Business Cycle. As far back as reliable statistics for the American economy exist, periods of expanding output and employment have alternated with periods when output and employment have contracted. This pattern has also characterized the economies of the other industrial nations. Although such fluctuating “cycles” have been irregular in amplitude and duration, the word “cycle” does emphasize their recurring nature.

Systematic research into the U.S. business cycle dates to the early and mid‐twentieth century work of Wesley C. Mitchell, Arthur F. Burns, and others associated with the National Bureau of Economic Research (NBER), a private organization whose widely used dating of business cycle peaks and troughs has been accepted by the U.S. Department of Commerce. The NBER considers a recession to have occurred when output, employment, and trade have declined for at least six months. A particularly severe recession has been termed a depression, although no formal definition of depression exists.

Because of the paucity of data for earlier periods, the NBER began its business‐cycle chronology with the recession that followed the cyclical peak of December 1854. Significant economic downturns clearly occurred before the 1850s, however. Major recessions, perhaps severe enough to be called depressions, took place in 1819 and 1837. The close linkages between the U.S. and foreign economies was evident in these early contractions. The 1819 downturn followed a decline in U.S. exports, particularly cotton. The protracted downturn that began in 1837 was set off when the Bank of England tightened credit. Because statistics on prices for these years are more readily available than data on production and employment, some economic historians have argued that the pre–Civil War cycles mainly affected prices and wages and not the real productive economy. Contemporary accounts, however, establish that noticeable increases in unemployment occurred in urban areas during contractions; soup kitchens for the jobless, for example, appeared as early as 1819.

In the Gilded Age, major recessions came during the 1870s, 1880s, and 1890s. The downturn that began with the cyclical peak of January 1893 was particularly severe, causing high unemployment through the remainder of the decade. The pace of industrialization exposed more workers to unemployment during these downturns. During the 1890s' depression, unemployment probably peaked at well above 10 percent of the labor force and may have exceeded 15 percent. As the fraction of the workforce experiencing unemployment during business‐cycle contractions increased, so did agitation for reform. The most visible manifestation of the pressure for government action during these years was the march of the unemployed on Washington, D.C., in 1894, led by Jacob Coxey of Ohio and popularly known as Coxey's Army. Local governments and private agencies, however, provided the bulk of assistance to the unemployed during the nineteenth century by expanding existing programs of poor relief and sometimes creating public‐works programs.

Most recessions in the post–Civil War period also brought financial panics during which banks, unable to satisfy their depositors' demands, suspended withdrawals, thereby exacerbating the crisis. For this reason, after a particularly severe panic and recession in 1907, influential figures demanded reform of the banking system. The 1913 Federal Reserve Act was designed to moderate recessions by providing a lender of last resort to banks experiencing liquidity problems. Although a brief but severe recession occurred in 1920–1921, economists attributed it to demobilization problems following World War I. Most observers were thus surprised by the length and severity of the downturn that began in 1929.

According to the NBER, the Great Depression of the 1930s began with the cyclical peak of August 1929 and reached its trough in March 1933, at which point the unemployment rate probably exceeded 25 percent. Unemployment remained high until 1941, when the reinstatement of the military draft and increased military spending stimulated the economy and expanded job opportunities. Economists continue to debate the causes of the Great Depression, some blaming the 1929 stock market crash, others the Smoot‐Hawley Tariff of 1930, and still others the series of bank panics during 1930–1933. President Franklin Delano Roosevelt's New Deal (building in some respects on initiatives dating to the Herbert Hoover administration) represented the first significant attempt by the federal government to ameliorate the impact of the business cycle.

Although many public figures and scholars feared that depression would return after World War II, the postwar business cycle proved relatively mild. The long expansion during the 1960s led many to declare the business cycle “dead,” but severe recessions in 1974–1975 and 1981–1982 revived concern about macroeconomic stability. Subsequently, however, the long expansion of the 1990s once more stimulated discussion about whether business cycles were inevitable in modern economic life.

Many explanations for the business cycle have been advanced. In earlier agricultural economies, some observers linked contractions to sunspots, which occur in fairly regular cycles. In the nineteenth century, Karl Marx proposed that cycles resulted from the tendency of capital accumulation to cause an overproduction of goods relative to the purchasing power of the working class. The British economist John Maynard Keynes provided the most influential explanation. In The General Theory of Employment, Interest, and Money (1936), Keynes attributed business cycles to fluctuations in total spending or aggregate demand. Controversy long raged between supporters of Keynes's theory and proponents of its main rival, monetarism or the neo‐quantity theory of money. Monetarists, led by Milton Friedman (1912–) of the University of Chicago, ascribed business cycles to fluctuations in the money stock. Toward the end of the twentieth century, many economists embraced a theory that saw the business cycle as an expression of the rational response of workers and firms to the economic impact of underlying technological transformations.
See also Agriculture; Antitrust Legislation; Banking and Finance; Business; Capitalism; Cotton Industry; Depressions, Economic; Economic Development; Economic Regulation; Employment Act of 1946; Foreign Trade, U.S.; Keynesianism; Mass Production; Monetary Policy, Federal; Multinational Enterprises; New Deal Era, The; Stock Market; Tariffs.

Bibliography

Arthur F. Burns and and Wesley C. Mitchell , Measuring Business Cycles, National Bureau of Economic Research, Studies in Business Cycles, No. 2, 1946.
Milton Friedman and and Anna Jacobson Schwartz , A Monetary History of the United States, 1867–1960, 1963.
David Glasner, ed. Business Cycles and Depressions: An Encyclopedia, 1997.
Michael D. Bordo, Claudia Goldin, and Eugene N. White, eds., The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, 1998.

Anthony P. O'Brien

Simon Kuznets

American economist, researcher, and author, Simon Kuznets (1901-1985) won the Nobel Prize in 1971 for pioneering the use of a nation's gross national product to analyze economic growth.

Simon Kuznets was born in Kharkov, Russia, in 1901. At an early age he and his family emigrated from Russia to the United States. Kuznets and his family settled in New York City, where he attended school. He received his bachelor's degree from Columbia University in 1923. He also attended Columbia University to do his graduate work, completing his master's degree in 1924 and his doctorate in 1926. His doctoral dissertation was entitled "Cyclical Fluctuations in Retail and Wholesale Trade." This work, in principle, set the stage for many of his future research efforts. In 1929 he married Edith Handler. They raised two children.

Kuznets' fields of specialization were economic growth, economic development, and economic planning theory and policy; the economics of technological change; and demographic economics. He taught in all of these areas and did research in them as well. He was especially interested in researching the relationship of population size and population traits to the process of long-term economic growth. His research was not restricted to the experience of the United States; quite to the contrary, he was interested in and did extensive analysis of the national income and growth data of a number of industrialized nations. In addition, Kuznets did a significant amount of research on secular movements in production levels and prices.

He was employed at the rank of professor in the Economics Department at the University of Pennsylvania from 1936 until 1954. He then joined the Economics Department at Johns Hopkins University as a full professor from 1954 until 1960. From 1960 until 1971, he was professor of economics at Harvard University and then professor of economics emeritus there until his death in 1985.

Kuznets was well known for his analysis involving national income data. Indeed, Kuznets was the intellectual "father" of modern methods of national income accounting. He was credited with having developed the basic format for studying both national income and product accounts and the composition of such accounts. In the process of his pioneering work on national income and related data, many important contributions to economic policy and economic understanding were developed. For example, digging back to the year 1870 Kuznets estimated national income and the components of national income for the United States for both the latter part of the 19th century and the early part of the 20th century. As a result, his studies involved him in a number of important national economic policy issues and debates. In point of fact, his involvement in such issues and debates won him recognition in a wide variety of economics textbooks.

One of the main issues in which Kuznets' studies played an important role involved the relationship among the levels of aggregate consumer spending, aggregate consumer saving, and aggregate household disposable income. For instance, the relationship between the level of aggregate consumer spending and the level of aggregate disposable income is critical to the effectiveness of public economic policy and to the formulation of public economic policy. Kuznets found that the proportion of per capita income that is saved had not significantly changed since the year 1870.

To many analysts, Kuznets' finding of a proportional relationship between the level of aggregate consumer spending and the level of aggregate disposable income was seemingly at odds with Keynesian theory and Keynesian policy analysis. In point of fact, the findings by Kuznets essentially related to the long run, whereas the theory of Keynes related essentially to the short run. The findings by Kuznets and the theories of Keynes actually supplemented each other. Indeed, the findings by Kuznets provided a most suitable format for the study of long-term economic growth. Among other things, Kuznets' findings helped to shape the evolution of modern theories of both macroeconomic growth and development and regional economic growth and development.

The work by Kuznets on national income accounting led to a myriad of other contributions. For example, Kuznets was apparently the first economist to observe a 15 to 25 year long business cycle involving business construction. As a result, Kuznets was able to contribute substantively to the study and the theory of business cycles in industrialized nations. In addition, Kuznets had several insightful observations to make regarding the components of the national income and product accounts. For instance, national defense expenditures are classified as "regrettable necessities."

Kuznets received recognition and honors on many occasions. For example, he was voted in as the president of the prestigious American Economic Association in 1954. In itself, this is an honor of enormous proportions, for only an economist of true distinction is ever awarded such recognition.

In 1971 Kuznets received the Nobel Prize for his empirically founded interpretation of economic growth. Kuznets' receipt of this honor is an example of a prize awarded for inductive analysis rather than deductive analysis. In point of fact, Kuznets' greatest strength had been to reveal new facts and new relationships about the real world. He was able to find "new truths" about the real world with the aid of common sense and rational thinking and with a minimum of the elegant, formal economic models with which most economic researchers are so enamored. An example of a "new truth" derived by Kuznets is his celebrated "law" of the relationship between long-term economic growth in a society and the distribution of income in that society.

In certain respects, the Nobel Prize to Simon Kuznets may be regarded as an award for interdisciplinary research. In integrating techniques from economic analysis, statistics, and history, Kuznets attempted to give quantitative precision to fields of study that were supposed to be pertinent to the understanding of the processes of economic development and social development. He was a pathbreaker in the integrated use of technology, population, marketing, and industrial structure.

Further Reading

The work of Simon Kuznets is perhaps best represented in his two-volume work entitled National Income and Its Composition, 1919-1938 (1941). Kuznets also examined long-term economic growth in 14 Western industrial nations in his book Modern Economic Growth: Rate, Structure, and Spread (1966). □

business cycle Recurring economic cycles, involving a period of above-average growth (expansionist phase), followed by one of lower than average growth (recession), then one of negative growth (depression). Modern economists generally assume that the ‘normal’, ‘classic’, or ‘Juglar’ cycle lasts approximately five years, but there is no consensus as to its causes, indeed there are some who have argued that the fluctuations themselves are random rather than uniform in character. The Russian-born American development economist Simon Kuznets also identified a longer economic cycle (‘Kuznets cycle’) lasting some fifteen to twenty years. So-called Kondratieff cycles (named after the Russian economist who developed the idea in the 1920s) consist of ‘long wave’ cycles of boom and recession averaging half a century or so, fuelled by major technological and industrial advances, such as the advent of steam power. These cycles are often linked to developments in the world-system (see, for example, Christopher Chase-Dunn and and Peter Grimes , ‘World-Systems Analysis’, Annual Review of Sociology, 1995
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Simon Kuznets , 1901–85, American economist, b. Kharkiv, Russia (now in Ukraine), grad. Columbia (B.S., 1923; M.A., 1924; Ph.D., 1926). He emigrated to the United States in 1922. After serving as a fellow on the Social Science Research Council (1925–27), he worked for the National Bureau of Economic Research (1927–63), where he became involved in the study of business cycles. Kuznets taught at the Univ. of Pennsylvania (1930–54) and Johns Hopkins (1954–60); he joined the faculty of Harvard in 1960. Generally credited with having developed the Gross National Product as a measure of economic output, Kuznets was awarded the Nobel Memorial Prize in Economic Sciences in 1971. His National Income and Its Composition, 1919 to 1938 (1941) is considered his major work. A prolific writer, Kuznets has also written National Income and Capital Formation (1938), National Product Since 1869 (1946), Economic Growth of Nations (1971), and numerous other books and scholarly articles.