Business Cycle

.) In the purest sense of capitalism, producers and consumers of goods and services are inextricably linked, constantly and freely interacting with one another to transact the resources of the economy. Producers charge consumers a price that is instantaneously updated by the perpetual intermingling of supply and demand, which in turn is dictated by the instant and unfettered flow of information. Consumer preferences remain stable or, at least, are easily and accurately predicted by producers. As a result of these elements working in concert, all market participants are happy. Consumers always receive the goods that they desire at a price they are willing to pay, and producers always supply the goods and services that consumers want and know that they are going to sell out every time. The economy grows without interruption.

In a small town of mechanized creatures unaffected by the outside world, perhaps pure capitalism would work as illustrated above. Reality, of course, does not support this model of perfection. Consumers are fickle, the economy is global, and information is imperfect. As a result, contractions and expansions of an economy's real output over time are inevitable. And while these fluctuations are the result of natural interactions between sellers and buyers, government intervention also affects these intervals.

The business cycle is unavoidable because, in part, it is the economical representation of a volatile element: human psychology. In the example above, consumers are predictable. But we all know consumer preferences and their senses of well-being change, sometimes overnight. The new fashion, the hot stock, the trendy social cause or diet can change instantly. Sentiment about a nation's political and economic health shifts the day following a big news story. What's trendy and positive one day, can literally turn to passé and negative the next. To an extent, capitalism breeds such behaviors, as its tenets support constant innovation by