Trade Cycle

TRADE CYCLE. The phrases trade cycle, business cycle and cyclical fluctuation of trade are all convenient methods of labelling those alternating upward and downward sweeps in the volume of business activity which have constituted, for at least a century and perhaps more, one of the outstanding phenomena of the modern business world. The most obvious manifestations of the trade cycle are a quasi-rhythmical fluctuation, extending over several years, in the level of prices, the level of money profits and the level of employment. In the absence of satisfactory statistics, it is difficult to be sure how far there occurs a corres ponding fluctuation in the level of production and consumption, i.e., in the real income of the community affected. While it is certain that these latter quantities fluctuate to some extent, it seems probable (a) that the fluctuations in output are less in tense than the fluctuations in prices; (b) that the output of or dinary goods for immediate consumption fluctuates as a rule far less than the output of instrumental or constructional goods (typified by iron and steel) ; and (c) that the fluctuations in out put do not entirely synchronize with the fluctuations in prices, but that, in the later stages of a "boom" of prices, production may cease to make any significant advance, while in the later stages of a "depression" of prices production may make a marked re covery. Nor is it safe to dogmatize about the length of the trade cycle or about the degree to which its phases synchronize in the leading industries and the leading industrial countries. Before the World War there were indications that the normal period of the cycle had shortened from about r o to about six or seven years. The dates of "crisis" or turning-point from boom to depression, during the past century, are for England: 1825, 1836, 1847, 1857, 1866, 1873, 1882, 1890, 190o, 5907, 1913, 192o; while in the United States the booms of the late '8os and '9os were prolonged, somewhat precariously, to 1893 and 1903 respec tively. Again, the post-War boom, which in England and America broke in 192o, was prolonged in Germany till 1923 ; and while the recovery in America from the great slump of 1921 has been rapid and complete (with a slight set-back in 1923), recovery in England has been partial and slow. Again, the change-over

from depression to prosperity, or prosperity to depression, does not affect all trades at the same moment, or even always in the same order. In the main, however, it still seems to be fair to describe the trade cycle both as a general movement and as a rhythmical one; and any explanation of its causes must take these two factors into account. Very many such explanations have been offered—too many to expand or criticise fairly in the course of a short article. It must be enough to set out and clas sify certain roads of thought, as it were, along which economists have been led to travel in search of the truth.

The Psychological Approach.

The first road leads into the domain of psychology. We are invited to find the chief explana tion of the trade cycle in the nature of man himself, and espe cially of those men who are responsible for conducting and con trolling the operations of modern industry, commerce and finance. These business leaders are bound together not only by their busi ness dealings but by ties of sentiment and environment : they op erate, necessarily, in an atmosphere of uncertainty : and any error of forecasting which they make, whether of an optimistic or of a pessimistic kind, is apt to be magnified by their mutual con tact into a great wave of erroneous judgment, which gathers strength for a time and then breaks, yielding place to an equally exaggerated movement in the opposite direction. There seems to be little doubt of the importance of this factor both in aggravat ing the amplitude of the trade cycle and in moulding it into its quasi-rhythmical shape. But we must be on our guard against supposing that all decisions made by business men to vary the scale of their purchases or their output are erroneous. Many such decisions are clearly in the true interest of those who make them, if not of society as a whole.