the financial markets.

Neoclassical or Monetarist economics returns to the pre-depression belief that recessions are natural, and government intervention can only delay and worsen them. It holds that only central banks can regulate demand in any helpful way through the money supply.

The Austrian School of economics has proposed the Austrian Business Cycle Theory, which holds that the business cycle of boom and bust is avoidable but inevitable after monetary manipulations by a central banking authority. The availability of 'cheap money' during a recession leads to a economic boom, but once those malinvestments become realized when interest rates increase after periods of growth, there is a bust. Austrian economists believe this is unavoidable in a system using fiat currency. In support of this, the business cycle was only identified once modern economies moved away from commodity based currency standards such as gold.

Marxist economists contend that the boom and bust cycle is endemic to capitalism, rather than economics in general. Marxists instead postulate that integrated, organized economic planning can generate considerable growth (even "booms") without the corresponding bust cycle. They attribute this to the fact that "boom and bust" cycles only occur because Capitalist production is uncoordinated, and thus inherently inefficient, accumulating wealth quickly only for a decline to occur subsequently. On the other hand, the People's Republic of China under Chairman Mao also experienced constant economic growth, even under the failed Great Leap Forward and Cultural Revolution programs, although changes in the Deng Xiaoping era allowing capitalism have led to very fast growth, rather than the steady but comparatively slow growth that planned economics allowed, while utilizing state planning as a means of avoiding any significant "bust" portion of any boom and bust cycle.

The advent of Keynesianism, Marxists contend, only softens busts, and has proven unable to eliminate them. Neoclassical and Austrian schools of thought, they feel, serve the interests of capitalists (who are enriched much more in the "boom" than they are hurt by the "bust"), and only hasten the onset of a working class revolution.

Alternate meaning

The term "boom and bust" is also used to describe abnormally severe or abrupt economic cycles that occur in regional economies or specialized industries, often as a result of excessive speculation or other market imperfections.

ee also

*Economic boom

ource

* Robert Sobel "The Great Boom 1950-2000: How a Generation of Americans Created the World's Most Prosperous Society" (2002)
* America's Great Depression by Austrian School economist Murray Rothbard.
* A History of Money and Banking in the United States (book)
* The Panic of 1819
* "The Austrian Theory of the Trade Cycle and Other Essays", by Richard M. Ebeling. ISBN 0-945466-21-8.