Economic recession: the concept, causes and consequences

The economy of any, even the most developed country, is not static. Its indicators are constantly changing. The economic recession is replaced by an upswing, the crisis is the peak values of growth. The cyclical nature of development is characteristic of the market type of management. The change in the level of employment influences the purchasing power of consumers, which, in turn, leads to a reduction or increase in the price of food. And this is only one example of the relationship of indicators. Since today most countries are capitalist, such economic concepts as recession and recovery are suitable for describing and developing the world economy.

History of the study of economic cycles

If you construct a GDP curve for any country, you can see that the growth of this indicator is not permanent. Each economic cycle consists of a period of decline in social production and its rise. However, its duration is not clearly delineated. Vibrations of business activity are poorly predictable and irregular. However, there are several concepts that explain the cyclical nature of the economy and the time frame for these processes. The first to recurrent crises drew the attention of Jean Sismondi. "Classics" denied the existence of cycles. They often linked the period of economic decline to external factors, for example, by war. Sismondi drew attention to the so-called "panic of 1825", the first international crisis that occurred in peacetime. Robert Owen came to similar conclusions. He believed that the economic downturn is due to overproduction and underconsumption due to inequality in the distribution of income. Owen advocated state intervention and a socialist way of doing business. Periodic crises, characteristic of capitalism, became the basis of the work of Karl Marx, who called for a communist revolution.

Unemployment, the economic downturn and the role in solving these government problems are the subject of a study of John Maynard Keynes and his followers. It was this economic school that systematized ideas about crises and proposed the first consecutive steps to eliminate their negative consequences. Keynes even tried them in practice in the United States during the Great Depression of 1930-1933.

Basic phases

The economic cycle can be divided into four periods. Among them:

• Economic recovery (revival). This period is characterized by increased productivity and employment. The level of inflation is low. Buyers are eager to make purchases that were postponed during the crisis. All innovative projects pay off quickly.
• Peak. This period is characterized by maximum business activity. At this stage, the unemployment rate is extremely low. Production capacity is maximally loaded. However, negative aspects start to appear: inflation and competition are increasing, the payback period of projects is increasing.
• Economic recession (crisis, recession). This period is characterized by a decline in entrepreneurial activity. The volume of production and investment is falling, and unemployment is increasing. Depression is called a deep and prolonged decline.
• Bottom. This period is characterized by minimal business activity. At this stage, the lowest level of unemployment and production is observed. During this period, the excess of goods that is generated during peak business activity is spent. Capital flows from the sphere of trade to banks. This leads to a decrease in interest on loans. Usually this phase does not happen for a long time. However, there are exceptions. For example, the "Great Depression" lasted for ten years.

Thus, the economic cycle can be characterized as a period between two identical states of business activity. It should be understood that, despite the cyclical nature, in the long run, GDP tends to grow. Such economic concepts as recession, depression and crisis do not disappear anywhere, but each time these points are located higher.

Loop Properties

The considered economic fluctuations differ both in nature and in duration. However, they can identify several common features. Among them:

• Cyclicity is characteristic for all countries with a market type of management.
• Crises are an inevitable and necessary phenomenon. They stimulate the economy, forcing it to enter all the larger levels of development.
• Any cycle consists of four phases.
• Cyclicality is not due to one, but to many different causes.
• Due to globalization, today's crisis in one country inevitably affects the economic situation in another.

Classification of periods

The modern economy distinguishes more than a thousand different cycles of business activity. Among them:

• Short-term cycles of Joseph Kitchin. They last about 2-4 years. Named after the scientist who discovered them. The existence of these cycles Kitchin initially explained the changes in gold reserves. However, to date it is believed that they are due to delays in obtaining the necessary business information for decision-making. For example, consider the saturation of the commodity market. In this situation, manufacturers must reduce output. However, information about the saturation of the market comes not immediately, but with a delay. This leads to a crisis due to the emergence of surplus goods.
• Medium-term cycles of Clement Juglar. They were also named after the economist who discovered them. Their existence is explained by the delay between making decisions about the volume of investments in fixed assets and the direct creation of production capacities. The duration of the cycles of Juglar is about 7-10 years.
• Simon Smith's rhythms. They are named after the Nobel laureate, who opened them in 1930. The scientist explained their existence by demographic processes and fluctuations in the construction industry. However, modern economists consider the renewal of technology as the main reason for Kuznets rhythms. Their duration is about 15-20 years.
• Long waves of Nikolai Kondratiev. They were discovered by scientists, after whom they were named, in the 1920s. Their duration is about 40-60 years. The existence of K-waves is due to important discoveries and related changes in the structure of social production.
• Forrester cycles lasting 200 years. Their existence is explained by the change in the materials and energy resources used.
• Toffler cycles of 1000-2000 years. Their existence is associated with fundamental changes in the development of civilization.

Causes

The economic recession is an integral part of the development of the economy. Cyclicality is caused by the following factors:

• External and internal shocks. Sometimes they are called impulse impacts on the economy. These are technological breakthroughs that can change the nature of farming, the discovery of new energy carriers, armed conflicts and wars.
• Unplanned increase in investments in fixed assets and stocks of goods and raw materials, for example, due to changes in legislation.
• Change in prices for factors of production.
• Seasonal nature of harvesting in agriculture.
• The growth of the influence of trade unions, and hence the increase in wages, and an increase in job security.

The decline of economic growth: the concept and essence

Among modern scholars there is still no consensus on what to consider a crisis. In Soviet literature of the times of the Soviet Union, the point of view prevailed, according to which economic recessions are characteristic only of capitalist countries, and under the socialist type of management only "growth difficulties" are possible. Today, economists are discussing whether crises are typical for the micro level. The essence of the economic crisis is manifested in the excess supply in comparison with the aggregate demand. The recession is manifested in massive bankruptcies, rising unemployment and a decrease in the purchasing power of the population. The crisis is a violation of the balance of the system. Therefore, he is accompanied by a number of socio-economic upheavals. And for their resolution, real internal and external changes are needed.

Functions of the crisis

The economic cycle decline is progressive in nature. It performs the following functions:

• Elimination or qualitative transformation of the obsolete parts of the existing system.
• The assertion of initially weak new elements.
• Test the system for strength.

Dynamics

During its development the crisis is going through several stages:

• Latent . At this stage, the prerequisites are only ripening, they are not yet breaking through.
• The period of the collapse. At this stage, the contradictions are gaining strength, the old and new elements of the system come into conflict.
• The period of crisis mitigation. At this stage the system becomes more stable, prerequisites are created for the revival in the economy.

The conditions of economic recession and its consequences

All crises have an impact on social relations. During the recession, state structures become much more competitive than commercial ones in the labor market. Many institutions are becoming more corrupt, which further exacerbates the situation. The popularity of military service is also increasing due to the fact that it becomes harder for young people to find themselves in civilian life. The number of religious people is also growing. The popularity of bars, restaurants and cafes in the crisis is falling. However, cheap people begin to buy more cheaply. Negative impact of the crisis on leisure and culture, which is associated with a sharp drop in the purchasing power of the population.

Ways to overcome the downturns

The main task of the state in the context of the crisis is to solve existing social and economic contradictions and help the least protected layers of the population. Keynesians advocate active intervention in the economy. They believe that economic activity can be restored through state orders. Monetarists are in favor of a more market-oriented approach. They regulate the volume of money supply. However, one must understand that all these are temporary measures. Despite the fact that crises are an integral part of development, every firm and the state as a whole should have a long-term program developed.