Theories On Recession

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Theories On Recession

Introduction

A recession is a downturn in the economy. Economists have two ways of identifying when a recession is occurring. According to the most precise definition, a recession is a decline in a country's gross domestic product, or GDP (the total value of all goods and services produced within that country in a specific time period), for two or more successive quarters (in the financial world, each year is commonly broken down into four three-month periods called quarters). For practical purposes, however, most economists agree that a recession is best defined more loosely as an extended period of decreased economic activity marked by the following characteristics: high unemployment rates (a measure of the number of people who want to work but do not have jobs), a decline in the profits made by corporations, and a decrease in the amount of money people are investing in the stock market (a central location, such as the New York Stock Exchange, where people buy stocks, which are shares of ownership in corporations, in order to receive shares in their profits).

Typically recessions can last anywhere from 6 to 18 months. (Before the Great Depression, which lasted from 1929 until about 1938 in the United States, every economic setback was considered a recession. After the Great Depression economists used the word depression to characterize a particularly long and severe recession.) During a recession interest rates (the fees that bank customers pay to borrow money) tend to fall. Low interest rates can then offer a way out of the recession. As bank loans become cheaper, more people are likely to apply for mortgages (loans for homes), and more corporations are likely to apply for loans to expand their business. These loans put more money into circulation, stimulating the economy in a way that creates more jobs, more spending, and more corporate profit. Since World War II the average recession in the United States has lasted 11 months.

Economists agree that a recession is a normal and inevitable part of the business cycle, which consists of five stages. The first stage is expansion or growth in the economy, which occurs when more people invest in the stock market and buy homes. During an expansion, unemployment rates go down. The second stage, the high point of the expansion, is called the peak. The peak is followed by the contraction or recession stage. The fourth stage is the low point, or trough, which is followed by the recovery stage, during which the economy begins to regain its strength.

Discussion

Various Theories on Recession

Karl Marx (1861-1863) differentiated between the potential for crises and the necessity of crises. The potential for crises emanates from money and credit, which enable buying and selling to be separated, leading to realization problems. The goods may be “exchanged” before the payment of “money,” due to the existence of trade credit, promissory notes, IOUs, credit cards, and so forth. The market enables potential circulation crises to emerge through supply-demand coordination failures as the final payment of money fails to materialize due to insufficient demand and over-indebtedness.

The necessity for crises, according to Marx, lay in “the ...