All Attempts to Cheat Death Will End Poorly

Business cycles are natural. To interfere with them is unnatural. Yet there is a fixation by economists searching for a magical explanation of business cycles that will enable us to banish them to the ash heap of history. Why don't we also try getting rid of winter? All the arguments made in favor of ending business cycles can be used to argue equally for the end of seasons. But the attempt to find a "solution" to business cycles will end in failure, just as it will should we ever try to ban winter. Fortunately, we've matured enough to realize that winter arrives every year and there's not much we can do about the seasons. Why can't we see the same thing with the economy? It's ridiculous to try to find a "solution" to winter; the same goes for recessions.

In all business cycles, we have booms and busts. Typically a bust is called a recession; very bad busts are called depressions. When times are good, businesses expand and jobs are easy to find. The stock market consistently rises. At the extreme end of this, at the very top of the economic boom, people start talking about how "it's different this time," or how we are "entering into a new economy." Inefficiencies and misallocations accumulate as businesses expand and invest. Businesses might end up hiring too many people, for example, or they might decide to invest in a project that realistically will never return a profit -- they invest in it because nobody wants to be left out. It might be somewhat unsafe, maybe not a very good idea, but if those people are doing it, then we can and should do it too. Eventually, somebody realizes that no, this doesn't make sense, these businesses can't actually turn a profit on these projects. Costs are too high, sales are too low, we can't afford this. The money that flowed so freely to fund every single hot idea -- regardless of whether it was a good idea or not -- suddenly dries up. Businesses lay off workers, consumers cut back spending, and the economy falls into a recession. The mismanaged businesses and the ones that made bad mistakes shut their doors. All the fluff is blown away. The shrewd investors and businessmen will see the new opportunities that start popping up everywhere -- and they will lay the groundwork for the next expansion.

When left alone, the business cycle clears out the rot and allows the economy to become even stronger. To make another analogy, think of a forest fire. Nature ensures a forest fire every so often in order to clear all out the dead brush. When humans interfere, the dead brush accumulates to such an extent that when the next fire starts -- and it always will -- the resulting forest fire will be completely devastating.

Forest fires and recessions are a painful thing to go through, but they are every bit necessary. The problem, of course, is that it is a painful process. Politicians want to be to be reelected, and doing nothing during a recession appears makes one appear indifferent to the suffering of the people. Constituents want to avoid pain, and they too want action during a recession. The irony is that in their quest to avoid pain today, people end up having to endure a deeper and longer lasting pain tomorrow.

It's quite clear what I believe we should do during a recession: nothing. Unfortunately, this is completely unrealistic in the world we live in; we will just have to accept that people will meddle in things they should not.