Circular and Cumulative Causation

Circular and cumulative causation is a theory developed by an institutional economist named Gunnar Myrdal. The idea behind it is that a change in one form of an institution will lead to successive changes in other institutions. These changes are circular in that they continue in a cycle, usually vicious, in which there is no end, and cumulative in that they persist in each round. The change doesn’t occur all at once but in small changes because that would lead to chaos, at least from an evolutionary and institutional point of view. Perhaps an easier way to look at this theory is from Myrdal himself, “poverty creates poverty.”

A paper by Antoniya Ganeva, a student at Mount Holyoke College, about the movie Roger and Me provides a perfect example of this theory. The movie is by film maker Michael Moore (Bowling for Columbine, Fahrenheit 911, Sicko) who is in pursuit of Roger Smith, chairman of General Motors. Moore wants to ask Smith about General Motors’ recent closing of 11 of its plants in Flint, Michigan during times of high profits for General Motors. The closing of the plants leads to the layoffs of 30,000 workers. As a result of these layoffs, many people leave Flint and “the rat population has ‘surpassed’ that of humans.” As a result of there being more rats than humans, “this on its parts, leads to the spread of physical illness, and is a symbol widely associated with poverty.” Due to such a high increase in unemployment, the market is suddenly flooded with a surplus of highly skilled workers in which there aren’t jobs that pay as equally well or jobs that pay much lower wages. As a result, more and more people become poor and cannot pay their mortgages or rents and are evicted from their homes. The crime rate in Flint also increases, but “there are not enough prison cells for the criminals anymore.”

A current event that is happening today, which is similar to the series of events in Flint, is also germane to the circular and cumulative causation theory. The housing “crisis” began when many people were being approved for loans that they could not pay back. As a result of too many defaults, many homes were either abandoned, because people couldn’t afford the payments anymore, or they were repossessed by the banks. These defaults led to a surplus of homes in the market across the country.

The demand for new homes decreased due to the sudden influx of so many homes on the market and so few people who could be either approved for loans or who had the capital to buy a home, which lead to many new home construction businesses cutting back on building new properties. Suddenly, partners with new home businesses such as interior design companies felt the affects, and as a result, both types of businesses began scaling back production, leading to many layoffs. There were also effects on companies that provided materials to the new homes such as lumber mills and home furnishing companies, both of which experienced decrease in demand.

Small mortgage companies folded as a result, leaving only the ones that could afford to stay in business or the ones that best adapted to the situation. Many banks defaulted because their loans were not being paid back. With the unemployment rate increasing, the labor sector saw an increase in the supply of workers to a market that saw small demand for labor.

This uncertainty has led to a cutback in the consumption of superior goods which affected the business sector. This cycle continues on and it appears that we are in for the long haul.

Although the above case isn’t exactly poverty creating poverty, many people have been adversely affected by this catastrophe. Some people have lost their life’s savings by buying a home they thought they could afford. It seems like this vicious cycle will continue on for a while with no end in sight; at least not in the very near future.

3 thoughts on “Circular and Cumulative Causation

  1. Found this little gem of cause and effect, amusingly entitled, The Self-Help Guide to Living in a Free Society:

    Too many Americans are losing the ability to take care of themselves and are instead looking to the government to run their lives for them, in the tax-gouging, liberty-killing system called the welfare state.

    Too many Americans seem willing to replace the life of proud American eagle, flying alone and free, with that of a hapless chicken penned in a coop, waiting to be fed. The welfare state has all but squashed the essential skill of our survival: the skill of taking responsibility for our own lives.

    Although we are besieged by self-help guides of every kind—from how to train a parakeet, to how to cook pasta, to how to combat addictions to alcohol, or obsessive ’Net surfing, or other disorders—there is one guide to personal improvement that is conspicuously absent from today’s cultural scene. It’s a guide that statist politicians and the groups that support them do not want us to discover. It’s a guide to curing the worst dependency of all: the urge to satisfy one’s needs by dipping his hand into the wallet of his taxpaying neighbor.

    To combat this affliction and to rediscover the meaning of freedom, we need a “Self-Help Guide to Living in a Free Society.” It might read something like this:

    1. If you don’t go to school and don’t work hard to get ahead, don’t expect the same rewards as those who do. You haven’t earned them.

    2. Don’t expect others to pay for your foolishness. If you spill hot coffee on yourself, be more careful next time. Don’t sue the restaurant that served you or push for a law to regulate the temperature of coffee. And if you’re on a jury, don’t award people huge sums for being irresponsible.

    3. If you choose to live in a hurricane zone, then buy insurance or take your chances. Don’t expect the taxpayers of Minnesota to cover your losses.

    4. Drop the communal mentality that aims to force one course of action on everyone, paid for by one cosmic bank account: the taxpayers’. Don’t ask, “Should we go to Mars?” If you want to go, go—as a private venture, and stake a claim when you get there.

    5. Don’t meddle in others’ affairs. Don’t ask, “Should we ban this drug for arthritis because it has side effects?” Consult your doctor, not the government, and let others decide for themselves how severe their arthritis is and the risks they’re willing to take. Other peoples’ joints are none of your business.

    6. Don’t expect the government to look after your health. If you think certain foods will clog your arteries, then don’t eat them. Don’t call for a battalion of bureaucrats to control other people’s blood vessels.

    7. Don’t try to force your personal living standards on everyone by pushing for the government to ban harmless activities. If you don’t approve of gambling on the Internet, then don’t do it. Leave others alone if they choose to gamble and are causing you no injury.

    8. Don’t try to get a home for free. It’s not free. Get a job and pay for it. Don’t force others to pay a premium on their homes so that you can get yours at their expense. If you want affordable housing, then support the deregulation of the industry, which will lower the prices for everyone.

    9. If you default on a loan, accept the consequences, lick your wounds, and avoid making the same mistake again. Don’t expect the government to bail you out with money fleeced from taxpayers who made more prudent lending and borrowing decisions.

    10. Don’t try to get ahead by forcing people to give you special privileges. Your sex or race doesn’t qualify you for a degree or a job. Only merit does.

    11. Don’t look for a risk-free life. There is no such thing. If you buy a malfunctioning toaster, return it for a refund. If it is truly harmful, seek redress in court. But don’t unleash a squadron of inspectors to regulate every toaster on the planet, just to protect you from one defective cord.

    12. Don’t instigate laws to stifle your competitors or to give your business special government favors. If you can’t win customers by offering them the best products and services in a free market, then close up your shop and get a job working for a competitor who can.

    13. Don’t force people to support your pet causes. They are entitled to use their money to support their own causes. Look for private funding—not government grants—to find a cure for a disease, to produce a play, or to preserve an old mansion. The government has no business giving you charity with money that it uncharitably seizes from other taxpayers.

    14. Don’t support laws to control your employers. They’re covered by the Constitution, too. They have the right to decide whom to hire, what to pay, and how long a lunch break will be in the businesses they own. If you don’t like the terms, go elsewhere—and work to loosen the regulatory noose around business’s neck, so you’ll find better job opportunities.

    15. Don’t expect any guarantees in life. There are none. You can lose your job, your investments can fail, and your fiancé can leave you. You have the right to pursue happiness, but no one ensures you’ll attain it. Stop trying to use the government to shield you from life’s risks.

    16. Stop shouting “Tax the rich!” The rich are also citizens whose rights are protected by the Constitution. The rich have the right to pursue their own happiness, not yours; and they are entitled to the fruits of their own labor, just as you are to yours. Instead of chipping away at the rights of the rich, redirect your energy to creating wealth and joining their ranks.

    17. Don’t campaign for the government to give you things for free. If it pays your medical bills, then it controls the treatment you’ll get or won’t get. There is no such thing as a free lunch, but there is such a thing as being swallowed by a shark.

    18. In short, recognize that every person—not just you—has an absolute right to his own life, liberty, property, and pursuit of happiness. Being a good citizen is like being a good neighbor: You live your life privately, and you respect others’ rights to do the same. You keep what you make, and they keep what they make. You don’t force your opinions, causes, needs, or problems on your neighbors, and they don’t force theirs on you.

    To live in a free society, each person must embrace the responsibility for his own life that comes with freedom. To defeat the creeping tyranny of the welfare state, we must rediscover the founding principle of America: the power, the moral rightness, and the glory of the individual as the master of his fate and the captain of his soul.

  2. Trung, somebody actually wrote that down as an economic theory? I suppose they get their place in history for coming up with a fancy name and being scholarly about it, but to me it sounds like inventing air.

  3. It’s easy to discredit the genius or insightfulness of someone’s observation or thinking when one lives in a community in which that insight has long been accepted as the norm. Myrdal was given the nobel prize for this and other contributions to economic science.

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