Notices

Boom and bust

From Traderpedia

Definition:
In economics, the movement of an economy through cycles due to changes in aggregate demand.


During booms, there is a high level of aggregate demand, inflation increases, unemployment falls, and growth in national income accelerates. During busts, or recessions, when aggregate demand is low, inflation decreases, unemployment rises and national income falls.

Due to its relevance to public policy, the workings of the economic cycle have been an important political issue since the Great Depression. Prior to this, classical economic theory variously either denied the existence of the economic cycle (Adam Smith), or claimed it was an inherent aspect of the capitalist system (Karl Marx).

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). 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.

It has been the case that Keynesian economics has been popular with left wing parties, as it encourages 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.

The term "boom and bust" itself has been a motto of Social Democrat parties, claiming to represent a "Third Way" and who wish to regulate the economic cycle as to prevent both booms and recessions. The Labour Government of Tony Blair in the United Kingdom has gone about this via counter-cyclical spending policies (Keynesian) as well as giving the Bank of England control over interest rates (Monetarist).

Although to date this has led to low and steady inflation and low unemployment, some critics claim it will lead to lower growth over the long term.

[edit] See also