The Early 1980s Recession, the Dot-Com Bubble, the 2008 Great Recession—all financial crashes labeled “once in a lifetime.” Yet, every decade or so, the US faces another recession threatening the stability of the lives of working people. In fact, these declines in markets are repetitive and predictable to the point that they are a well documented phenomenon by economists, dating back to the late 19th century. These recessions are known as “boom and bust cycles” in our economic system, and knowing how to navigate and survive them can lead to more sustainable investments and better long term saving plans. Ultimately, the key to understanding boom and bust cycles lies in comprehending the rate of production of capitalism.

Coming off the cusp of the Industrial Revolution in Europe, capitalism was sweeping the world, leading to population and labor force booms. In turn, this led to faster rates of productivity and amalgamations of factories into larger corporations as labor became more specialized. Now, instead of one person creating a product in its entirety, multiple laborers were assigned to a step of the process—this is the “boom” part of the cycle; production skyrockets, leading to lower prices as supply rises. This affects all aspects of the fiscal system, as factory owners and companies encroach upon untapped markets to develop them for profit. However, as supply continues to rise, it eventually exceeds demand to a critical point. As overproduction manifests, surplus investment by capitalists is unrecuperated as more commodities and goods sit on store shelves, unused by consumers. This means that the money entrepreneurs poured into developing and producing these goods is not made back because consumers cannot buy up the amount of products produced. This leads to crisis.

Gross unrecovered overinvestment leads to a massive loss in profit for businesses and corporations, destroying businesses: factories close, workers lose jobs, companies implode, and ultimately, living standards plummet. This is what was exhibited in crises like the Great Depression, and is known as the “bust” part of the cycle. The previously unsold goods either finally make their way to the people, or are destroyed, which is more typical. Eventually, the economy rebounds as more corporations develop and tap back into abandoned markets. Again, these new markets lead to a boom in productivity, and the cycle begins again. These busts do not always need to happen worldwide, either—boom and bust cycles can happen in specific industries when they become obsolete. The one thing that is guaranteed is the tendency of consumption under capitalism to fluctuate.

Historically, many outside factors can speed up or slow down the impact of the cycle. For example, the 2020 Covid-19 pandemic enhanced the ensuing recession with the destruction of small businesses. Since people weren’t shopping outside due to quarantine, family-owned stores like restaurants faced underconsumption. In the same way companies can’t recoup their capital overinvestment, businesses weren’t making enough money to make a profit, leading to mass unemployment. The only difference then was that the pandemic was unprecedented.

Boom and bust cycles are inherent to capitalism because of its unrelenting pursuit for growth—in the process of maximizing productivity for profit, supply always ends up exceeding demand eventually. Capitalism can provide massive leaps in innovation in short amounts of time; the challenge is the prioritization of profit over provision. Command economies in the past, such as the Soviet Union, have attempted to solve this by limiting production through state-sponsored algorithms that determine where production is needed in which sectors, yielding varying results. In the end, understanding and being able to predict the trend towards a recession can augment financial literacy in tangible ways: knowing when and where to invest properly, spend your money, and save more can strengthen the middle class workforce, protecting laborers who build our way of life.

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