Basic economics: busts lead to booms as well as vice versa

[feargach]

A lot of people posting here would seem to be unaware of this basic fact of economic life: The modern mixed-economy capitalist system has in-built mechanisms for causing activity to start moving upwards after a severe downwards move. This has been known about since Marx's time.

The recession puts millions out of work. These unemployed tend to be very eager to get back to employment, normally at a pay cut.

When demand for products returns to the world, Ireland will have a large reserve army of educated, experienced unemployed people happy to take almost any job that pays significantly more than the dole.

Companies of many different types will see great potential for opening new branches in Ireland to take advantage of this sharply lowered labour cost. Even if there is no growth in demand from Irish sources, there is a very high likelihood that the growth in demand from German and US and other sources will lead to significant job creation in Ireland.

Injections of money take about 18 months to work their way into the system, so it's not realistic to expect the rest of the world to pick up before the end of 2009. But it's just as unrealistic to expect the current ultra-slump in the rest of the world to last long into 2010.

Job destruction does really lead to job creation later on. Especially in economies with a social safety net. The USA in the 1930s and Japan in the 1990s had no social safety net, so their slumps were much worse. But advanced economies with a social safety net have always bounced back.

[toughbutfair]

American house starts had the biggest jump since October 2001 yesterday. The recession is over - time to start lighting your cigars with 50 Euro notes.

[feargach]

Heh, probably going a bit too far, but here's more:

June 3 (Bloomberg) -- Service industries in the U.S. shrank at a slower pace in May, while job losses mounted, indicating that any economic recovery will be slow to develop.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, climbed less than forecast to 44 from 43.7 in April, the Tempe, Arizona-based group reported today. ADP Employer Services estimated companies cut 532,000 workers from payrolls.

“These reports throw cold water on the notion that this aircraft carrier that is the economy will turn on a dime,” said Tim Quinlan, an economist at Wachovia Corp. in Charlotte, North Carolina. “We are heading into a long, gradual recovery that will finally culminate in positive economic growth at the end of this year.”

[20000miles]

A lot of people posting here would seem to be unaware of this basic fact of economic life: The modern mixed-economy capitalist system has in-built mechanisms for causing activity to start moving upwards after a severe downwards move. This has been known about since Marx's time.

The recession puts millions out of work. These unemployed tend to be very eager to get back to employment, normally at a pay cut.

When demand for products returns to the world, Ireland will have a large reserve army of educated, experienced unemployed people happy to take almost any job that pays significantly more than the dole.

Companies of many different types will see great potential for opening new branches in Ireland to take advantage of this sharply lowered labour cost. Even if there is no growth in demand from Irish sources, there is a very high likelihood that the growth in demand from German and US and other sources will lead to significant job creation in Ireland.

This is all good so far. Note that some Keynesians will argue that the capitalist method of ending recessions -- a fall in wages -- isn't enough to generate the employment needed to bring about recovery.

However, what do you mean by "busts lead to booms". Are you implying one causes the other?

Injections of money take about 18 months to work their way into the system, so it's not realistic to expect the rest of the world to pick up before the end of 2009. But it's just as unrealistic to expect the current ultra-slump in the rest of the world to last long into 2010.

Right, but the world didn't need an "injection of money" to cure this recession. If anything we've been set up for a bigger fall later on.

Job destruction does really lead to job creation later on. Especially in economies with a social safety net. The USA in the 1930s and Japan in the 1990s had no social safety net, so their slumps were much worse. But advanced economies with a social safety net have always bounced back.

The two slumps you mention had another thing in common. Can you guess what it was?

[seenitallb4]

Yeah- this is well known. However, the point of politics is not to uncover or reassert truth- the point of politics is to use/twist/fit situations and facts to short term political ends and to make your party look good in the eyes of those fools, the voters. The basic idea is to simplify and sensationalize the most mundane and obvious things in order to make yourself look like some sort of decisive messiah. To this end, it is better to avoid the stimulation of actual thought or analysis and to promote the simulation of the same. This is why the opposition is not much better than the government- they both operate on the basis of deception, the production of a stimulus and response. Consequently, the often observed phenomenon that boom follows bust and vice versa is overlooked and replaced with something more akin to the Jerry Springer show. I want my fkn money back.

[cd27]

Feargach I like your optimism and your view of the business cycle. The austrian economists would suggest that business cycles are the result of the manipulation of the money supply (interest rates) by central banks. Simple as.

Everything the government is doing is preventing Ireland and Irish people from pricing themselves back into the market so we will have a long, prolonged painful recession and exodus if I was to guess. We're bankrupt after all.

[feargach]

The austrian economists would suggest that business cycles are the result of the manipulation of the money supply (interest rates) by central banks. Simple as.

Well, virtually every professional economist on the planet(including the vast majority of economists in Austria) thinks "austrian" economics is about as useful as studying tea leaves, and I see no compelling reason to proclaim them wrong.

My views on "austrian" economics are clear as day: they are a waste of time, and a blind alley, and the world has thrown them on the dustbin for a reason. So you'll understand it if I choose not to get dragged into circular discussions about it. I will not refer to it again.

[Hazlitt]

The problem with your post is you assume (as your thread title suggests) that booms and busts are a normal occurence in a market economy. Have you ever heard the comment that before you understand how things go wrong you have to understand how they could ever go right. ?

[Irish Liberty Forum]

Well, virtually every professional economist on the planet(including the vast majority of economists in Austria) thinks "austrian" economics is about as useful as studying tea leaves, and I see no compelling reason to proclaim them wrong.

Most professional economists work directly for governments, for corporations in bed with governments, or in government-funded universities. Maybe that's why most mainstream economics is irrelevant to the real world, while most normal people with an interest in economics are willing to give the Austrian school a fair hearing.

[feargach]

Does anyone who is not an adherent of the early 20th century right-libertarian economic theories have any contributions to make? If not, might as well shut down the thread.