Shock (economics)

In economics a shock is an unexpected or unpredictable event that affects an economy, either positively or negatively. Resiliance to such events depends on general preparedness, economic policy, existing infrastructure and effective emergency management planning. The use of floating exchange rates has been promoted as a way to dampen the effects of economic shocks.

Milton Friedman, a prominent economist, has argued that financial shocks are routine and that government actions may hinder recovery through poor fiscal policy. Naomi Klien, in her book The Shock Doctrine, argues that the shocks Friedman refers to are enacted during times of widespread social duress, allowing political groups to initiate what would otherwise be unpopular policies (such as Augustus Pinochet's rise to power and rule in Chile, the creation of the Patriot Act after the September 11 attacks, or the rise to power of insurgents in Iraq during the 2003 Iraq War).

Types

If the shock is due to constrained supply it is called a supply shock and usually results in price increases for a particular product. A technology shock is the kind resulting from a technological development that affects productivity.

Shocks can also be produced when accidents or disasters occur. The 2008 Western Australian gas crisis resulting from a pipeline explosion at Varanus Island is one example.

ee also

*Oil crisis
*Shock therapy
*Social risk management
*The Shock Doctrine

References