The Economics Book

78

THE ECONOMY

IS A YO-YO

BOOM AND BUST

B

usiness cycles are the shift

between strong economic

growth, described as a

boom or expansion period, and

periods of economic decline or

stagnation. They are often referred

to as cycles of boom and bust. The

Swiss historian Jean-Charles

Sismondi was the first to identify

the occurrence of periodic

economic crises, but it was the

work of a later economist, the

Frenchman Charles Dunoyer

(1786–1862), who revealed their

cyclical form. Sismondi challenged

the “market knows best” orthodoxy

of Adam Smith (p.61), Jean-Baptiste

Say (p.75), and David Ricardo (p.84).

IN CONTEXT

FOCUS

The macroeconomy

KEY THINKER

Jean-Charles Sismondi

(1773–1842)

BEFORE

1776 Adam Smith argues that

natural market forces create

an economic equilibrium.

1803 Jean-Baptiste Say claims

that the market will balance

supply and demand naturally.

1817 Welsh social reformer

Robert Owen identifies

overproduction and

underconsumption as causes

of economic downturns.

AFTER

1820s French economist

Charles Dunoyer identifies the

cyclical nature of the economy.

1936 John Maynard Keynes

urges governments to spend

in order to avoid economic

fluctuations.

This leads to

excess supply.

In boom times

companies have

high profits. They

increase production

to satisfy demand

for goods.

Companies

cut prices to

compete for

customers...

... leading to

lower profits,

lay-offs, and

economic

depression.

Eventually

lower prices lead

to an increase

in demand and

profits go

back up.

The

economy is

a yo-yo.