Economics Everyone Should Understand: The Bubble

One of the fundamental principles to emerge from the conflict resolution field is the notion that positive-sum conflicts are a lot easier to deal with than zero- or negative-sum conflicts. When the "pie" is expanding, it's a whole lot easier to craft genuine win-win agreements that leave everyone better off. If you can't expand the pie (a zero-sum conflict), then the only way to get ahead is by taking something from someone else. Even worse are conflicts in which the pie is shrinking -- creating situations in which everyone faces the prospect of being worse off than they were before. This means that folks who want to maintain or enhance their current situation need to fight that much harder to obtain stuff from others.

This, unfortunately, is a situation that will certainly arise with the popping of the current economic bubble. The dismal economic news and the near-certainty of an ultimately painful outcome highlight the need for what might be called "downside" dispute resolution or political debate. Here, the goal is to allocate the costs of the impending downturn in ways which are wise and equitable and don’t aggravate the already deep tensions that exist within our society.

If you want to understand the nature of the boom/bust problem, there is no better place to start than John Kenneth Galbraith’s Short History of Financial Euphoria. The book explains the social dynamics that underlie enormously destructive boom-and-bust cycles and provides simple -- but perpetually unheeded -- advice on how we can avoid falling into the same old trap again and again.