Hypothetical Long-term Business Cycle

Question

I was looking through my textbook on Money, Banking, and the Economy and I came to the chart of the hypothetical short-term business cycle deviating around an upward sloping long-term cycle trend. My quarrel with this is does there necessarily have to be an upward sloping long-term trend?

I'm pondering that if we were to look at economies from different times (that are isolated in our analysis) couldn't there exist a possibility that in the more grandiose long-term an economy may exhibit flat, or perhaps negative long-term trends. Perhaps nations that are on the decline may exhibit these traits. Just a random question that I wanted to throw out there.

Answer 1

You are correct that there have in fact been periods of time when growth was flat, or even negative. For example, if one could observe the economy of the Cahokia over time, one would expect to see a period of negative growth. Further, the rapid growth we're to which we are accustomed is a very recent phenomenon.

It's impossible to know whether growth will continue at such a pace or slow dramatically; prominent economists such as Robert Gordon have argued that future growth may be much slower (though few argue that it will be flat or negative), a set of hypotheses known as "secular stagnation".

So while your textbook, showing cyclical variation around a positive long-term trend, correctly depicts modern business cycles, there's no reason to believe that such a trend must appear in all societies at all times.

Answer 2

Not really. The long term upwards trend is what we deal with in growth theory. And the reasons that are brought up for that trend typically are inventions/technology, population growth, increases in human capital.

There are reasons to believe that technological growth - an important driver - may stop, and hence long term growth may flatten out. But there's nothing inherent in these drivers of growth that necessarily implies mean reversion (and eventually negative growth).