Understanding Economic Cycles

What causes an economy to fall from a peak? Many economists will argue it’s exogenous shocks but, as Phil and Steve discuss, there’s not too many of those around. Maybe COVID was one, but even that came about because our economic system has drawn us closer to wildlife habitats.

Or is it a lack of resources? We run out of capacity to produce more, whether it’s factories, people or natural resources, like fossil fuels. Does the shortage relative to demand force prices up and its inflation that ultimately kills growth.

No, says Steve. Karl Marx had it right when he postulated that the rising pressure on wages will cut the profit that capitalists thought they would be earning, which would mean they cut investment. Talk about cutting off your nose to spite your face.

So, if that’s how economies peak, what is it that pulls hem out of a trough? And is there anything we can do to minimise the impact of business cycles, or are they simply the natural order of things?

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