1) Economic growth. 2) Boom and bust cycles
An economy is defined by the products and services provided by a society. The ultimate goal is to add value.
That value/benefit is subjective because it depends on each consumer preferences.
A growing economy increases the availability of value, which improves the standard of living.
Economics is the social science that tries to understand how an economy develops, by studying the behavior of the individual, including its social interactions, as well as through the use of logic to deduce consequent actions.
FREE MARKET ECONOMY
1) Competitive experimentation to satisfy consumers' desires is what drives an economy.
Producers, guided by the expectation of interest generated by capital, try to identify which products and services provide the greatest benefit, to deploy more capital for the efficient creation of such goods.
2) Markets balance supply and demand through prices.
Prices variations signal new conditions in the economy, which business are constantly trying to anticipate and adapt to. The boom and bust of certain businesses form part of this coordination process.
phase characterized by false expectations that lead to malinvestments (allocation of savings into capital goods that end up wasting value).
Bubble is a relative term for the last part of an extreme boom phase. At that stage there is a self-reinforcing mechanism where the actions from investors feed even more incorrect assumptions.
Bust or crisis:
adjustment in the economy once losses have been revealed. The uselessness of capital has been made visible, so the creation of new savings is needed before being allocated into well suited capital.
Depression is a relative term for a big recession/bust.
CENTRALLY PLANNED ECONOMY
When markets are intervened or centrally planned, prices don't reflect a natural supply-demand relation, so profits don't represent creation of value anymore. Therefore, capital is attracted by such profits and allocated into the favoured producers instead of into those that increase value availability the most.
1) As a consequence there is a reestructuration of the economy that lowers economic growth because of a non-natural allocation of capital.
2) Those suddenly created distortions that are not allowed to self-correct, may create false expectations, which may trigger or exacerbate business cycles, transforming them into economic cycles and bubbles.
Economic cycles consist of generalized business cycles, those that affect simultaneously different sectors.
Usually, when the destruction of value is evident, those policies are somewhat reverted, or further policies are enforced at different places of the value chain.
Example of a centralized market: fiat money
1) Fiat money results in a value-redistribution scheme from holders of that money to the Central Bank that issues new units. Each previously existing unit represents now a smaller portion of wealth, which destroys previously acquired knowledge through the price mechanism and tends to harm any formerly established recipient of payments while benefiting the payer.
The fact that the Central Bank doesn't look for a return when it distributes those units constitutes an advantage for inefficient producers, specially for those directly connected to it.
Businesses that otherwise would be bankrupt, are able to profit and expand. Companies that are able to survive because of the cheap credit "subsidized" by the constant injection of fiat, are called zombie companies.
Rescues and guarantees are intermittent injections of fiat money that incentivize the benefited companies to disguise capital consumption as profit.
E.g. commercial banks receive compensation from excessive risk taking. Prior to the 2007-2010 financial crisis, they assumed extreme investment risks that appeared very profitable until the market correction came. They had actually been depleting their reserve, so they had to request a rescue when their bankruptcy was evident.
The abuse of the fiat money system conducts the economy to an anemic growth (poor growth in which business that destroy economic value are able to capt the new money that flows from the Printing Press).
2) The unpredicted variations of the monetary base and its distribution provoke unanticipated abrupt changes into the sectors where it flows to. This can feed incorrect assumptions that do not identify such a temporary flow as the main cause.
E.g. in Iceland's prior to the 2008 economic collapse, there was an artificial wealth illusion due to a spectacular growth in asset prices. Excesses were spurred by a massive growth in debt. The natural barrier for the containment of debt was demolished by the current of money from Central Banks to debt markets. Iceland's bust phase started at the time its credit expansion finalized.
The pumping of money is stopped when the Central Bank considers that the value of fiat money is diluting too quickly. The restructuring of the economy that follows is called crisis.
Income: value received per unit of time.
Savings: value accumulated. It may include money, capital and final products.
Wealth: a relative abundance of savings.
Trade: a voluntary swap of property between two people.
Capital - Asset - Property - Good: anything useful - valuable - possessable - desired.
Investors - Producers - Companies - Businesses: economic agents whose main role is the coordination of capital use.