Addressing these underlying irrationalities may be necessary for preventing and mitigating future crises.
The irrationality of social structures can significantly influence economic downturns in capitalist systems in several ways:
Overproduction and underutilization: There is a tendency towards overproduction of goods that cannot be fully utilized within an irrational social structure where effective demand is limited by inadequate purchasing power. This leads to unused productive capacity despite unmet social needs.
Financialization: Excess capital that cannot find profitable outlets in production spills over into financial speculation, creating bubbles that eventually collapse and spread economic chaos.
Cognitive biases: Individual and collective cognitive biases, like arrogance in rising asset prices, contribute to irrational exuberance and bubble formation.
Debt-driven growth: An irrational reliance on expanding debt (government, consumer, corporate) to power economic growth that has strong stagnation tendencies.
Short-term thinking: Public companies and financial institutions take on excessive risks for short-term gains without considering long-term consequences.
Misaligned incentives: Perverse incentives in the financial system, like the ability to securitize risky mortgages, lead to the development of high-risk products.
Present bias: A tendency to overvalue present consumption at the expense of long-term planning and saving.
Resistance to change can prevent necessary reforms and adaptations in economic systems. These irrational elements of social and economic structures can combine to create and exacerbate economic downturns, often in ways that defy conventional economic theories and policy responses. Addressing these underlying irrationalities may be necessary for preventing and mitigating future crises.
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