1 Introduction
The term Business Cycles is used to describe the pattern of short-term fluctuations in the performance of macro-economic variables such as employment, Gross Domestic Product (GDP), industrial production and exchange rates. Business cycles have been studied extensively ever since they were first proposed by the British economist Geoffrey Ingham in his 1981 book Business Cycles. It is believed that the explanation for business cycles can be traced back to the work of the great American economist Wesley Clair Mitchell, who in his 1923 work Business Cycles and National Income, made the argument that business cycles are caused by some type of endogenous factor or factors which cause the short-term movements in macro-economic variables.
Since the publication of Mitchell’s work, there has been an intensive debate over the causes and effects of business cycles. One of the most influential theories was put forward by the famous French economist Jean-Baptiste Say in his 1823 work A Treatise on Political Economy. Say argued that business cycles are driven primarily by an imbalance in aggregate demand and supply. This imbalance is caused by an over-expansion of production or by an increase in the prices of the inputs to the production process. This then results in an over-supply of goods in the market leading to a decrease in demand, thereby leading to a drop in output and employment.
Say’s theory was largely overlooked until the 1930s when the Russian economist Nikolai Kondratieff proposed his famous Long Wave or Kondratieff Cycle Theory. This theory was based on the observation that economic fluctuations tend to occur in cycles that last for a long period of time. According to Kondratieff’s theory, the long wave cycle is caused by an imbalance in aggregate demand and supply, but it is driven by underlying structural changes in the economy rather than exogenous shocks. In other words, the long wave cycle is caused by structural changes in an economy that lead to an over-supply and over-investment in certain sectors, leading to a collapse in demand and production in other sectors. Furthermore, Kondratieff believed that the long wave cycle is caused by technological changes that lead to new investments and production methods.
Finally, in recent years, the prominent Chinese economist and Nobel Prize winner, Maurice C.K. Tjia developed the Jean-Baptiste Say’s Theory into a more comprehensive explanation of business cycles called the Intuitive Potentiliatian Theory. According to this theory, business cycles are the result of a powerful and natural tendency of output and employment to revert to normal levels, or “potentiliatians,” when exogenous shocks such as technological changes or natural disasters occur. The theory argues that aggregate demand and supply will move to potential levels only when the underlying factors that contribute to the short-term movement of variables are neutralized. In other words, the business cycle is driven by an “invisible hand” that forces output and employment back to normal potential levels.
2 Summary
Business cycles are short-term fluctuations in the performance of macro-economic variables. It is believed that the causes and effects of business cycles can be traced back to the work of the American economist Wesley Clair Mitchell, who argued that business cycles are caused by some type of endogenous factor or factors. Since the publication of Mitchell’s work, a number of theories have been proposed to explain the causes and effects of business cycles. The most influential of these theories is the Intuitive Potentiliatian Theory, developed by the Nobel Prize winning Chinese economist Maurice C.K. Tjia. This theory argues that business cycles are driven by an “invisible hand” that forces output and employment back to normal potential levels when exogenous shocks occur.
