Getting Rid Of Boom-And-Bust Cycle Of The Economy

By Hema Senanayake –January 22, 2016 

Hema Senanayake

Global Economic Revolution Is Overdue; Part 9

We have a macroeconomic system that follows boom-and-bust cycles. Let me ask this simple question. Does the development of physical productive power is cyclical? No, it is not. Physical productive power set the limit of human civilization’s ability to produce goods and services for the wellbeing of people. Therefore, if the development of physical productive power behaves in a boom-and-bust cyclical pattern, then we have to tolerate the boom-and-bust cycles of total output and the system as a whole.

But if the progress of the physical productive power or even the potential of the increment of physical productive power is progressive and does not follow “boom-and-bust cyclical pattern”, it is not necessary to tolerate the cyclical behavior of the total output of the economic system. Since, if we remove the boom-and-bust cyclic behavior subjected to the consumer preference, then the distribution of distributable output which really matters for the wellbeing of each individual of the society is truly a question that can be resolved fairly easily; no revolution is needed to do it. We do not need Professor Stiglitz’s advices to do it. Why?

It is because, capitalism has already learnt as to how to separate the distribution of distributable income (commonly mentioned as redistribution of income) of an economy from the ownership of means of production. What does this mean? This means that the distribution of distributable income is not a matter which controls purely by capitalist owners of businesses in a good democracy. Even under any socialist model which accepts the use of money, it is necessary to do this separation of distributable income from the ownership of enterprises even though enterprises could be owned by the workers or by the unions or workers or by the government.

However, the above does not mean that the business cycles within the microeconomic system under any economic model should not be tolerated; instead, such cyclic behavior is necessary in order to ensure business efficiency. This means that inefficient businesses should be allowed to fail and new businesses should be allowed to emerge based on business efficiency justified by the choice of the consumer. But periodic macroeconomic system failures occur not due to any of above two reasons but due to the general illiquidity of consumers arising from cyclical bad-debt crises. This is where we need advices from Stiglitz or from any other mainstream economist.

The general illiquidity of consumers is not a physical phenomenon. Also, the general illiquidity of consumers does not arising purely from the choices of individual consumers in borrowing amounts that they cannot be paid back or risk taking lenders. Instead the illiquidity of consumers arises from the economic system’s inability to ensure that consumers would get enough debt-free money in order to buy what they have collectively produced as producers. Let me explain this point differently.Read More