Tuesday, 4 August 2015

Cycles and fads in economic growth

The history of business cycles in capitalist economies shows many leading drivers depending on the duration and amplitude used. These range from those based on inventory theories (3-5 years), on fixed-investment (7-11 years), on infrastructure (15-25) or on technology (45-60 years). These cycles interact with credit and financial market cycles. They are often associated with specific events or policies. And, ever since Keynes, a discussion continues among economists and policy makers on whether cycles can be managed through monetary and fiscal policy.

Not surprisingly, the ascending sides of such cycles are often qualified as economic miracles or simply as fads if they take place in just a few regions or sectors. Likewise, one should note that fluctuations in economic activity (a better name than cycles, if one disagrees about their regularity) are not specific to capitalism. Indeed, we may find them in other economic systems, where often they are the result of natural or man-made disasters. For instance, droughts in Africa or Mao’s famine in China. And, it is important to remind, in long term stagnating economies business fluctuations are not always noticeable.

However, the notion that cycles of excess supply or shortages were inherent to capitalism, as claimed by Karl Marx, is not proved at the macroeconomic level. They happen at the level of individual businesses or industries who fail to react on time to the law of diminishing returns, but they rarely occur simultaneously to cause a macroeconomic cycle.

Others invoke temporary spurs in economic activity to support the idea that more centralized (often undemocratic) systems of state capitalism are more successful than a system of market capitalism. In fact, although such systems may have an initial advantage in terms of rapid capital accumulation this quickly transforms into a drag due to the rise of rent-seeking and the loss of competitiveness.

These fads (or economic miracles) are present in the history of almost any country (e.g. in Italy from 1963-74), but will subside whenever they fail to create enduring conditions such as – a high level of education, good governance, business culture and business elites supporting the six principles of market capitalism.

Business elites and culture are ephemeral whenever policies are dependent on a good ruler and not on a wise system, or when they rely excessively on foreigners or a few tycoons that sooner or later will be gone.

Leaders are important to mobilize people and resources, but if they stretch too much their power of persuasion soon their followers will be called down to earth by the correcting forces of the market. And the earlier these are allowed to work the smaller will be the cost of adjustment. This is a key reason why market capitalism is superior to managerial or state-controlled forms of capitalism.

Unfortunately, politicians on the left and the right often use such short-lived episodes to justify and perpetuate their anti-capitalist ideology.

It is therefore, crucial to assess all episodes of a sudden economic success in relation to their sustainability and reliance on an enduring system or a fad and passing leadership.

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