Economic downturns are the result of coincident reductions in financial investments. They are marked by larger numbers of companies cutting back on their budgets, and by large numbers of investors who perceive value to be falling. When one individual makes a decision, it has negligible impact on the market (unless it's Buffet!), but when large numbers of individuals act at the same time, the market moves. The more people are making the same decision at the same time, the equilibrium is shocked by more, too. In other words, the invisible hand becomes an invisible linebacker; pushing harder.

This means that when larger groups of people are influenced in the same ways by the same media, then the market and the economy are going to swing with greater magnitude.

Social inconsistency provides a healthy dissonance in the economic markets. Different consumer confidence levels and uncorrelated investment views ensure that the economic growth remains relatively stable. Just like many stocks in an index reduce the volatility of the index relative to the average volatility of the index components.

So, ironically, by improving the communications tools that make our economy function better, we are also increasing the magnitude and danger of economic downturns.

Labels: Investment, Public Policy