Saturday, 15 September 2012

Could Economic Drought Be Necessary For An Evolving Economy?

We hear in the news that recessions are intrinsically bad, that they reflect the faults in our economy and our economic models. Yes they do encourage unemployment. Yes they do lead to some businesses closing down. Yes they do put our country in debt. What if this is temporarily bad for those unemployed or for those businesses, but necessary over time for an evolving economy, one that is changing based on new technologies, new demands and based on a complicated animal... us.

Firstly recessions represent the slowing down of economic activity, again we must think of demand and investment priority (human quantities) as changing in the private sector. Resources may be shortening out too which could cause some businesses to halt. So we can think of recessions as human caused, either on the consumer level, provider level and on the banker level. Remember bankers are human too and to keep their money rolling in they will do whatever they can, to them capital > morals.

Recessions happen for a reason, they happen due to an accumulation of micro-economic human activity which is trying to push the direction of the economy into a different direction. When I say direction I do not mean physically or financially (being only two- up or down) I mean that there are big changes in markets and businesses which microscopically are significantly affecting the economy as a whole.

So in recessions... some businesses fail to keep their revenue stable this means they have to drop staff to keep break even. This leads to unemployment. Now those who are unemployed may have skill sets and move to other businesses who are still doing okay, or they will stay unemployed for a while or move to a different job or location. This means that there is massive musical chairs of employees waiting to find another seat. The businesses that fail to keep standing will die. After time other businesses will pick up their profits and begin to look for more employment and hence pick up those that were unemployed. Some may stay unemployed because they have out of date skills or are not wanted or a just plain lazy. What is key here is that a recession has the ability to sieve out unwanted businesses, unwanted skills but give possibly new business or prevailing businesses more market room and possible employment (from unemployed). So the economy has evolved slightly, some die some prevail. If unemployment and business inactivity are halted for a while it merely shows that something needs to change... businesses need to meet demands more successful to grow, people need to get better qualifications (or update their qualifications) and of course this takes time. (Look at Greece).

We always think of the economy as an entity infinitely progressing upwards through time... yes some quantities like GDP can progress upwards for a very long time, but the economy is a complicated system based on finite objects and cannot expand infinitely. The fuel for the economy (money) is limited and as such we should view the economy as an organism or collection thereof which can only get more efficient in its environment (nation) it is not something which can get infinitely bigger and richer.

If we view the economy as an organism which is built upon 'selfish' businesses then it is to no surprise why recessions occur, they could mathematically (this has not been proven) be necessary for it's evolution algorithm.

It is common sense really, at the moment,  we are an ever changing (culturally short term wise) organism and if something which is based on us does not change infrequently and slightly chaotically then it will fail. It will fail to adapt to is environment.

In nature, genes die out or spread and become successful. Nature is ugly but efficient over time. We have to drop the assumption that large complicated systems should obey simple rules and adapt linearly. They are ugly and complicated and hence we need methods resembling chaos to explain them .

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