How the Economy Grows and Why it Crashes

The economy always sees growth and deceleration, but why is this the case, and why is it so inevitable that it crashes? Well, first things first...
by Yoaquim Boom
March 14, 2023

Economic Growth and Crashes

Economic growth is the key to prosperity, and for centuries, people have tried to unlock its secrets.

However, economic growth is not always a steady and continuous process.

Often, economies grow and then crash, which leads to deep recessions, high unemployment rates, and social unrest. The reasons why economies grow and crash are complex, but a few key factors are responsible for this phenomenon.

The Key Factors

Here are the primary factors in growth and crashes.


Technological innovation is a fundamental driver of economic growth.

When a new technology is found, it has the potential to significantly boost productivity, which in turn promotes economic growth.

For example, the Industrial Revolution was an era of fast technical innovation that resulted in enormous economic expansion in the United Kingdom, the United States, and other nations.

Human Capital

Human capital is another important driver of economic progress. Education and training have the potential to greatly boost productivity and promote economic growth.

For example, South Korea's economic growth, which has resulted in the country being one of the world's most successful, is partly owing to the country's enormous expenditures in education and training.

Economic Resources

Natural resources can also contribute to economic progress.

Natural resource-rich countries, such as those wealthy in oil, minerals, and lumber, may leverage these resources to build wealth and fuel economic growth.

However, because natural resources are finite, and their depletion may lead to economic crises, this form of economic expansion is frequently unsustainable.

Economic Credit

Credit availability is another important aspect driving economic growth.

Credit enables firms and people to invest in new initiatives and expand existing operations, therefore stimulating economic growth.

However, too much credit can lead to an economic bubble and eventual disaster, as was the case with the US housing market in 2008.

Despite the numerous forces that might propel economic progress, countries frequently fail. The causes of these catastrophes are frequently complicated, but they may be attributed to a few crucial elements.

Economic Speculation

Excessive speculating is one of the key causes of economic downturns.

When individuals become too optimistic about the economy's development prospects, they may spend excessively in speculative projects, resulting in an economic bubble.

The market may tumble if the bubble breaks, causing widespread economic misery.

Economic Cycles

The business cycle is another major cause of economic downturns. Economic expansions and contractions occur, and as the economy reaches the end of an expansionary cycle, a recession might develop.

Recessions can be triggered by a number of causes, including lower consumer spending, decreased company investment, and a loss of economic confidence.

Economic Cycles

Economic Crash Examples

Economic crashes can also be caused by external factors. Wars, natural disasters, and geopolitical instability can all lead to economic crashes.

For example, the Great Depression, which lasted from 1929 to 1939, was caused by a combination of the stock market crash and a severe drought that led to widespread crop failure in the US.

The 2008 financial crisis is another example of an economic crash caused by a combination of factors. The housing market bubble, fueled by easy credit, burst in 2008, leading to a severe recession.

The crisis was compounded by the interconnectedness of the global financial system, which meant that the crisis quickly spread beyond the US and affected economies around the world.

US GDP History

So Why Does the Economy Grow and Crash?

To summarize, economic growth is necessary for the creation of wealth and prosperity, but it is not necessarily a constant and continuous process.

Economic growth may be driven by a number of variables, including technical innovation, human capital, natural resources, and credit availability.

However, economies frequently collapse as a result of excessive speculation, the business cycle, and external forces such as wars and natural catastrophes.

Policymakers may attempt to create more stable and sustainable economies by understanding the elements that drive economic growth and the reasons why economies fail.