Boom and Bust: Financial Cycles and Human Prosperity

By Alex J. Pollock

While the recent economic crisis was a painful period for many Americans, the panic surrounding the downturn was fueled by an incomplete understanding of economic history. Economic hysteria made for riveting journalism and effective political theater, but the politicians and members of the media who declared that America was in the midst of the greatest financial calamity since the Great Depression were as wrong and misguided as the expansionists of the Roosevelt era. In reality the cyclical nature of market economies is as old as the markets themselves. In a free market system, financial downturns inevitably accompany economic prosperity-but the overall trend is upward progress in living standards and national wealth. While it is helpful to understand what caused the recent crisis, the more important questions to consider are 'What makes the 'boom and bust' cycle so predictable?' and 'What are the ethical responsibilities of the citizens of a free market economy?' In Boom and Bust: Financial Cycles and Human Prosperity, Alex J. Pollock argues that while economic downturns can be frightening and difficult, people living in free market economies enjoy greater health, better access to basic necessities, better education, work less arduous jobs, and have more choices and wider horizons than people at any other point in history. This wonderful reality would not exist in the absence of financial cycles. This book explains why.

• Language: English
• Publisher: AEI Press
• Release date: Dec 16, 2010
• ISBN: 9780844743844

Alex J. Pollock

Alex J. Pollock spent thirty-five years in the banking industry before becoming a resident scholar at the American Enterprise Institute, where he researches housing finance, government-sponsored enterprises, corporate governance, and the banking system. He is a director of the Chicago Mercantile Exchange and the International Housing Union for Housing Finance.

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BOOM & BUST

FINANCIAL CYCLES AND HUMAN PROSPERITY

BOOM & BUST

FINANCIAL CYCLES AND HUMAN PROSPERITY

Alex J. Pollock

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LCCN: 2010020471

ISBN-13: 978-0-8447-4383-7

eISBN-13: 978-0-8447-4384-4

FOREWORD

by Peter Greer

Economics, market forces, fi nancial cycles: These topics are not likely to elicit a passionate response. They’re necessary topics, but they’re not really much fun. And they’re certainly not buzzwords among people who want to change the world. We are passionate about issues of justice, service, poverty, slavery, education, healthcare, and clean water. But if we really want to make a sustainable impact on any of these issues in the United States or internationally, then we simply must grow in our understanding of economics, market forces, and fi nancial cycles.

I remember the first time I realized that my help was insufficient at best, and actually could be harming the people I was trying to assist. While living in Rwanda, I met Jean, a survivor of the 1994 Rwandan genocide. Soon after the genocide, he had begun to rebuild his life, starting a poultry business that provided eggs to his community. His business thrived for a time—until a church in Georgia adopted his village as part of its crusade to help victims of the genocide, providing food,clothes, and free eggs imported from a neighboring village. With this new surplus, Jean’s egg business failed. No matter how good a business plan might be, it is nearly impossible to compete with a free or heavily subsidized product. Jean was forced to sell his most productive assets, his chickens, and look for other employment.

A year later, the church left the village to support other individuals struck by disaster. With no local supplier of eggs, the village had to import them at a higher price than Jean had charged originally. At first, giving away free eggs had seemed like a great solution: The community was poor, the American church was rich, and, for a time, the community was well fed. In the long-term, though, their efforts were not sustainable and, ultimately, Jean and the other community members were negatively impacted. The church had a vision to improve the lives of those in a poor community, the passion to set the groundwork for change, and the drive to implement their vision. So what went wrong?

For most of my life, I thought that if people are hungry, the best thing we can do is to give them our excess food. If people are thirsty, let’s import bottled water. If people need clothes, we should empty our closets for charity. If people are caught in slavery, let’s purchase them and set them free. But I missed the bigger picture: These are all temporary and ultimately dissatisfying fixes. People will be hungry tomorrow. Clothes will wear out and need to be replaced. Chains of dependency willslowly strangle aspirations and dreams. Disincentives for productivity will undermine long-term progress. With short-term solutions, people will always have the same needs a short time later. It is becoming clear that intervention in market forces is not as straightforward as we might imagine. To have a greater likelihood of improving the extreme poverty and injustices in our world, we desperately need an understanding of business cycles and markets.

Contrasting Jean’s story to that of another entrepreneur in Rwanda, I began to see how important it is to understand a free market system. Like my friend Jean, Chantal Nyiraneza is a Rwandan genocide survivor and a gifted entrepreneur. Unlike Jean, she had the freedom to use her entrepreneurship to bring about change in her community. Orphaned after the genocide, Chantal decided to become the caretaker for her siblings and cousin. After marrying another genocide survivor who also had orphaned family members, Chantal needed to fi nd a way to provide for her growing family. She had been in the business of selling tea, milk, and soda, but she needed capital in order to increase her business profits. She took out a small loan of $35.00 from Urwego, a Rwandan microfinance institution, and with this loan, she expanded her small menu to include an array of entrees.

Today, her restaurant is thriving; with over two hundred customers stopping each day, she daily roasts two goats in order to keep up with the demand. Her daily profits exceed the original loan she took. Through her business, she has had the ability to feed her family and send her nine children and siblings to school. Not only does she support the needs of her family, she has employed twenty-eight others