History

JOURNAL OF ECONOMIC ISSUES
Vol. XLV No. 3 September 2011
DOI 10.2753/JEI0021-3624450310

Notes and Communications
Portrait of a Crisis

Abstract: The Bush expansion (2001–2007) slowed in 2005–2006 and began to
decline in 2007. Empirical data show why it declined. The expansion followed the
same patterns all capitalist expansions, but more sharply. This pattern showed
slowing of businessrevenue rises and speeding up of cost increases.
It was long-run trends in three institutions that turned that recession into
Great Recession. They are housing, finance, and the rest of the world. Housing had
a strong bubble, then began a decline in 2006 and continued that decline until
today (2011). Credit had a very long and very strong bubble, then began a decline
in 2007. Credit actuallyremained rising a little into 2008. Then there was a terrible
financial crisis in the end of 2008 and beginning of 2009. Finally, the rest of the
world had the same weaknesses and passed into crisis itself as a result of the U.S.
crisis.
Keywords: business cycle expansion, business cycle recession, financial crisis
JEL Classification Codes: A13, D00, G01

How did the Bush expansion of 2001to 2007 become a recession? Why did that
recession turn into a Great Recession, including a financial crisis? The answer will be
found in a combination of the usual cycle patterns under capitalist institutions plus
the long-run trends caused by changing capitalist institutions.
The dates of the last six cycles are shown in Table 1. The focus here is on the last
cycle, including the GreatRecession.
Progressive Institutionalist Macroeconomics
The basic view of the traditional neoclassical macroeconomics is that the capitalist
economic system always remains at full employment equilibrium unless there is an
Howard Sherman is Professor Emeritus of Economics at the University of California, Riverside and Visiting Scholar in
the Department of Political Science at the University ofCalifornia at Los Angeles. He is grateful to his statistical
assistant, Raffaele Asquer, and to an anonymous referee who provided very constructive criticisms.

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©2011, Journal of Economic Issues / Association for Evolutionary Economics

Notes and Communications

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Table 1. Troughs and Peaks of the Business Cycle
Initial Trough

Peak

Final Trough

1970.4

1973.4

1975.11975.1

1980.1

1980.3

1980.3

1981.3

1982.4

1982.4

1990.3

1991.1

1991.1

2001.1

2001.4

2001.4

2007.4

2009.2

Note: The dates are given by the National Bureau of Economic Research
(NBER.org), founded by Wesley Mitchell.

outside shock, after which it quickly returns to full employment equilibrium.
Although the Great Recession at first disturbed many ofthem, they now seem to be
returning to the old view, even in the face of continuing large-scale unemployment at
a high level.
To understand the Great Recession, however, requires a new, progressive,
institutionalist macroeconomics. The institutionalist Wesley Mitchell concluded that
the business cycle is inherent in capitalist institutions. He explained in empirical
detail how each stage ofthe cycle is the evolutionary product of the previous stage
(Mitchell 1951). The other most important progressive contributions around the time
of the Great Depression were from John Maynard Keynes (1936), and Paul Sweezy
([1942] 1970). Attempted syntheses of these views are in Sherman (1991, 2010).
The points common to Mitchell, Keynes, and Sweezy, as well as many other
progressiveinstitutionalist economists, include the following. Capitalism is a
monetary economy. Such an economy circulates money and credit for products in
order to make profit. It expands production if, and only if, there is the expectation of
profits. Private investment results in the expansion or stagnation of the whole
economy. Private investment arises from profit expectations, which are based on...