Do Free Markets cause Recession?

Readers Question: Consider the view that leaving the economy to private enterprise and the market system is more likely to lead to recessions and instability than to sustained economic growth.

Without government intervention, I believe the economic cycle would be more volatile.

  • Booms and busts will be more common see: The economics of Herding and irrational behaviour
  • Economies can get stuck in recessions, where resources are under utilised and it can take a long time for the economy to recover. See: Keynes general theory.
  • The finance sector does need regulating. The experience of the current credit crunch suggests that banks are not good at self regulation; it would have been better to have stricter regulation of lending and this would have avoided many bad debts.

See: How long do recessions last?

However, government intervention is not always successful:

Also, it is argued by classical economists that economies will automatically recover after a fall in short term output. But, the experience of the great depression shows that a lack of government intervention can cause problems.

1 thought on “Do Free Markets cause Recession?”

  1. I’m sorry…but i have to disagree with you. The Great Depression would’ve turn out like the last one in 1921-1922 (sharp but short) if it wasn’t for Hoover’s policies to combat the depression. He passed what was known to be the biggest tax increase in American peacetime history, including tariffs. The last things the government should do when combating economic turndowns is ask for more money and spend too much. it worked in the ’20s and it probably worked in the ’90s. We had recessions every decade since our nation was created. Recessions cannot be avoided. unless you follow China’s path into a mostly-command economy. The problem is you gotta know how to fix the problem so that the economy would be so strong it would be almost unnoticable. One example would be during Eisenhower’s administration: he let 3 recessions happen and the economy was strong.

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