Economics

It has frequently been observed that interest in business or trade cycle theory is itself cyclical (e.g. Zarnowitz 1985, p.524). In periods of sustained prosperity interest wanes, as it did in the 1960s and early 1970s when research into macroeconomic dynamics concentrated on growth theory. At the end of the 1960s, the continued existence of business cycles was questioned. The experiences of the 1970s and early 1980s, especially following the 1973 and 1979 oil price shocks, brought a resurgence of interest in business cycles.

The elasticity of demand is its responsiveness to changes in another factor, such as price. British economist Alfred Marshall is generally credited as the first economist to define the concept in 1890, but the German statistician Ernst Engel published a paper five years earlier, showing how changes in income alter the level of demand. The origins of the concept may be disputed, but its importance is not.

The word demand has a special meaning in economics. Most American teenagers own a pair of sneakers. Because of high demand and high price, however, not everyone who wants a pair of Nike Air Force 1 sneakers is able to acquire this particular brand. As you read this section, you’ll learn that the idea of demand centers on people being both willing and able to pay for a product or service.

Perhaps the most widely quoted and influential definition is that of Burns and Mitchell (1946, p.l) who state that:

Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organise 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;
  • the sequence of changes is recurrent but not periodic;
  • in duration cycles vary from more than one year to ten or twelve years;
  • they are not divisible into shorter cycles of similar character with amplitudes approximating their own.

The possibility that the financial system might be a source of instability leading to crises was frequently discussed in pre-Keynesian business cycle literature, which is reviewed briefly in the next section. The main focus of the chapter is the revival of interest in the financial instability hypothesis (FIH) in the 1970s and 1980s.

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