This second article deals with cycles. Life is a cycle. We humans experience bio rhythm which is a cycle. Our climate is a cycle of the seasons. Our calendar is a repetition of cycles. Our sun has sunspots that appears to peak every 11 years or so. In the Jewish tradition, there is a 7 years cycle called the Shemitah.
Economics has a cycle. It is a cycle of boom and busts or inflation and recession. This cycle is a natural occurring event. One of the difficulty of government is to manage that cycle. Ideally, we can minimize the effects of this cycle and keep it in a less volatile swing. We don't want a repetition of the depression of 1929. This is a difficult task. Sometimes, government makes mistakes by intervening and either over or under correct the natural cycle.
Think of this as a balloon. You can pump it up and you can deflate it repeatedly. Once in a while, if you over inflate, the balloon pops and you are left with a bust.
- April 2020
The Business Cycle
In a free market environment, business are created and owned by private companies. They compete against each other constantly to win customers and market share. Those with a better product or a cheaper price usually win. This leads all business to constantly innovate. This is a good thing for consumers. It keeps the products getting better and the prices low. The consumer has a choice. He votes with his pocket book. He determines winners and losers.
Every business experience this cycle in one form or another. It invest in a new product. The product is accepted by the public. People want it and they sell like hotcakes. The company ramps up production and make a profit. Then, another company comes along and create a competing product. This new product may be an improvement or may be cheaper or both. Consumers switch from buying the first product to the second product. The company lost sales and have to cut back production and lay off employees. Hence, the typical business cycle.
It can happen in various forms. It could be self inflicted. The CEO may make a bad decision. This leads to a loss of income and poor results for the company.
It can happen from outside. Just lime the current coronavirus crisis. Many businesses are forced to shut down. Thus the start of a recession.
Ideally, we would like a stable economy. Any economy that goes through huge swings of expansion and recession is unstable. This instability would lead to disaster like the depression of 1929.
Our government is given the task to try and manage this cycle. They do this by way of taxes, stimulus, interest rate, and regulations.
However, these are only tools. The underlying cycle that drives economy is more fundamental. Any external interference may only be temporary but eventually will take shape and possibly in a more devastating manor.
That is why economics is not an exact science. We cannot predict the outcome.
There are some guidelines that will help. Fo example, we want to have a balanced budget. Both in our own personal finances and in government. This is just common sense. You want to live within your means. Don't borrow and spend money you don't have. It will lead to bad outcomes.
We also want fairness. We want equal opportunity for all. We want to prevent any one business from monopolizing a whole industry. In a way, it is like our Democracy. we don't want power in the hand of one person or a dictator. We want power to be distributed among several sources.
We also want to have fair trade with our neighbors and other nations.
We want to protect innovation in the form of patents.
We want regulations to maintain fairness and prevent fraud.
The cycle of life is real and so are economic cycles. They occur periodically. How deep they affect our lives is the real question, and how can we best mitigate those effects?
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2020 Jack Lee