ECONOMIC DEPRESSION IS PSYCHOSOCIAL DEPRESSION

Copyright 2008,

by Surly

Have you ever considered that economic depressions may be caused by mass social depressions? The Great Depression of the 1930s is a prime example. When we examine what happened it's difficult to find one definitive cause. There was no shortage of people who could work or of production capabilities, no lack of knowledge and creativity, no famines, plagues, wars, natural disasters or lack of natural resources – no apparent physical causes that might fit economic theories. However, the effects were certainly physical: the stock market crash, runs on banks, loss of jobs, loss of savings, devaluation of currencies, starvation, all causing real suffering and mass migrations that eventually caused devastating political fallout. When we look at economic theory, the deflation, inflation, recession, depression business cycle should not in essence exist unless one of the above mentioned physical conditions occurs. But it appears that depressions follow psychological states. The Great Depression was a society wide mental depression, a loss of faith. Once fear and mistrust gained ascendancy in a significant number of the population the crash was inevitable. We had it too good for a long time, and that made people uneasy, if for no other reason than wondering when that condition might change.

Why and what causes the fear? It's always there, hidden, increasing or decreasing as political security and insecurity rises and falls. We're never completely secure, self-confident, assured and optimistic. But which comes first? Many social conditions influence the collective psyche - social movements, changing political and social conditions in other nations. Economic cycles appear to follow the degree of health of the social psyche and are a barometer of mass mental health.

It is only recently that economists have considered anything psychological to have relevance on economic theory. And because economists often don't understand psychology, they have formulated some ridiculous theories. Rational Expectations was one of the worst, that being that a majority of the people participating in an economy make rational decisions most of the time. But humans largely make economic and other decisions irrationally. There's so much irrationality in real economic transactions that theory can't cope with it. After all, it's humans who decide value; there's no inherent value in anything absent humans. Each one of us has different reasons for valuing things based on our often irrational, and sometimes dysfunctional, preferences. It's the case of "I like chocolate better than vanilla." There's no possible scientific evaluation of that statement. Economists want economics to be a hard science, but it is primarily a human endeavor where only psychology, itself not a hard science, can provide some understanding.