79
Skyscrapers are often built during
times of excessive optimism, a sure
sign that the economy is overheating.
By the time they are finished, the
economy has often crashed.
See also: Free market economics 54–61 ■ The Keynesian multiplier 164–65 ■ Financial crises 296–301 ■ Housing and the
economic cycle 330–31
THE AGE OF REASON
They believed that if the market
is left to its own devices, an
economic equilibrium is quickly
and easily achieved, leading to full
employment. Sismondi thought a
sort of equilibrium would eventually
be reached, but only after a
“frightful amount of suffering.”
Before Sismondi published his
New Principles of Political Economy
in 1819, economists had either
overlooked short-term economic
booms and busts or had attributed
them to external events, such as
war. Sismondi showed that short-
term economic movements are due
to the natural results of market
forces—overproduction and
underconsumption—caused by
growing inequality during booms.Fueling the boom
As economies grow and businesses
do well, workers are able to demand
wage increases and buy more of the
goods they produce. This fuels the
economy’s boom. As more and
more goods are sold, companies
expand, hiring more workers to
produce more goods. The new
workers then have money to buy
goods, and the boom continues.
Competition means that all
companies will increase production
until supply outstrips demand,
Sismondi argued. This forces
companies to cut prices in order to
attract customers, triggering falling
profits, falling wages, and lay-offs
among the workforce—in other
words an economic crash followed
by a recession. Companies begin torecover once prices become cheap
enough to stimulate demand and
credit becomes more available,
starting the cycle all over again.
An early crisis that confirmed
these economic cycles was the Panic
of 1825. This stock-market crash was
one of the first documented crises
caused solely by internal economic
events. It was precipitated by
speculative investments in Poyais
—a fictional country invented by a
con man to attract investments—
and the repercussions were felt in
markets across the world.
Sismondi argued against the
laissez-faire approach of Adam
Smith and claimed that government
intervention is necessary to
regulate the progress of wealth and
avoid these periodic crises.
The discovery of these cycles
enabled economists to analyze the
economy in a new way and to
devise strategies for trying to avoid
crashes and recessions. Keynes
built on Sismondi’s and Dunoyer’s
work to develop his own theories,
which were to make up one of the
world’s dominant economic
approaches in the 20th century. ■Universal competition,
or the effort to always
produce more, and always
at a lower price... has been
a dangerous system.
Jean-Charles SismondiBull and bear markets
As whole economies grow and
contract, markets within them
rise and fall. Markets that
show sustained price rises
are sometimes known as bull
markets; those in which prices
are falling as bear markets.
These labels are usually
applied to assets such as
shares, bonds, or houses. Bull
markets—for example, a rising
stock market—often occur
during periods of economic
growth. Investors becomemore optimistic about
economic prospects and
buy shares in companies, so
fuelling rising asset values.
As the economy falters, the
process goes into reverse.
Investors become “bearish”
and start to sell assets as the
market falls. US stocks were
in a bull market in the 1990s
with the dot-com boom. A
major bear market took place
during the Great Depression
of the 1930s.