Businesses Cycle

Business cycle is the common nature rule in economic. What goes up must come down. It is true and always true, since it had been depicted by Adam Smith since 1886. So, how we able to understand the business cycle?

Every business is drive by private consumption. For most major economy countries from G20 to 3rd world countries, private consumption making up the major share of annual gross domestic product. In the end, it is the customer that making a business to profit. Yet, most economist are only focusing on the spending pattern of the consumer. Rather they should be paid more attention to what drive those pattern. Apart form the psychological aspect, there are more about the economical aspect, that we can examine.

First of all, salary & wages is what drive consumer to spend. You could not spend if you do not have income. Unless you got a parent who left you hundred of million dollar heritage. Salary obviously is given by private sector - the employer. The economy size of company will ultimately decide the scale of salary, given there is no government wages control policy. Here is the key factor, the economy size of private sector. All private sector is funded by private investor or institution - private direct investment. The same goes to the question of "egg & chicken", "Private investment & private spending" , which drive which, which come first. Indeed, Private direct investment, is motivated by consumer spending. But, in business world, you can't dig hole only when you need to go to toilet. It will be too late. So, the motivator is what perspective and outlook of future consumer spending pattern - the future potential demand and supply. You need to place your money some place though, therefore, decision must be made, by means of calculated risk to potential projection return. Whenever there are prospective economy opportunities available, it will attract private investment. Every boost in private investment will therefore increase the economy scale of certain company. When new fund is introduced to a company, salary and wages normally will increase. New jobs will be created as well to accommodate a bigger and more aggressive business activities. Employment increase making consumer market even attractive. This will induce Productivity, hence, market supply will go up. While for every positive economy demographic, chances for demand to meet the supply is still high during the beginning business cycle. A sound proven economy activities will boost profitability therefore return of investment. Such episode will draw even more private investment. Again, more fund is received, the management of company will need to conjure new way to spend it. Here is the part which drive the ultimate break down in the business cycle. Excessive investment and mis-allocation of funds will likely to happen. While more jobs created, and there is higher productivity; there will started to plant a oversupply seed in the market. Apart from that, competitor will started to flow into the economy, since profitability had been proven from the first cycle of businesses. Now, the oversupply or market glutted will emerge, making price to go down. Profit will retreat. Less jobs will be required. No new private fund will be induce into market. Unemployment raise, making the consumer market even less attractive. And recession set in. Supply will withdraw to the limit where demand is higher again. And only then a new business cycle will begin. This how our economy work, and it will always work. You can't avoid economy bust, if there is an economy boom. So, it is always foolish to believe that market will ultimately goes up to the sky. What always make men kill is utopia optimistic. And a lot of amateur investor always got kill during the end of business cycle. Being optimistic is important, but realistic must play its role as well.

"The only way to avoid economy recession and contraction, is by to prevent a economy boom" John Maynard Keynes