So why do we go through business cycles? Why aren't we just constantly growing? Why is there growth and then recession and then growth again? Why doesn't it happen smoothly? Well, it's because events happen rather sporadically, spontaneously. We get shocks to the standard flow of things that cause unexpected booms and severe recessions in the market. The main idea here is that these events occur spontaneously. When we experience a shock in the market, it's going to cause an unexpected growth or recession.
The first factor is irregular innovation. There are going to be big inventions and revolutionary technologies that cause economic booms, like when we had the railroad, automobiles, or most recently the internet. When these technologies were created, there was a sudden expansion in our economy that was unprecedented. After one of these inventions, there's unprecedented expansion, but eventually, our economy will absorb this new technology. All that expansion that happened when the railroad was built has now fueled new growth in the logistics business. However, this logistics business will eventually cap out. The transportation of people from East to West is going to reach its peak and will be absorbed by the economy. Thus, that expansion must eventually end. Growth is going to slow down from that new technology until a new technology emerges. These ideas occur sporadically; it's not like every 5 years we have a new revolutionary idea. We can't plan on it like that; it just happens all of a sudden.
Another factor is changes in productivity, similar to irregular innovation. Changes in productivity can be caused by new technologies, an increased availability of resources or even human capital. For example, a new public education system could lead to more human capital, leading to higher productivity, which could lead to unexpected booms and busts. Likewise, the discovery of a new oil deposit and the subsequent decrease in oil prices, allows more businesses to invest and use oil to boost the economy. Any kind of shock like this in the availability of a key resource can lead to a shock in the economy.
Another shock to the economy comes from monetary factors. This is more controlled because it involves monetary policy by the Federal Reserve. This policy is generally aimed at fixing a recession or helping the economy in some way through changes like printing money or buying and selling bonds.
Political events also play a role. An unexpected war, peace, or act of terrorism can cause a shock to the economy, either stimulating a boom or leading to a bust. Finally, there is financial instability from market bubbles, like the one we saw in 2008 during the recession, which was in the real estate market. The burst of this huge bubble led to an unexpected decrease in real estate prices, spiraling into a major recession.
Let's pause here, and we'll continue with a conclusion about our discussion on business cycles in the next session.