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groups of investors bee cautious。 Fear turns to panic selling; so creating 
a vicious downward spiral that can take years to recover from。 
Categories of cycle 
Economics is the science; in so far as it can be considered one; of the indistinctly 
knowable rather than the exactly predictable。 Though all cycles; even 
the one you are in; are difficult to understand or predict with much accuracy; 
there are discernible pa。。erns and some distinctive characteristics。 
Figure 7。2 shows an elegant curve; which depicts the theoretical textbook 
cycle。 
Figure 7。2 Textbook economic cycle 
Four phases typically occur in each textbook cycle: 
。 U1; where demand is picking up and toeing the line of the long…term 
trend; 
。 U2; where demand exceeds the long…term trend; 
。 D1; where demand dips down to hit the long…term trend; 
。 D2; where demand slumps below the long…term trend。 
Boom 
Boom 
Slump 
Slump 
Log scale 
D2 
D1 
U1 
U2 
10
5
3
2
1 
0。5 
0。3 
GDP 
D1; (D2) Down phases above (below) trend 
U1; (U2) Up phases below (above) trend 
Trend
Economics 203 
To make things more plicated; there is not one cycle but at least four 
that operate; each with different characteristics yet interacting one with the 
others。 
Kondratieff’s long waves 
Kondratieff (kwaves/kond_overview。htm); a Soviet economist; 
who fell out with Russia’s Marxist leaders and died in one of Stalin’s prisons; 
advanced the theory that the advent of capitalism had created long…wave 
economic cycles lasting around 50 years。 His theories received a boost 
when the great depression (1929–33) hit world economies and resonated in 
Britain in 1980–81 when factory closures; high unemployment and crippling 
inflation devastated the country。 The idea of a long wave is supported by 
evidence that major enabling technologies; from the first printing press 
to the internet; take 50 years to yield full value; before themselves being 
overtaken。 
Kuznet’s cycle 
American economist Simon Kuznet; a Nobel Laureate (1971) working in 
the University of Pennsylvania; made a lifelong study of economic cycles。 
He identified a cycle of 15–25 years’ duration covering the period it takes to 
acquire land; get the necessary permissions; build property and sell。 Also 
known as the building cycle; this has credibility as so much of economic 
life is influenced by property and the related purchases of furniture and 
associated professional charges; for example for lawyers; architects and 
surveyors。 
Juglar cycle 
Clement Juglar; a French economist; studied the rise and fall in interest 
rates and prices in the 1860s; observing boom and bust waves of 9 to 11 
years going through four phases in each cycle: prosperity; where investors 
piled into new and exciting ventures; crisis; when business failures started 
to rise; liquidation; when investors pull out of markets; and recession; when 
the consequences of these failures begin to be felt in the wider economy in 
terms of job losses and reduced consumption。 
Kitchin cycle 
In 1923; Joseph Kitchin published in the Harvard University Press an 
article entitled ‘Review of Economic Statistics;’ outlining his discovery 
of a 40…month cycle resulting from a study of US and UK statistics from 
1890 to 1922。 He observed a natural cyclical path caused; he believed; by 
movements in inventories。 When demand appears to be stronger than it 
really is; panies build and carry too much inventory; leading people 
to overestimate likely future growth。 When that higher growth fails to 
204 The Thirty…Day MBA 
materialize; inventories are reduced; o。。en sharply; so inflicting a ‘boom; 
bust’ pressure on the economy。 
Monitoring cycles 
The National Bureau of Economic Research (nber/cycles。htm) 
provides a history of all US business cycle expansions and contractions 
since 1854。 The Foundation for the Study of Cycles (h。。p://foundationfort 
hestudyofcycles); an international research and educational institution 
established in 1941 by Harvard economist Edward R Dewey; provides a 
detailed explanation of different cycles。 The Centre for Growth and Business 
Cycle Research based at the School of Social Sciences; The University of 
Manchester (socialsciences。manchester。ac。uk/cgbcr); provides details 
of current research; recent publications and downloadable discussion 
papers on all aspects of business cycles。 
Robert Wright; a former mercial pilot; started his first business; 
Connectair; while on the MBA programme at Cranfield。 His aim was to 
start a small feeder airline bringing passengers into the main UK airport 
hubs such as Heathrow and Gatwick; where they would connect 
with the major carriers’ flights。 He started out at the tail…end of the UK 
recession in 1982; so to keep costs low; as well as being the MD he was 
at times the pilot; steward and baggage handler as well as greeting 
passengers at check…in。 
Over the next few years he built the business up to the point where it 
employed 60 people and made a modest profit。 He sold it at the height 
of the Lawson boom in 1989 to Harry Goodman’s International Leisure 
Group; which collapsed spectacularly in the 1991 economic downturn; 
leaving crippling debts and thousands of people without jobs。 
Wright bought the pany back for a nominal £1; financing working 
capital with backing from 3i; the venture capital firm。 Over the next 8 
years he and his team built the business up; now renamed City Flyer 
Express; selling out in 1999; just ahead of the dot stock market 
collapse; to British Airways for £75 million。 
INFLATION 
Inflation is defined as too much money chasing too few goods and if it 
gets out of control it can devastate an economy。 Not all goods and services 
have to experience price increases。 The inflation rate itself is measured 
by defining a basket of goods and services used by a ‘typical’ consumer 
Economics 205 
and then keeping track of the cost of that basket using such indices as the 
retail price index。 During the upswing stage of a business cycle there is a 
tendency to overshoot; which can lead to the economy ‘overheating’。 As 
there is usually a lag while production struggles to catch up with demand; 
prices rise to ‘ration’ goods and services。 Inflation is generally seen being a 
problem for a number of reasons: 
。 ‘Inflation makes fools of us all’ is a truism about the misleading signals 
sent by rapid changes in price。 Consumers and businesses like certainty; 
and fluctuating rates of inflation make planning more difficult; which 
in turns leads to a loss of confidence。 
。 Inflation redistributes wealth in a haphazard and o。。en unfair manner。 
For example; savers will find their purchasing power diminish as 
their fixed sum saved will buy fewer goods and services in the future。 
Borrowers will benefit as they are effectively paying back a capital sum 
that is being eroded in value by inflation。 
。 If the inflation rate is greater than that of other countries; domestic 
products bee less petitive; so exports will be reduced and economic 
growth will slow。 
。 High inflation can lead to high wage demands; which can in turn lead 
to an upward spiral in costs and so feed further inflationary pressures。 
Current economic wisdom has it that a modest degree of inflation is healthy 
provided that everyone knows what it will be and can factor it into their 
decision making。 That is why central banks have as one of their functions 
monitoring inflation rates and taking action to keep below a certain figure 
– in the UK this is 2 per cent。 Three further aspects of inflation that need to 
be considered are: 
。 Deflation is the opposite of inflation and occurs when the general level 
of prices is falling。 This can occur a。。er a major bubble collapses and 
will lead to people pu。。ing off purchasing decisions in the expectation 
of being able to buy later at even lower prices。 
。 Hyperinflation is unusually rapid self…feeding inflation; in extreme 
cases; this can lead to the collapse of a country’s monetary system。 This 
occurred in Germany in 1923; when prices rose 2;500% in one month 
and in Zimbabwe in April 2008 when the annual infl

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