Recessions seem to occur every decade or so in modern economies, and they seem to regularly follow periods of strong economic growth. This pattern recurs with striking consistency, but is it inevitable? Can a recession be avoided, or is it an unavoidable feature of a modern capitalist econom🐎y?

What Is a Recession?

A recession is an economic period marked by negative 澳洲幸运5官方开奖结果体彩网:real growth, declining output, depressed prices, and rising unemployment, which often follows a period of strong 澳洲幸运5官方开奖结果体彩网:economic growth as measured by these same variables. Recessions are characterized by an unusual, simultaneous, and large grouping of business errors, whi꧋ch some economists call “malinvestments.”

Faced with financial loss and declining margins, businesses scale back production or fail entirely, and business managers (or the new owners) reallocate resources tied up in the failed projects to different uses. During the period of transition, some of these resources will need to be repriced (in terms of goods prices, 澳洲幸运5官方开奖结果体彩网:asset values, or in the case of labor, wages), and some will remain idle for some time until a new use is found. As this process proceeds, the economy recovers.

Causes of Recessions

The key issue as to whether this process of growth to recession to recovery is inevitabl𝔉e is: What causes the cluster of business errors to occur? Why can businesses not continue to groꦉw and asset prices continue to rise indefinitely?

Economists have developed numerous explanations for these clusters of business failures. Some rely on psychological factors. These explanations point out that people can be prone to excessive optimism and confidence or pessimism and fear, leading to the propagation and collapse of market bubbles and persistent deficiencies of aggregate demand.

Some of this can even be reproduced experimentally through simulations or experiments on a very limited scale. Such theories are popular, but in general fail to actually explain how a large-scale cluster🃏 of business errors can occur across markets and asset classes in an entire economy, as happens during a recession.

Others point to 澳洲幸运5官方开奖结果体彩网:economic shocks, which are random events such as wars or epidemics, that can negatively affect production, consumer demand, or the costs of key goods and commodities in an economy. These kinds of things can certainly hurt businesses across an economy all at once. However, it doesn't explain why recessions seem to occur with such regularity or why they consistently follow periods 🌠of notably strong growth. After all, economic shocks are, by nature, random events. There is no particular reason for random shocks to follow patterns like these, which are easily observed. Random negative shocks may be inevitable, but that doesn’t show why the observed 🐻boom-and-bust patterns in the economy should be inevitable.

Other economists explain the recurrent cycle of growth and recession in purely financial terms. These often involve errors by the 澳洲幸运5官方开奖结果体彩网:central bank or monetary authority that 澳洲幸运5官方开奖结果体彩网:supplies money to the economy. Maybe too much new money leads to excessive 澳洲幸运5官方开奖结果体彩网:inflation, but too little may lead to tightening credit conditions and defaults leading to 澳洲幸运5官方开奖结果体彩网:debt deflation, and this is why we have recessions.

Each of these types of explanations for the cycle of growth and recession that can be seen over the decades seems to have some🐽 power and perhaps some bit of truth. But none of them really shows that recessions are inevitable, or that a cycle of expansion and contraction in the economy should really exist at all.

These theories fail to explain why monetary authorities should err so greatly and with such apparent regularity as to cause a readily visible cycle of boom and bust in the economy. Essentially these theories simplify the question from “Why do clusters of severe business errors ocﷺcur?” to “Why should severe clusters of central bank errors occur with such regularity?”

An Alternative Explanation

Another alternative explanation for recessions comes from 澳洲幸运5官方开奖结果体彩网:Austrian Business Cycle Theory (🦄ABCT). This theory takes a deeper look at many of the factors discussed above. It focuses on how central banking and monetary policy interact with real economic events and the psychology and incentives faced by investors, producers, and consumers in the economy. By looking at how all these things relate to each other, we can get a more complete view of how business cycles work and whether they are inevitable.

In ABCT, the key cause of recessions is the creation of new money in the form of loans and corresponding deposits by the🌄 banking system, known as fiduciary media of exchange. Banks, and especially central banks, do this not out of an error in calculating the correct monetary policy, but because it is their essential business model. This sets in motion a series of investments in the economy by distorting the incentives of investors, consumers, and savers in favor of debt-financed investment and consumption and a simultaneous decrease in savings. 

This creates a temporary illusion of a strong economy as prices and spending across the economy rise—but because the plans of investors, consumers, and savers are fundamentally in conflict, this illusion cannot last. Business invꦇestment projects previously expected to be profitable under the illusion of distorted incentives and the optimistic exuberance of the boom are eventually revealed to be a cluster of errors.

Often, this revelation of the cluster of errors may be triggered in part by some random economic shock, but not necessarily. The conflicts that arise as investors, consumers, and savers try to increase both present and future consumption while decreasing savings often take the form of real constraints and bottlenecks in supply chains that may resemble random economic shocks, though they are nonetheless systematically caused by the initial overissuance of new money and credit. These lead to business failures, rising unemployment, debt deflation, and🦋 all the econo🌊mic pain of a recession.

Recessions Are Inevitable—at Least for Now

In the end, once the proces🃏s of the🍃 artificial boom in the economy by the issuance of credit is set in motion, then the ensuing bust and recession are indeed inevitable. But this does not mean that recessions are always and generally inevitable, other than after episodes of inappropriate creation of money and credit. Recessions are not logically inevitable in any economy, but are contingent upon the monetary practices and institutions that a society adopts. 

However, for better or for worse, all modern, capitalist economies include banking systems based on 澳洲幸运5官方开奖结果体彩网:fractional reserve lending coordinated by central banks that routinely and continuously issue new fiduciary media into the economy. As long as this is the case, then the cycles of boom and bust that we regularly experience, as described by ABCT, will unfortunately be inevitable. Given the ubiquity and entrenched position of the current mone🍨tary arrangements, for now, recession💟s are just part of how our economy works.

The Bottom Line

Recessions, or economic contractions, are likely an inevitable function of the usual operations of a modern capitalistic economy. Unfortunately, recessions can lead to high levels🅘 of unemployment, lower asset prices, investment losses, and firms going out of business. But they also show us something very important about how modern economies work: that unchecked growth and credit expansion funded by banks is unsustainable when it occurs without regard for fundamental constraints on the supply of goods and services.