Economics

Recessions Aren’t a Bug – They’re a Feature!

Economic Musings by Luke Hauser – an Index

Those Pesky Crashes

Back in the early days of tech when computers routinely crashed and programs had all sorts of weird glitches that you had to work around, engineers would explain the anomalies by saying:

“That’s not a bug – that’s a feature!”

Capitalism says the same.

Recessions aren’t a glitch in the system, something that our shiny new virtual economy has rendered obsolete.

They are a built-in self-cleansing mechanism for an incredibly durable economic system.

A Tendency to Overproduce

Capitalism has a tendency to overproduce.

When a company makes a profit doing something new – oh, let’s say, producing subscription exercycles for the global elite to give as holiday gifts – immediately – in fact, before the original company even remotely shows a profit – competitors materialize. Soon the market is flooded with exercycles (and soon flea markets will be flooded…)

Whether it’s car companies, music streaming services, or fast food – capitalism has a tendency to overproduce.

Left unchecked – or propped up by irresponsible interest-rate and tax-cut policies – we’d soon drown in ride-sharing services, music streaming sites, and exercycles.

It’s as if the whole system has gone on a giant binge.

Capitalism Purges Itself

But as our beloved if somewhat crotchety ancestor Karl Mark noted, capitalism has a built-in safety device. At the peak of over-production, companies get overstocked warehouses (can you say China 2020?), too many fast-food franchises (your home town?), etc.

Companies slash prices, selling below cost, taking anything just to get some cash flow.

Some survive, some hit the wall. A quick look at the US auto industry shows the results. Where there were once twenty or more auto companies, by 1960 there were basically three. The others hit the wall during recessions.

That was a disaster for investors, for workers, for the home communities. But for capitalism as a whole, it was a blessing.

Think of it as a cleansing. A purge. Like a giant dose of Ex-Lax for what ails the system.

It gets shit moving again, so to speak.

It Works – Unless We Decide Otherwise

It works. Depressions in the 1890s, 1930s, and 1980s eliminated vast amounts of excess production. Hundreds of factories closed. Thousands were thrown out of work and onto the streets

But in the end, capitalism got on just fine.

We escaped recent crashes in 1989, 1999, and 2008 by lowering interest rates and cutting taxes. This time, we’ve already used up those options.

The next crash will be long and ugly. But unless we specifically decide otherwise, history will repeat itself. Capitalism will get on just fine.

As they say – it’s not a bug.

It’s a feature.

Economic Musings by Luke Hauser – an Index