Recession

Background

A recession is a significant decline in economic activity across the economy. The concept is crucial for understanding economic health, appropriate policy responses, and the implications for businesses and individuals.

Historical Context

The term “recession” became widely used in the 20th century to specify periods within the business cycle where economies experience downturns. Major recessions throughout history, like the Great Recession (2007-2009), have had profound impacts on economic policy and scholarly understanding.

Definitions and Concepts

General Definition

A recession is characterized by a noticeable slowdown in economic activity lasting more than a few months. It often implicates a substantial fall in real Gross Domestic Product (GDP), real income, employment rates, industrial production, and wholesale-retail sales.

Technical Definitions

Real GDP: Falling for two successive quarters: This technical criterion is frequently used, but not universally acknowledged as the definitive measure.
National Bureau of Economic Research (NBER) Definition: The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting longer than a few months. This decline is typically visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Major Analytical Frameworks

Classical Economics

Classical economists often perceived recessions as self-correcting phases of the business cycle where the economy naturally returns to full employment overtime due to competitive forces.

Neoclassical Economics

Neoclassical views stress the role of supply-side factors and market efficiencies. Recessions are disruptions caused by exogenous shocks or policies that prevent efficient market functioning.

Keynesian Economics

Keynesians attribute recessions to deficiencies in aggregate demand. John Maynard Keynes argued that economic interventions from the government through fiscal and monetary policies are necessary to manage demand and mitigate the effects of recessions.

Marxian Economics

Marxist perspectives see recessions as inevitable outcomes of capitalist systems’ intrinsic contradictions. Overproduction, underconsumption, and capital accumulation crises are key factors.

Institutional Economics

Institutional economists emphasize the role of institutional rigidities and structures. Recessions can result from institutional failures or inefficiencies in banking, labor markets, and other areas.

Behavioral Economics

Behavioral economics highlights the impact of psychological factors and irrational behaviors on economic downturns. Loss aversion, herding behavior, and panic can exacerbate recessions.

Post-Keynesian Economics

Post-Keynesians extend Keynes’ theories, focusing on financial instability, inherent market uncertainties, and the role of demand in economic stability.

Austrian Economics

Austrian economists see recessions as corrections to previous excessive growth fostered by artificial interventions like expansive credit policies. They advocate for minimal governmental interference.

Development Economics

This framework explores the impacts of recessions in developing economies, often emphasizing colossal vulnerabilities due to lesser economic resilience and inadequate social safety nets.

Monetarism

Monetarists, like Milton Friedman, argue that inappropriate monetary policies often lead to economic instability. Controlling the supply of money is seen as critical for managing economic cycles and avoiding recessions.

Comparative Analysis

Recessions differ in origins, duration, and impact, influenced by various economic schools of thought. A comparative analysis highlights the diverse methodologies applied to comprehend, diagnose, and address recessional turbulence.

Case Studies

Examining recessions like the Great Depression (1929), the Dot-Com Bubble Burst (2001), and the Great Recession (2007) provides insight into their causes, governmental responses, and recovery processes.

Suggested Books for Further Studies

“Animal Spirits” by George A. Akerlof and Robert J. Shiller
“Capitalism and Freedom” by Milton Friedman
“The General Theory of Employment, Interest, and Money” by John Maynard Keynes
“Man, Economy, and State” by Murray Rothbard

Depression: A severe and prolonged downturn in economic activity marked by major declines in income and employment.
Business Cycle: The upward and downward movements of levels of GDP, reflecting expansions and contractions in the economy.
Real GDP: GDP adjusted for inflation, representing the value of all goods and services produced adjusted for price changes.

This comprehensive dictionary entry should serve as a full guide to understanding the concept of “recession” within economics.