Slump

Background

A “slump” is an informal term widely used in economics to describe a period of poor performance in the economy, often marked by reduced levels of investment, consumption, and general economic activity. It is a phase where economic growth plunges, and various economic indicators such as GDP, employment rates, and production volumes decline significantly. While often synonymous with economic depression, the term can also refer to milder economic slowdowns.

Historical Context

The term “slump” has been used throughout various economic downturns. One well-documented historical instance is the Great Depression of the 1930s. Other notable examples include the stagflation crisis of the 1970s and the Great Recession that followed the financial crisis of 2007-2008.

Definitions and Concepts

Economic Slump: A noticeable and sustained decline in economic activity across multiple sectors over a period of time.
Depression: A more severe and prolonged form of an economic slump, characterized by extended periods of recession and deflation.

Major Analytical Frameworks

Classical Economics

Classical economists attribute economic slumps to various macro-economic factors like supply and demand imbalances and believe that markets are self-correcting.

Neoclassical Economics

Neoclassical economics widens the perspective with microeconomic foundations and monetary factors, emphasizing rational expectations, price inflexibility, and market imperfections causing slumps.

Keynesian Economics

Keynesian economists stress insufficient demand, leading to underutilization of resources. They advocate for government intervention through fiscal policies to reactivate the economy during a slump.

Marxian Economics

Marxian economics views an economic slump as an intrinsic feature of the capitalist system, where cyclical crises are seen as inevitable due to capital accumulation and profit rate declines.

Institutional Economics

Institutional economists point to the role of economic structures and institutions and their evolution through time, seeing slumps as resulting due to foundational inadequacies within these systems.

Behavioral Economics

Behavioral economics examines irrational behaviors and collective decisional errors that may lead to deprived consumer confidence and herd behaviors, contributing to slumps.

Post-Keynesian Economics

Post-Keynesianism advances the Keynesian framework for slumps, emphasizing endogenous money, financial instability, and effective demand.

Austrian Economics

Austrian economists argue slumps result from misallocations of resources caused by expansive monetary policies, advocating for non-intervention to let natural economic correction occur.

Development Economics

From a development economics perspective, slumps can be seen through the impact on emerging economies, considering structural challenges that enhance susceptibility to economic downtimes.

Monetarism

Monetarists hold the supply of money as central to economic activity, warning that poor monetary policy leads to economic slumps by disrupting price stability and signalling to investors.

Comparative Analysis

While slumps share common features across analytical frameworks, various theories offer distinct causes and remedies:

Classical and Austrian economics caution against intervention.
Keynesian and Post-Keyensian frameworks recommend active government policy to stimulate demand.
Behavioral economics encourages understanding the social and psychological contributors to avert slumps.

Case Studies

The Great Depression (1930s): Severe global economic downturn known for asset bubbles leading to widespread slumps across economies.
The Great Recession (2007-2009): Financial market collapse initiating a severe economic slump globally, prompting massive fiscal and monetary intervention.

Suggested Books for Further Studies

“The General Theory of Employment, Interest, and Money” by John Maynard Keynes
“Capital: A Critique of Political Economy” by Karl Marx
“Man, Economy, and State” by Murray Rothbard
“Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism” by George A. Akerlof and Robert J. Shiller

Recession: A significant decline in economic activity spread across the economy, lasting more than a few months.
Depression: A prolonged period of severe economic downturn, substantially greater than a recession.
Stagflation: A situation of simultaneous slow economic growth, high unemployment, and high inflation.