business cycle contraction; general slowdown in economic activity

In economics, a recession is a business cycle contraction. It is a general slowdown in economic activity. Macroeconomic indicators such as GDP (gross domestic product), investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.


  • The phenomenon of recessions puzzled many economists in the early years of this century, and led many of them to produce their worst work. Thorstein Veblen went from his brilliant Theory of the Leisure Class to write a really terrible book (The Engineers and the Price System) purporting to explain economic slumps. Joseph Schumpeter, whose magnificent vision of the "creative destruction" inherent in capitalist growth continues to inspire many economists, wrote a turgid, almost meaningless two-volume study, Business Cycles. Marxists gleefully seized upon the biggest recession of all, the Great Depression of the 1930s, as evidence of the irrationality of capitalism, yet they never offered a good explanation of why and how such things happen, just assurances that socialism would cure them.
    It fell to the British economist John Maynard Keynes to provide a clear story about what happens during a recession, and some useful advice about how to get out of one.
    • Paul Krugman, Peddling Prosperity (1994), Ch. 1 : The Attack on Keynes

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