Severe economic fluctuations which had recently hit the entire world economy after relatively prosperous decades despite numerous institutional efforts to control them have recalled an interest to the theory of economic cycles. Historical data on main economic indexes and academic evidence show that recurrent fluctuations in the pace of economic growth are consistent over time. Technological revolutions and worldwide implementation of basic inventions are necessarily accompanied by the processes of creative destruction or “sanitation” of the economy, which cause long term economic cycles which appear to be predictable but practically unavoidable. This paper explores the theoretical background and formulates the basics of the mechanism of economic cycles driven endogenously by modern knowledge based economy. It analyzes definitions of economic cycles, employs the concept of hierarchical economic cycles, studies the links between inventions, innovations and economic cycles, provides a concept of “economic organism” versus “economic mechanism”, gives a definition of “good cycles” versus “bad cycles” and proposes taxonomy of business cycles according to four attributes. This working paper is the first in a range of several papers summarizing the intermediate results of research undertaken by the author in order to reconsider and provide explanations on how modern economy creates cyclical movements.
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