Chapter 2 Some causes of economic magic and/or black magic
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Chapter 2 briefly discusses the following causes of economic magic and black magic: advances in technology and their speed; uncertainty and fear; specialization; competition or the lack of it; optimism, pessimism, and over-confidence; bad (wrong) economic theories or just plain ignorance; government regulation and corruption; bad (biased) economic data; rapid increases in the labor supply; and economic hysteresis. Excessive income inequality and the pandemic are discussed in Chapters 7 and 12. Among other things, this chapter uses the concept of economic hysteresis to suggest that the widely accepted Natural Rate Hypothesis (NRH) might not always be true. If firms are optimistic when actual output exceeds potential output, then existing firms will expand, and new firms will arise. Also, the labor supply might increase if discouraged workers and those on disability become sufficiently optimistic about the economy. Both events will increase actual and potential output. The NRH is correct in saying that an economy cannot consistently produce more than its potential output, but a booming economy can increase potential output.

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