A History of Economies

The history of economies of Wstern nations has, since the early nineteenth century, been one of repeated cycles of growth and recession. Typically, four or five years of expansion have been followed by onr or two of retraction , with occasionall massive retrenchments lasting five or six years. Graphs of national wealth often resembe the profiles of angular mountain ranges, in whose every valley lie the bankruptcies of long-established firms, the layoffs of workforces, the closings of factories, the destruction of stock. We may seek to attribute those events to unnatural dimensions of economic life, and we may hope that one day we will learn to avert them, but for the time being, the best efforts of governments and central banks have demonstrated that there is little to be done about such turbulence.

Every cycle follows a similar pattern. It begins when growth picks up and companies invest in new capacity to meet perceived future needs. Production costs tend to escalate at this stage, as do asset prices, especially for equities and property, driven up in part by speculators. Inexpensive credit encourages businesses to commit to large, capital-intensive factories and offices. At this critical point, demand and current output both begin to slow, even as consumption contiues to accelerate. A lack of savings spurs an increase in personal and commercial borrowing. To satisfy domestic demand, companies start to import more and export less, a trend that soon results in a balance-of-payments deficit. The economy is now officially out of kilter, freighted by overinvesting, overconsumption, overborrowing and overlending. Here begins the slide into recession. Prices are pushed higher by the use of less efficient means of production, by the growth in the money supply and by speculation. Gas prices, for example, accelerated heavily through the last two months largely due to the action of a few traders on the commodities market - all the while the price per barrel remained constant or fell. Tighter, and more expensive credit raises the cost of outstanding debt. Asset values, inflated in the upswing, are punctured. Borrowers can no longer make their payments, and the collateral available for new loans is restricted. Incomes, investment and consumption all fall off. Companies and entrepeneurs flounder or go bankrupt; unemployment rates rise. As confidence evaporates, borrwing and spending dry up. Long term capital investments made in better days now come on line, increasing supply and depressing prices just as demand is slackening. Companies and individuals are forced to sell off assets at a loss, deepening the crisis, but many potential buyers wait for the market to hit bottom before purchasing, further delaying recovery.

Rather than a sign of hysteria, a state of steady anxiety may be a reasonable response to the very real threats of the economic environment.


If we are anguished by the thought of failure, it may be because success seems the only dependable incentive for the world to grant us in its goodwill. A family bond, a friendship or a sexual attraction may at times render material incentives unnecessary, but only a reckless optimist would rely on emotional currencies for the regular fulfillment of his or her needs. Humans rarely smile without having some robust reason to do so.


(Alain De Botton - Status Anxiety)

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