Does the economy suffer from bipolar disorder?
So says this J. J. B. Morgan paper from 1935.
Psychological Review, Vol 42(1), Jan 1935, 91-107.
Morgan, J. J. B.
An analysis of the various theories offered to explain the business cycle of alternate booms and depressions shows that all these theories are based on a superficial study of symptoms, rather than on an analysis of the real causes, which the author believes are psychological in nature.
Business is compared to a patient suffering from a manic-depressive psychosis, in which the boom period parallels the manic phase and the subsequent slump parallels the depressive phase. It is argued that, in business as in the individual psychosis, the manic period is not a period of real optimism or even over-confidence, but is really a period of fear, for which the excessive speculative activity is a compensatory mechanism.
This fear is induced by a lack of confidence in the credit system and a desire to beat it. Two alternative solutions are offered: one is to strengthen the credit system by building up a group of heroic leaders; but this is utopian at present. The other is to discover a better defense mechanism and adopt it.