Economic Bubble from a Standpoint of a Psychologist: Causes and Decisions, part 2
End of the article that begins here: http://lxa-shoustov.livejournal.com/9113.html
Psychological model of the bubble inflation and deflation
Now we are ready to look through the economic cycle with a psychologist’s eyes beginning from the recession apogee.
Stage 1
At the bottom point of the economic cycle there are many unemployed or partially employed people. They are not overworked and are ready to increase their productivity.
These are people who are afraid of the future and spend their money only for the most needed or desired goods and services. GNDA is low.
Most entrepreneurs have a fear of starting a new business or expanding their production. Those who were the best at their demand forecasting did not suffer much from the previous crisis but even they could not avoid a decrease in production. Their attention field is not overloaded with the current projects and their fear of starting new businesses is lower then the other entrepreneurs’.
Monetary policy of a central bank that is trying to stimulate growth provides the market with cheap money. It is easy to get a loan for a reliable business project.
Stage 2
Entrepreneurs who are the best at predicting future demand start new businesses. There are some other entrepreneurs who are very good at marketing and advertising techniques. They know how to create new wants and desires in people, which first become LPR Drives. They also risk starting businesses. Quality of demand forecasting accuracy is very high because the best demand prognosticators and creators fill the market. Most goods produced are Real Goods, which will be bought.
GNP growth is sane. People hired for the new enterprises provide some demand growth.
Stage 3
Advertisement and promotion using cheap money create a lot of LPR Drives to make people buy the LPR Goods from the enterprises that began. People work more and more to fulfill their new-born LPR Drives and MPR Drives that were repressed during a recession. GNDA grows.
National economy rises. GNP growth allows the Central Bank to expand monetary base.
Stage 4
Advertisement and promotion transfer LPR Drives into MPR Drives, making a lifestyle base from the goods produced. More and more people want to follow the advertised lifestyle. The demand for MPR and LPR Goods rises. People want to earn more money to swim in this economic stream. Cheap money allows them to buy lifestyle products using loans, i.e. long before sales display whether they get salary for Real Goods production or for Undesirable Goods production. Cheap money allows bad prognosticators to begin new enterprises, to buy stocks. They make mistakes estimating future demand. They are not very good at creating drives but they start their businesses and pay salaries to their employees. If they produce short production-sale cycle goods there is a chance of forthcoming bankruptcy that is cleansing. If they invest in a long-term cycle businesses their mistakes remain hidden.
Undesirable Goods quoted in GNP rise because of the wide pool of investors and their gorging behavior. GNP growth increases, but it is pretty insane by this point.
MPR Goods production does not rise much as all the best prognosticators had been busy with their enterprises started in Stage 2. MPR Goods demand rises dramatically because a total growth mood creates MPR Drives amongst more and more people. MPR Goods demand growth excels MPR Goods supply growth.
GNDA reaches its top level.
Stage 5
MPR Goods prices go up very fast. This results in pyramid building at the stock market. A 50% stock boost does not mean that the enterprise now produces 50% more goods that are required by the market. It does not mean anything important except demand-pull inflation for MPR Goods.
Trying to preserve their lifestyles buying MPR Goods, people have to refuse to purchase LPR Goods. Entrepreneurs who produce LPR Goods have to reduce prices and use sales and other tricks. As they see growth in response to discounts and coupons, they think that their problems are temporary, so they increase borrowing to continue production of the Undesirable Goods that were LPR Goods just yesterday.
Summary inflation registered (MPR Goods prices plus / LPR Goods prices minus) is not big.
Stage 6
More and more people feel that MPR Goods prices growth is higher then their income growth. This is quite explainable as many of them are involved in a production of Undesirable Goods that finally reached their sales stage and sit on shelves due to lack of demand. Others participated in a production of LPR Goods that are sold less and less. Those who are involved in a production of MPR and HPR Goods pay an inflation tax and also suffer. People start to change their lifestyle, reducing MPR Drives. Advertisement and promotion are less effective then in previous stages.
Entrepreneurs who produce LPR Goods are frightened with a continuing demand decrease. They lose their belief in a pending recovery and cut down production. People lose their jobs.
Soon most of the enterprises experience decreases in demand. Most people have to cut their drives. GNDA goes down.
Bubble bursts.
Here comes Stage 1 again.
Certainly, this model is simplifying reality. For example, it does not reflect what happens with HPR Drives and Goods. Still, it describes the most significant psychological features of the economic cycle and shows the key points for therapeutic intervention.
Ways of fixing problems
There are two different approaches to solve the problems. The first lays within the current financial policy mainstream. The second requires fundamental changes. Both are represented below.
How to launch economics growth?
The model of economic cycles presented above provided an opportunity to define basic conditions for growth. They are:
1) GNDA preceding decrease
2) Best prognosticators’ production preceding decrease
3) People’s readiness to work more
4) Cheap money supply
There is one more condition that was present during all previous crises that helped to start a new cycle and that is not present now. As problems developed in some parts of the global economy, it was possible to use other parts that were not involved in a recession to provide a revival demand. In contrast, during a global recession there is no national economy that is able to pull others. This situation makes the customary measures ineffective. An alternate, ‘locomotive creation’, is required.
Recall that government does not produce values, it redistributes them. So, it has to decide what will be the economy segment to get taxes redistributed and become a growth starting point. All the financial support provided without such a decision and correlated actions will result in general inflation and little else.
The way proposed below seems less fair then others that have become habitual, but it is probably the only effective method.
Government should provide some economy branch employees with salaries high enough to surpass HPR and MPR Goods current price inflation. Continuing growth of real income of people involved in these branch enterprises will make them increase their drives and provide a wider demand for consumer goods launching total economic growth.
The Great Depression in the United States was overcome mainly by use of this approach. The government spent money to build roads and for military production. There was a problem of military goods realization. World War II solved it and also decreased GNDA of European countries dramatically. Europe became an excellent market for American goods with people ready to work hard, thus earning money to buy them.
This Keynesian way seems to be well known but it faces some dangerous challenges. Technology cannot work if the drives of the people involved in new goods production did not suffer a significant decrease before the government intervention. It does not work if the entrepreneurs who can work in this branch did not shorten their activities earlier. It will fail if the goods produced by the government-supported enterprises will be Undesirable and not fulfill HPR or MPR Drives of people (we ignore the military actions demand as inhumane). So the full list of conditions for artificial growth launch is:
- GNDA preceding decrease
- best demand prognosticators’ field of attention is enough to start new enterprises
- people’s readiness to work more
- cheap money supply
- choose a branch to be a growth launch point
- people who work or will work in this branch suffered a significant decrease in drives
- government redistribution of funds into the branch chosen is enough to surpass current prices growth of HPR and MPR Goods wanted by branch workers
- branch enterprises produce HPR or MPR Goods
- stability of two previous conditions during some ‘ignition’ period
These conditions full execution only is able to ensure a cycle U-turn during a global economic recession.
What happens if governments fail to execute a manual launch?
It is hard to imagine that the crisis is insuperable, even the global one. What will be the price of the self-adjustment aggravated by mistaken government expenses interventions?
First, let us separate the inevitable price that is to be paid anyway. It is impossible to escape a bubble without a price to be paid by those who participated in the Real Goods production for the Undesirable Goods produced in the previous period. If you put all expenses of Undesirable Goods production on people who were involved in it during the previous growth period, many of them will become slaves paying their debts until the end of their years. Their HPR Drives will be frustrated and they will start to protest actively, breaking the social order. This contradicts all other people’s interests, so they allow government to buy toxic assets using their money paid as taxes.
Serious threats to social order and forthcoming recovery stem from particular groups with a tradition of increasing pressure on government during crises, instead of curbing their drives like others do. If they are successful, public funds are expended by government to feed these groups while little is done to stop the recession. It is meaningless to anticipate productivity growth as a result of money support from people who did not decrease their drives amount before. They will take money without changing behavior. The price to be paid for lack of their protest activeness is a political decision.
There is no economic recovery without GNDA decrease from the level reached during the growth. The more drives decrease, the longer growth you get on the next cycle. A small decrease before starting a new cycle results in the next recession coming soon.
The general rule is that people change their drives according to their environment. When people see that others get more and more opportunities to fulfill their drives, their own drives grow. When they see that people around them lose their jobs, their drives decrease. When they suffer from a war or mass unrest, their drives decrease. This is an alternative way of economics to self-adjust when governments make mistakes.
People experience the following sentiments when they find themselves in a crisis period:
1) ‘Sometimes it happens, we have to endure it’
2) ‘Those responsible are to be identified and punished’
3) ‘Stop it in any way possible!’
If the third stage is reached, the most active may begin to participate in riots. Government then has an opportunity to repress people’s freedoms or to start a war. All these changes lead to a significant drives decrease. Sooner or later HPR and MPR Goods demand descends lower then these goods supply that most precise demand prognosticators can provide. There is a condition for rising production and recovery starting.
If the leading governments of the world do not manage to launch the next growth period before folks reach Stage 3 we may have to live through military conflicts that involve many nations, internal disorders and other dramatic events, bringing people’s drives amounts down.
Sane approach, sane growth, sane economy
Do people like to live their lives on swing? Is it possible to create economic order that is stable and predictable? The answer is given by a cycle’s psychological model. If we remove ineffective demand prognosticators from investment opportunities, the growth will be sane. Very few Undesirable Goods will be produced. Natural sources, energy and working time will be preserved. No bubbles will grow from investors’ mistakes. How can we reach it?
Many people believe that it is impossible to figure out who are good in future demand forecast and who are bad. But this is not required.
What are the features of the economic system we search for? Here are the key conclusions:
1) only those who are the best in a demand forecast should get access to investments funds
2) mistakes made by entrepreneurs should be recognized as soon as possible and not accumulated inside financial bubbles
3) as most people are not good as demand forecasters, those who want to save money from prices growth should have an effective way to do it (other then investments)
4) economics should have a secure way of production expansion following people’s drives growth
Contemporary technologies make it possible to create a world-wide accessible electronic monetary system with a permanent amount of money and no money creation ever. All users would have an opportunity to control the total amount of money without an access to data concerning personal accounts. Such a control is much more reliable then any gold standard type system.
This monetary system supports permanent growth of money cost, but it cannot kill some people’s desire to earn more then others. Entrepreneurs who want to get investment money should pay a lot for loans and this makes them choose only the most reliable projects. Those who are not good as demand forecasters will suffer early bankruptcy without an opportunity to borrow more as the cost of money is too expensive. They will not get other loans in the future.
Prices for customer goods are always going down. People with little talent in predicting future demand can keep their money and buy tomorrow more then they are able to buy today. There is no need to invest money for them.
Production expansion is supported by customers. Their market baskets consist mostly of the goods already sampled and pre-ordered from the producers. They spend small parts of their income to try new goods produced by risk-taking entrepreneurs who are the best demand prognosticators. If their sampling results in a continuous drives, they place their orders and pay ahead at a significant discount from what they paid for the sample.
The Undesirable Goods quote in a gross product is very low.
Today, the idea of the economic system described may seem insane. The fact is that we live in an upside down economy and the approach proposed is actually a sane one. Transition is inevitable. There is not a question of whether it happens or not. There is a question of when it will happen and who will be the first.
_______________________________________________
This article was printed in May, 2009 in a Miscellany published by “AMP SPb” Laboratory for Social and Political Technologies in Saint Petersburg, Russia.
Alexei Shoustov, PhD (political psychology) is an expert in political and social technologies. He was elected to be a member of the local community council in Saint Petersburg, Russia (1990-1993). Later he worked as an assistant to several members of the upper and lower houses of Russian parliament, of Saint Petersburg regional Legislature, as an adviser for Governor of Saint Petersburg (2000-2003), director of the state-owned enterprise “The Board of Jubilee Celebrations” during Saint Petersburg 300-years anniversary (2002-2004). He worked as an assistant professor at the Psychology Department of Saint Petersburg State University (1994-2001).
In 1993-1994 he visited 10 cities of the United States meeting people involved in political campaigning. This trip was sponsored by public organization “Women of the World”.
Alexei Shoustov is an author of the numerous articles concerning political issues in Russian newspapers. In 2008 he published a book called “After State” (“Posle Gosudarstva”) with a complex analysis of democracy challenges and future opportunities of the political administration. He is a weekly political talk-show host on a local cable TV channel in Saint Petersburg, Russia.
You can write to Alexei Shoustov: lxaz@mail.ru or just here.
The author is truly grateful to Howard Kassinove for his extremely useful advices in developing the language of this paper. The author wants to express his deep appreciation to Lynn Hinkle for editing this text in a very short time.
Psychological model of the bubble inflation and deflation
Now we are ready to look through the economic cycle with a psychologist’s eyes beginning from the recession apogee.
Stage 1
At the bottom point of the economic cycle there are many unemployed or partially employed people. They are not overworked and are ready to increase their productivity.
These are people who are afraid of the future and spend their money only for the most needed or desired goods and services. GNDA is low.
Most entrepreneurs have a fear of starting a new business or expanding their production. Those who were the best at their demand forecasting did not suffer much from the previous crisis but even they could not avoid a decrease in production. Their attention field is not overloaded with the current projects and their fear of starting new businesses is lower then the other entrepreneurs’.
Monetary policy of a central bank that is trying to stimulate growth provides the market with cheap money. It is easy to get a loan for a reliable business project.
Stage 2
Entrepreneurs who are the best at predicting future demand start new businesses. There are some other entrepreneurs who are very good at marketing and advertising techniques. They know how to create new wants and desires in people, which first become LPR Drives. They also risk starting businesses. Quality of demand forecasting accuracy is very high because the best demand prognosticators and creators fill the market. Most goods produced are Real Goods, which will be bought.
GNP growth is sane. People hired for the new enterprises provide some demand growth.
Stage 3
Advertisement and promotion using cheap money create a lot of LPR Drives to make people buy the LPR Goods from the enterprises that began. People work more and more to fulfill their new-born LPR Drives and MPR Drives that were repressed during a recession. GNDA grows.
National economy rises. GNP growth allows the Central Bank to expand monetary base.
Stage 4
Advertisement and promotion transfer LPR Drives into MPR Drives, making a lifestyle base from the goods produced. More and more people want to follow the advertised lifestyle. The demand for MPR and LPR Goods rises. People want to earn more money to swim in this economic stream. Cheap money allows them to buy lifestyle products using loans, i.e. long before sales display whether they get salary for Real Goods production or for Undesirable Goods production. Cheap money allows bad prognosticators to begin new enterprises, to buy stocks. They make mistakes estimating future demand. They are not very good at creating drives but they start their businesses and pay salaries to their employees. If they produce short production-sale cycle goods there is a chance of forthcoming bankruptcy that is cleansing. If they invest in a long-term cycle businesses their mistakes remain hidden.
Undesirable Goods quoted in GNP rise because of the wide pool of investors and their gorging behavior. GNP growth increases, but it is pretty insane by this point.
MPR Goods production does not rise much as all the best prognosticators had been busy with their enterprises started in Stage 2. MPR Goods demand rises dramatically because a total growth mood creates MPR Drives amongst more and more people. MPR Goods demand growth excels MPR Goods supply growth.
GNDA reaches its top level.
Stage 5
MPR Goods prices go up very fast. This results in pyramid building at the stock market. A 50% stock boost does not mean that the enterprise now produces 50% more goods that are required by the market. It does not mean anything important except demand-pull inflation for MPR Goods.
Trying to preserve their lifestyles buying MPR Goods, people have to refuse to purchase LPR Goods. Entrepreneurs who produce LPR Goods have to reduce prices and use sales and other tricks. As they see growth in response to discounts and coupons, they think that their problems are temporary, so they increase borrowing to continue production of the Undesirable Goods that were LPR Goods just yesterday.
Summary inflation registered (MPR Goods prices plus / LPR Goods prices minus) is not big.
Stage 6
More and more people feel that MPR Goods prices growth is higher then their income growth. This is quite explainable as many of them are involved in a production of Undesirable Goods that finally reached their sales stage and sit on shelves due to lack of demand. Others participated in a production of LPR Goods that are sold less and less. Those who are involved in a production of MPR and HPR Goods pay an inflation tax and also suffer. People start to change their lifestyle, reducing MPR Drives. Advertisement and promotion are less effective then in previous stages.
Entrepreneurs who produce LPR Goods are frightened with a continuing demand decrease. They lose their belief in a pending recovery and cut down production. People lose their jobs.
Soon most of the enterprises experience decreases in demand. Most people have to cut their drives. GNDA goes down.
Bubble bursts.
Here comes Stage 1 again.
Certainly, this model is simplifying reality. For example, it does not reflect what happens with HPR Drives and Goods. Still, it describes the most significant psychological features of the economic cycle and shows the key points for therapeutic intervention.
Ways of fixing problems
There are two different approaches to solve the problems. The first lays within the current financial policy mainstream. The second requires fundamental changes. Both are represented below.
How to launch economics growth?
The model of economic cycles presented above provided an opportunity to define basic conditions for growth. They are:
1) GNDA preceding decrease
2) Best prognosticators’ production preceding decrease
3) People’s readiness to work more
4) Cheap money supply
There is one more condition that was present during all previous crises that helped to start a new cycle and that is not present now. As problems developed in some parts of the global economy, it was possible to use other parts that were not involved in a recession to provide a revival demand. In contrast, during a global recession there is no national economy that is able to pull others. This situation makes the customary measures ineffective. An alternate, ‘locomotive creation’, is required.
Recall that government does not produce values, it redistributes them. So, it has to decide what will be the economy segment to get taxes redistributed and become a growth starting point. All the financial support provided without such a decision and correlated actions will result in general inflation and little else.
The way proposed below seems less fair then others that have become habitual, but it is probably the only effective method.
Government should provide some economy branch employees with salaries high enough to surpass HPR and MPR Goods current price inflation. Continuing growth of real income of people involved in these branch enterprises will make them increase their drives and provide a wider demand for consumer goods launching total economic growth.
The Great Depression in the United States was overcome mainly by use of this approach. The government spent money to build roads and for military production. There was a problem of military goods realization. World War II solved it and also decreased GNDA of European countries dramatically. Europe became an excellent market for American goods with people ready to work hard, thus earning money to buy them.
This Keynesian way seems to be well known but it faces some dangerous challenges. Technology cannot work if the drives of the people involved in new goods production did not suffer a significant decrease before the government intervention. It does not work if the entrepreneurs who can work in this branch did not shorten their activities earlier. It will fail if the goods produced by the government-supported enterprises will be Undesirable and not fulfill HPR or MPR Drives of people (we ignore the military actions demand as inhumane). So the full list of conditions for artificial growth launch is:
- GNDA preceding decrease
- best demand prognosticators’ field of attention is enough to start new enterprises
- people’s readiness to work more
- cheap money supply
- choose a branch to be a growth launch point
- people who work or will work in this branch suffered a significant decrease in drives
- government redistribution of funds into the branch chosen is enough to surpass current prices growth of HPR and MPR Goods wanted by branch workers
- branch enterprises produce HPR or MPR Goods
- stability of two previous conditions during some ‘ignition’ period
These conditions full execution only is able to ensure a cycle U-turn during a global economic recession.
What happens if governments fail to execute a manual launch?
It is hard to imagine that the crisis is insuperable, even the global one. What will be the price of the self-adjustment aggravated by mistaken government expenses interventions?
First, let us separate the inevitable price that is to be paid anyway. It is impossible to escape a bubble without a price to be paid by those who participated in the Real Goods production for the Undesirable Goods produced in the previous period. If you put all expenses of Undesirable Goods production on people who were involved in it during the previous growth period, many of them will become slaves paying their debts until the end of their years. Their HPR Drives will be frustrated and they will start to protest actively, breaking the social order. This contradicts all other people’s interests, so they allow government to buy toxic assets using their money paid as taxes.
Serious threats to social order and forthcoming recovery stem from particular groups with a tradition of increasing pressure on government during crises, instead of curbing their drives like others do. If they are successful, public funds are expended by government to feed these groups while little is done to stop the recession. It is meaningless to anticipate productivity growth as a result of money support from people who did not decrease their drives amount before. They will take money without changing behavior. The price to be paid for lack of their protest activeness is a political decision.
There is no economic recovery without GNDA decrease from the level reached during the growth. The more drives decrease, the longer growth you get on the next cycle. A small decrease before starting a new cycle results in the next recession coming soon.
The general rule is that people change their drives according to their environment. When people see that others get more and more opportunities to fulfill their drives, their own drives grow. When they see that people around them lose their jobs, their drives decrease. When they suffer from a war or mass unrest, their drives decrease. This is an alternative way of economics to self-adjust when governments make mistakes.
People experience the following sentiments when they find themselves in a crisis period:
1) ‘Sometimes it happens, we have to endure it’
2) ‘Those responsible are to be identified and punished’
3) ‘Stop it in any way possible!’
If the third stage is reached, the most active may begin to participate in riots. Government then has an opportunity to repress people’s freedoms or to start a war. All these changes lead to a significant drives decrease. Sooner or later HPR and MPR Goods demand descends lower then these goods supply that most precise demand prognosticators can provide. There is a condition for rising production and recovery starting.
If the leading governments of the world do not manage to launch the next growth period before folks reach Stage 3 we may have to live through military conflicts that involve many nations, internal disorders and other dramatic events, bringing people’s drives amounts down.
Sane approach, sane growth, sane economy
Do people like to live their lives on swing? Is it possible to create economic order that is stable and predictable? The answer is given by a cycle’s psychological model. If we remove ineffective demand prognosticators from investment opportunities, the growth will be sane. Very few Undesirable Goods will be produced. Natural sources, energy and working time will be preserved. No bubbles will grow from investors’ mistakes. How can we reach it?
Many people believe that it is impossible to figure out who are good in future demand forecast and who are bad. But this is not required.
What are the features of the economic system we search for? Here are the key conclusions:
1) only those who are the best in a demand forecast should get access to investments funds
2) mistakes made by entrepreneurs should be recognized as soon as possible and not accumulated inside financial bubbles
3) as most people are not good as demand forecasters, those who want to save money from prices growth should have an effective way to do it (other then investments)
4) economics should have a secure way of production expansion following people’s drives growth
Contemporary technologies make it possible to create a world-wide accessible electronic monetary system with a permanent amount of money and no money creation ever. All users would have an opportunity to control the total amount of money without an access to data concerning personal accounts. Such a control is much more reliable then any gold standard type system.
This monetary system supports permanent growth of money cost, but it cannot kill some people’s desire to earn more then others. Entrepreneurs who want to get investment money should pay a lot for loans and this makes them choose only the most reliable projects. Those who are not good as demand forecasters will suffer early bankruptcy without an opportunity to borrow more as the cost of money is too expensive. They will not get other loans in the future.
Prices for customer goods are always going down. People with little talent in predicting future demand can keep their money and buy tomorrow more then they are able to buy today. There is no need to invest money for them.
Production expansion is supported by customers. Their market baskets consist mostly of the goods already sampled and pre-ordered from the producers. They spend small parts of their income to try new goods produced by risk-taking entrepreneurs who are the best demand prognosticators. If their sampling results in a continuous drives, they place their orders and pay ahead at a significant discount from what they paid for the sample.
The Undesirable Goods quote in a gross product is very low.
Today, the idea of the economic system described may seem insane. The fact is that we live in an upside down economy and the approach proposed is actually a sane one. Transition is inevitable. There is not a question of whether it happens or not. There is a question of when it will happen and who will be the first.
_______________________________________________
This article was printed in May, 2009 in a Miscellany published by “AMP SPb” Laboratory for Social and Political Technologies in Saint Petersburg, Russia.
Alexei Shoustov, PhD (political psychology) is an expert in political and social technologies. He was elected to be a member of the local community council in Saint Petersburg, Russia (1990-1993). Later he worked as an assistant to several members of the upper and lower houses of Russian parliament, of Saint Petersburg regional Legislature, as an adviser for Governor of Saint Petersburg (2000-2003), director of the state-owned enterprise “The Board of Jubilee Celebrations” during Saint Petersburg 300-years anniversary (2002-2004). He worked as an assistant professor at the Psychology Department of Saint Petersburg State University (1994-2001).
In 1993-1994 he visited 10 cities of the United States meeting people involved in political campaigning. This trip was sponsored by public organization “Women of the World”.
Alexei Shoustov is an author of the numerous articles concerning political issues in Russian newspapers. In 2008 he published a book called “After State” (“Posle Gosudarstva”) with a complex analysis of democracy challenges and future opportunities of the political administration. He is a weekly political talk-show host on a local cable TV channel in Saint Petersburg, Russia.
You can write to Alexei Shoustov: lxaz@mail.ru or just here.
The author is truly grateful to Howard Kassinove for his extremely useful advices in developing the language of this paper. The author wants to express his deep appreciation to Lynn Hinkle for editing this text in a very short time.