Of Cows and the Economy

Why do we have recessions in the economy? For the past couple of months, there’s been all sort of chatter in the press. “Are we in recession?” “How bad will the recession be?” “When will the recession end?” We take boom times and busts as if they were as predictable as the changing seasons and just as fickle. Does this make sense? I don’t see why it would.
Imagine if you will that we live in a cloistered little community of perhaps fifty people. Of those fifty, perhaps forty are involved in agriculture of some sort, growing crops, animals, and the like. Some of them might be bivocational. Perhaps the community’s doctor splits time between patients and potatoes. Other people might work full-time in a field that does not involve fields. Regardless of the exact numbers, we can hope that our population of fifty will produce sufficient food, clothing, housing, and the like to meet everyone’s needs. Perhaps they’ll sell off excess cream or some other commodity in order to purchase the cloth that the people in a nearby town of fifty produces in excess, but mostly, this group is self-sufficient. Would such a community ever experience a recession? If so, how would it happen?
If an agriculturally-based community were to experience drought or potato blight or mad cow disease, then we would understand a recession. In fact, in the old days, that sort of “recession” went by a different name: a famine. Is the current recession the result of such a production shortfall? No, because we aren’t ultimately an agriculturally-based community (or economy). We’re a dollar-based economy.
In an agricultural economy, wealth is measured in terms of production. For example, if my cows produce not ten but twelve healthy calves this year, then I’m twenty percent wealthier in that category. It’s a good year. Good management and good fortune can lead to this sort of result, and it benefits the entire community. The law of supply and demand suggests that if the three beef farmers in the community all have extra calves this year, then the price of steak will go down in the future. If the supply of milk cows rises, we can expect milk, butter, and cheese to be plentiful and relatively less expensive in the future. Everybody wins! The farmers sell or barter more of their product, leading to more carrots and eggs and blue jeans on their counters, while the beef-buyers get a better price.
But here’s the rub. If Farmer Abe runs fifty head on his hundred acres this year, that’s dandy. If he experiences a ten-percent increase, then he will have fifty-five head next year. As the boom times continue, he’ll have sixty and then seventy and eventually a hundred head of cattle jostling around in his pastures. What are Abe’s options? He could attempt to buy more land on which to run his blossoming herd. That’s fine, but it’s not a long-term situation. Land, as the real estate agents are apt to remind us, is something they’re not making more of. Eventually Abe’s herd overwhelms the carrying capacity of the land at his disposal. He’ll either pen his herds up in feeding pens, creating sub-standard beef, or foul his land, rendering it less useful tomorrow in order to enjoy profits today.
Now let’s think about a money-based economy rather than a cow-based one. When we expect a corporation to increase revenue and profits year after year, don’t we eventually ask them to exceed the carrying capacity of the financial system? No, money doesn’t leave manure lying around, nor does it eat grass, but it does have limits. We can’t continue to expand forever without repercussions. Those repercussions, I would argue, are called recessions, when the chickens come home to roost (or the cows come home to graze).