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What Is An Economic Recession and What Causes It?Words like 'market', 'economy' and 'recession' can be confusing.Let's consider some confusion about the word 'market'. People often talk about the 'stock market' which is a place where people invest their money for the future. The stock market is always a gamble. It can fall in a day only because powerful people said negative things on TV. For example, the Dow Jones industrial average index was about 10,800 toward the end of the 2008 presidential election. This level represents a hugely successful stock market. The stock market quickly dropped to about 6,700 by March of 2009! That's one HUGE headache! However, the drop in the stock market is a symptom of a problem and not the cause. You might have a bad headache. Yes, it hurts. But something else caused the headache.
The economy or marketplace, on the other hand, is not the stock market.
The marketplace is a place where people spend their money.
It's where homes, cars, clothing, vacations, medicine, computers, air travel -- and everything else that you might want to buy -- are all created.
It's where jobs are created.
In a 'free market system' people and businesses both own property in the marketplace, and depend on each other to prosper.Businesses need people to buy their stuff; and people need businesses to provide jobs, products and services in a free market. It's an almost infinite number of buying and selling decisions. The smart decisions end up moving people and businesses forward and the stupid decisions die out.So what keeps score of all the smart and stupid decisions in a free market? Money. The people vote with their money. Businesses invest with their money. Good businesses and good employees prosper together. Stupid businesses and stupid employees make less money because there's little interest. Failure doesn't need to be a permanent situation in a free market. They are free to reinvent their products or services so that more people are interested in them. Then they too may prosper. That's the way that it's been done for a long time in the United States. The Constitution is largely responsible. It gave the people the right to life, liberty, and pursuit of happiness. People have the right to their property. The free market economic system sort of came to be as people and business figured out how to work within the Constitution. Systems like Socialism and Communism and Fascism don't fit well with the Constitution. Government can change the score by taxing the people's money out of the free market and sending it where they want it to go -- instead. They can take the money directly. Or they can control money by passing regulations that forces their will on how money is to be spent. Government taxation can be a very GOOD thing. For example, government uses tax money to take care of unfortunate and disabled people, to provide national security, to provide police and fire protection, and more. Business can be a very GOOD thing. Business invests in new ideas and in employing good people. They create and invent new products and services that can improve life and provide entertainment. However, government taxation can also be a very BAD thing. Governments are powerful, arrogant and stupid. So as government gets bigger and takes more of the people's property, the Constitution gets more ignored. The score gets more corrupt and more stupid. However, business can also be a very BAD thing if they get too powerful, for pretty much the same reasons. The 'free market' really depends on the freedom of the people. It can ultimately die when the people finally lose control. At some point it wouldn't make sense then to talk about a 'free market recession'. The system ultimately moves into something else like Socialism, Communism, or Facism. These have their own set of issues. What is a 'recession'? That's when people buy fewer things that businesses produce, and businesses sell fewer things that people want. So what hurts a free market economy? It's sometimes a lack of confidence in the future freedom of our free market. Other times it happens when a government taxes too much money out of our free market. Or both. An economic recession is when: People hang on to their money and don't buy as much because they don't feel confident in the future. And, businesses don't hire people because they don't feel confident in the future. Prosperity returns to where it was when businesses feel confident again to hire people AND people feel confident again of having a good long-term job. This article was last updated in November, 2009. |
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