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Encyclopedia > Economic boom

In economics, the term boom and bust refers to the movement of an economy through economic cycles due to changes in aggregate demand. During booms, there is a high level of aggregate demand, inflation decreases, unemployment falls, and growth in national income accelerates. During busts, or recessions, when aggregate demand is low, inflation increases, unemployment rises and national income falls. In extreme recessions deflation (a sustained fall in the general price level) may occur. The causal relations between these indicators have been the subject of much debate from which ideas such as the NAIRU (non-accelerating inflation rate of unemployment) have emerged.


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.


  Results from FactBites:
 
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A stable price level and booming output persuaded the likes of Keynes and Professor Fisher that a New Era had indeed arrived, with Keynes describing Federal Reserve Board monetary management as a "triumph" — a triumph whose economic and political denouement was the Great Depression.
Though the 1920s is considered by some to be the greatest boom period in US history the greatly neglected boom of 1896-1903 exceeded it, certainly in terms of physical production though not in financial folly.
It evidently did not occur to the author that booming output is incompatible with 'excess capacity.' Moreover, he admitted that falling prices were caused not by a monetary contraction, i.e., genuine deflation, but by increasing investment — thus demonstrating how rife confusion is on this subject.
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