Tuesday, 25 November 2008

Cycling on calmer than before

This article by John Kemp tells us a lot about our current predicament and should be certainly referred to when reading hyperbole in the national newspapers.

Look at Kemp's graph. Look at the volatility in the first half of the twentieth-century. And then see how much calmer life has been in the last 50 years. Here's a general rule of thumb: in a capitalist economy, the less volatility there is the more wealth is created.

And this graph also suggests a reason why ‘emerging market’ economies (China, Russia etc) may not rapidly overtake the economies of Europe and the US. If you take a look at GDP growth in China then you’ll see similarly large swings in GDP, with a recent, and admittedly long, upswing.

During periods of growth, capitalist economies invest, build and implant physical and institutional structures to support further growth. During a downturn, some of this is destroyed. The bigger the downturn, the less stuff (both tangible and intangible) is carried over to the next growth period from the previous one. Hence, volatility is generally (and I'm being very general here) a long-term economic bad.

I think this is how the UK government is approaching the economy. It knows that pumping some extra cash into the economy (sorry, a ‘fiscal stimulus’) is a risk but better for the government to borrow a more now and people feel there’s an economic security blanket rather than there be a sudden, long-lasting and hugely value-destroying downturn.

As Kemp notes: "What made the Great Depression 1929-33 unusual was not the DEPTH of the contraction (which was not abnormal for period) but its DURATION. Previous business downturns had lasted a few months but this one dragged on for years. Industrial activity peaked in Sep 1929 and did not begin expanding again significantly until H2 1933."

Though it is also here worth noting Matt’s point that downturns in economic cycles are often “symptomatic of some deeper cycle in the way that we organise ourselves” and could be seen as a part of a wider more positive dynamic at work.

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