Monday, January 26, 2015

Phases of the Business Cycle

Something I found while looking through my old notes on the Schumpeter essay in Readings in Business Cycle Theory, from a file I wrote (or last edited) back in 1996:

Schumpeter (writing in 1935) described a cycle in four phases. We speak today of four phases as well, but they are not the same. Today we speak of a period of growth, a peak, a period of recession, and a trough (pronounced to rhyme with "cow") or low point. Schumpeter, by way of contrast, emphasized the importance of the smoothed trend line about which the cycle varied. He described a period of prosperity followed by a period of recession (both above the trend line), then depression as the decline continued below the trend line, and finally a period of revival as the economy climbed back toward its trend line.

For Schumpeter all four phases are time periods with duration. For us today, two of the phases have duration, and two are turning points.

For Schumpeter the cycle is like a sine wave, beginning and ending at its average value. For us the cycle is measured peak-to-peak (like a cosine wave) or trough-to-trough, bottom to bottom.

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