LSN Students: Business Cycle, Depressions, and "I,Pencil".

BUSINESS CYCLE:

This is the cycle of business expansions and recessions. It is a characteristic of a capitalist economic system.

In an expansion, people are buying goods and services. Businesses get money. They can invest in new technology, buildings, and employment. The gross domestic product (GDP) of a country in expansion will go up. Unemployment will fall. The traders in stocks and bonds will talk about a bull market.

However, the economy may get saturated. Orders for new goods and services fall off. Businesses get less money. As this downward trend continues, businesses lose money and must start laying off workers. After a while, the economy goes into a recession. Traders in stocks and bonds will talk about a bear market.

But, because many people have lost jobs and money, businesses and individuals are willing to work or sell for less. The companies less damaged by recession will start recovering soon. A recovery begins. This is when the economy starts coming out of the recession. Usually, it is hard to notie the beginning of a recovery. Only when unemployment rates fall dramatically is the recovery noticeable to most people.

For politics and government, the business cycle is important. When a country goes into a recession, many people want the government to "DO SOMETHING!" The ideas of socialism and a command economy become attractive. Poorer people become very resentful and envious of those who have not been so badly harmed by the recession. There are calls to take from the wealthy and give to the poor. In America's Great Depression of 1929-42, President Herbert Hoover tried government interventions (including foregoing his own salary) to try to end the depression. He was unsuccessful, and lost the election to Franklin Roosevelt in 1932. Roosevelt also tried major government programs to end the depression. However, high taxes used to pay for these programs did not allow businesses to grow and recover. The Great Depression was not ended until the US entered World War II, and government demand for manufactured goods spurred the recovery of American industry.

The essay "I, Pencil", by Leonard Read, was written in 1958. Read criticized the idea that government guidance, control, and planning could keep the economy healthy. He observed that making a simple thing like a number 2 pencil really requires a complex network of producers, money, and resources; but no "master-mind". Hence, he did not believe that government planners could really help something as large and complex as the US economy.