If you’re convinced that the current cycle of the boom and bust economy is due to the collapse of collateralised debt obligations secured on oversold mortgages that destablised the European market due to its reliance on cheap loans from an artificially inflated US market – think again!
A 1935 Psychological Review article proposed a ‘manic-depressive psychoses’ theory of economic highs and lows based on the idea that the market has a form of monetary bipolar disorder.
Manic-depressive psychoses of business
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.
I suspect when Dr Morgan thought of a ‘better defense mechanism’ he wasn’t thinking of a bunch of unemployed people and students camping out in the local financial centre.
The article was apparently mentioned by economist Robert Shiller at a talk at the ongoing Society for Neuroscience conference.
Link to article summary (via @carlzimmer)
Mind Hacks 
I don’t think the protesting college students would be the alternative ‘defense mechanism’, rather they would represent the alienated friends, family and coworkers when the economy has gone off its meds. I think something else would be the intended medication for this disease, mood stabilizers = govt regulation? I wonder.
“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 idea was clearly conceived by a man living in an era in which our understanding of bipolar disorder was exceptionally underdeveloped–a man who quite obviously was ill-informed about the illness, even among contemporaries.
If his claim has any validity, it’s only with respect to a certain variety of mania–a “mixed episode”–during which patients often have delusions and ideas of reference, engage in risky behavior, and, quite frequently, experience extreme irritability.
His speculation–which is all it is–doesn’t even remotely pertain to the prototypical manic episode, a state in which the patient frequently experiences ideas of reference, inflated confidence, delusions of grandeur, flamboyance, and maverick tendencies. These symptoms frequently give one nearly palpable charismatic magnetism. These are not traits commiserate with depression. Not even remotely.
I don’t disagree that there is likely a psychological dimension to the cycles of booms and busts, but I would describe it in different terms: it seems to draw upon the human tendency to overreact (think here about occasions when you nearly crossed the center line after nearly veering off the other side of the road). Another psychological factor not mentioned is our innate tendency to think about the short-term rather than the long.