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BUSINESS CYCLEBUSINESS CYCLE, term used in economics to designate changes in the economy. Ever since the Industrial Revolution, the level of business activity in industrialized capitalist countries has veered from high to low, taking the economy with it. Phases of the Business CycleThe timing of a cycle is not predictable, but its phases seem to be. Many economists cite four phasesprosperity, liquidation, depression, and recoveryusing the terms originally developed by the American economist Wesley Mitchell (18741948), who devoted his career to studying business cycles. During a period of prosperity a rise in production becomes evident. Employment, wages, and profits increase correspondingly. Business executives express their optimism by investing to expand production. As the upswing continues, however, obstacles begin to occur that impede further expansion. For example, production costs increase; shortages of raw materials may further hamper production; interest rates rise; prices rise; and consumers react to increased prices by buying less. As consumption starts to lag behind production, inventories accumulate, causing a price decline. Manufacturers begin to retrench; workers are laid off. Such factors lead to a period of liquidation. Business executives become pessimistic as prices and profits drop. Money is hoarded, not invested. Production cutbacks and factory shutdowns occur. Unemployment becomes widespread. A depression is in progress. Recovery from a

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