You can’t avoid talking about the economy these days. What started with a banking crisis, progressed to a credit crisis, and now it’s a full blown economic crisis. Worst downturn in 70 years, that sort of thing. Economists don’t actually know if this will eventually end up being the case, but they have projections and best bets and the range of forecasts is glum. However, we won’t know if it’s been the worst economic downturn since the Great Depression until we are out of it, and all the data is in the books. So what’s a recession? And what’s a depression? And where do they come from?
A recession is defined as two quarters of negative economic growth. I’ve had friends chuckle at this definition, negative growth being somewhat of an oxymoron. In plain words, it’s two quarters of economic contraction; the economy gets smaller for six months running. There’s no hard and fast way to define a depression, but loosely it is a severe recession. Wikipedia suggests a depression is characterized by people selling tangible assets in order to fund everyday living, which might be how people on the margins of society operate, but when your neighbour starts hawking family heirlooms to buy bread, that’s a clear indicator.
When an economy is shrinking, and you are participating in that economy (ie, you’re not off in the woods eating berries and bark), then you are necessarily getting a smaller piece of the pie on average. With an expanding population, an economy’s natural state is one of growth. Growth above and beyond what comes from population growth translates into increased wealth for the economy. In a recession, less income and wealth are being generated as less widgets are sold and assets fall in value. If the population was holding steady, or shrinking, this wouldn’t ‘feel’ so bad. But historically, populations expand, so in a recession there are more people looking to earn income from a smaller economy. If you hold onto your job, you might feel like nothing has changed, but somewhere, somebody is looking for work and worried about the future, and soon enough they’ll be willing to do your job for less than you are paid.
Economic downturns have been a feature of capitalism and the market for as long as they have existed. If capitalism is an expression of human psychology and drive, then periods of relative optimism progress into periods of enthusiastic optimism and then there is a painful slide into disbelief and extreme pessimism. Once optimism starts creeping back in, the cycle of boom and bust is starting anew. If we could eliminate this aspect of capitalism, then we would be much happier in general. There would be steady economic growth without the periods of contraction, where people and families are displaced and the feeling that the future is bleak is prevalent.
Next time, I’ll explore the idea of the business cycle and loosely where it comes from and why it produces these periods of boom and bust.
