By Jayant Rao

Edited by Namitha Sadanand, Senior Editor, The Indian Economist

We always venture into the unknown with the help of the known. Transition is helped by conviction. I believe that it is very important for us to be convinced and risk the unknown.
The core thought behind the economic cycle has already been explained in the Vedic scriptures.

There are a few similarities between the economic cycle and the concept of Yugas explained in Vedic scriptures. Let us see how.

The Economic Cycle can be comprehended in two different ways:

1) The Ideal
2) The Actual

The Ideal situation:y2

In an ideal setting, if everything is expected to go smoothly, we can expect the economic growth graph rising without a downward trend.
This could happen when the following is seen in an economy:

1) An increase in per capita productivity i.e. production of goods/services per person is increasing.
2) Advances in technology
3) Discoveries of natural resources from time to time
4) Aggregate demand ahead of the supply (not an excessive gap, however, as that would lead to more than desired rates of inflation).

However, this is a utopian scenario. The real picture is different. The human psyche is an important factor, which was not considered in the ideal scenario. The end result of the products brought about by our ideas could be both positive and negative. With human imagination at play, things get more complex and have to be tackled with equally complex tools (monetary and fiscal policies).

The Real Situation:

y3

One can recognize the diagram from economics books- the highest point being the peak and the lowest being the trough. A business cycle can be explained as the movement from one trough to the other.  Is there anything else that can be established from the diagram?

Yes.

1) The cycle is always moving upward in the long run albeit there are ups and downs in the short run.

2) If the points on the cycle are taken into consideration and a line is drawn, (averaging the numbers out) an ideal linear graph is derived. The cycle hovers around the line, a process that can be termed mean reversion.

3) The line + human imagination give rise to the Business Cycle.

Which is the better way out?

Ideal Scenario:  The linear way, this would be devoid of pain (troughs) and desires (peaks).
Or
Real Scenario: The cycle that would have both agony and desire in its path.

Well, we don’t have a choice here but to be realistic, hence it is being termed the real scenario and the ideal scenario.

Now that the fact of the troughs and peaks being inevitable has been established, our endeavor should be to have a sustained upward trend and a persistent stay at the peak, and shallow downward trend and less time at the trough.

Can this be achieved?

Yes, with the help of monetary and fiscal tools.

Fiscal and monetary policies are like the breaks and the accelerator of a car. A skilled driver knows how to maneuver a car using the break, gears and accelerator, and maintain the speed of and control over the vehicle. Similarly, fiscal and monetary policies should be used effectively and efficiently by the authorities of the economy as per its requirements. The position of the economy at that precise point on the cycle also matters.

y4

Let’s say if the economy is at a trough, the monetary and fiscal policy should be such that it helps boost investor sentiment which in turn helps the economy get going. In such cases loose policies help in gaining momentum. When the economy is moving towards the peak or is at its peak, holding back helps. This can be attained by tighter monetary and/or fiscal policies.

The Philosophical Touch – The Concept of Yuga

Let’s move to the Vedic explanation of the concept of the business cycle, which is explained through the concept of Yuga.

The concept of Yuga depicts the evolution of humans. It portrays how humans realize that they are intellectually advanced and have the power of thought.
The power of thought and imagination is the major advantage and a disadvantage at the same time.

How are humans different from animals?
In the animal kingdom, the motto followed is survival of the fittest.  Might has the right to survive.
In the human kingdom, humans empathize. It’s not just the might having rights but the meek too. This is termed as moving towards Dharma (humanity).

There are 4 divisions of the Yugas.

Satya – Phase of realization of the difference between animals and humans
Treta – Phase of attaining the highest point (humanity)
Dwapara – Phase of downfall, reverting towards Adharma
Kali    – Phase of exploitation (the darker age)

y6

Given above is the diagram depicting the economic cycle and the cycle of Yugas (the yugas depicted in order).

Satya Yug:
Humans realize that they are different from animals.  They work towards development, start to empathize, form a collaborative society and culture, with principles identified and rules framed to achieve objectives.

Economic Cycle Interpretation:
The potential of the economy has just been realized. Efforts are taken to get the economy started.

Treta Yug (Ram Rajya):
Dharma is at its peak. Principles and rules are followed to a large extent. Every human empathizes with other humans. Ram shows how an ideal king should be, and that for every human the welfare of others, even at the cost of oneself, should be foremost. If everyone tries to adopt this mantra, society as a whole will benefit and the Earth will be a more content place to live in.


Economic Cycle Interpretation:

The economy has gained momentum and reached its peak. It is working at its full capacity. It is the maneuvering of the fiscal and monetary policies that decide the duration of the economy at this position. The start of the downfall can be prolonged but cannot be avoided.

Dwapar Yug (Krishna’s Reign):
Humans start deteriorating from the peak of dharma. They are moving again towards being an animal. The preachers of dharma hold all the rules but the principles are missing. This is when Krishna bends and breaks the rules ‘TO UPHOLD DHARMA’.

Economic Cycle Interpretation:
The economy starts deteriorating slowly from its peak; the downfall has started.

Kali Yug:
We are again at the line of divide, heading down towards Adharma– becoming animals again. With the help of the mind we become much fiercer than animals. We are approaching the end of one Yuga cycle. Pralay (the big flood) is in the offing, which would be followed by a new start (Satya Yug).

Economic Cycle Interpretation:
 The fact of an economic downfall has not yet sunk in. Things get worse and we hit recession. There is pessimism all over.  People start hoarding, and the outlay of all these factors add to the miseries of the economy.

The Post-Kali Yuga period or post-recession period gives the cycle a break and we are ready to make a fresh start.

It goes on.


Jayant Rao is currently working as an analyst with a Hedge Fund, and has a penchant love for Economics. He feels economics is an inseparable part of philosophy which has to be read in conjunction to get a better sense of it. He is a big time foodie and a coffee lover and never steps back in trying various cuisines. He likes to read Indian philosophical books and enjoys listening to music. He can be reached at jayantrao88@gmail.com

Posted by The Indian Economist | For the Curious Mind