Mania and Depression

Mania and depression refer at once both to psychological states and to economic conditions. The parallel has long been observed, and is somewhat apt. The primary divergence between economy and psychology lies in the depression phase. Economically, the depression itself is primarily the consequence of actions taken during the mania. Or put differently, economic mania and depression are related as cause and effect. Psychological mania and depression, also referred to as bipolar disorder, are merely two phases of mood, related by a common underlying cause.

What was the mania that caused the 2007 Depression? Obviously, the 'housing bubble' was part of it, with its attendant mortgage-backed securities - a classic case worthy of Extraordinary Popular Delusions and the Madness of Crowds. But could the whole of the collapse be pinned on housing?

We propose that several structural economic flaws introduced during the 1929 Depression created an unbalanced economy and several long-lasting manias, the consequences of which will now need to be dealt with. Failure to reform these flaws will result in further economic collapse. Successful reformation will set the stage for economic recovery. We will be discussing these flaws and their resultant manias in this and future posts.

As an example, one flaw we would call Make-Workism. Among developed nations, this is most acute in the USA, as it does not officially believe in socialism. Where socialism would create public-owned enterprises to provide essential services (railroads, sanitation, water, electric power, low-cost housing, and so on), in the USA, government tends to avoid competing with private business and instead provides services that provide little or no economic benefit, e.g. shoddy education, prisons galore, unimaginably bloated military-industrial complex, airline luggage inspectors. The make-work strategy really took off during the 1929 Depression, and now employs a substantial portion of the population.

Make-Workism created a mania in government-directed activity because, like all manias, it seemed to work for a time, and gathered great popular support, largely as a result of generous pay packages, and well-funded lobbyists. Hardly anything valuable has been created by this mania, and much that is destructive. With the prospect of collapsing tax revenues, and the imminent bankruptcy of several US states and many municipalities, this mania may well be at an end. Do not look to see the public sector shrink gracefully though.