Everything about Virtuous Circle And Vicious Circle totally explained
A
virtuous circle or a
vicious circle is a complex of events that reinforces itself through a
feedback loop toward greater instability. A virtuous circle (or virtuous cycle) has favorable results, and a vicious circle (or vicious cycle) has deleterious results. A virtuous circle can transform into a vicious circle if eventual negative feedback is ignored.
Both circles are complexes of events with no tendency towards equilibrium (at least in the short run). Both systems of events have
feedback loops in which each iteration of the cycle reinforces the first (
positive feedback). These cycles will continue in the direction of their momentum until an exogenous factor intervenes and stops the cycle. The prefix “hyper” is sometimes used to describe these cycles. The most well known vicious circle is
hyperinflation.
Example of a vicious circle in macroeconomics
Hyperinflation is a spiral of
inflation which causes even higher inflation. The initial exogenous event might be a sudden large increase in international
interest rates or a massive increase in government
debt due to excessive spendings. Whatever the cause, the government could pay down some of its debt by printing more money (called monetizing the debt). This increase in the money supply could increase the level of inflation. In an inflationary environment, people tend to spend their money quickly because they expect its value to decrease further in the future. They convert their financial assets into physical assets while their money still has some purchasing power. Often that'll purchase on
credit. Because of this, the level of savings in the country is very low and the government could have problems refinancing its debt. Its solution could be to print still more money starting another iteration of the vicious cycle.
Example of a virtuous circle in macroeconomics
Economic growth can be seen as a virtuous circle. It might start with an exogenous factor like technological innovation. As people get familiar with the new technology, there could be
learning curve effects and
economies of scale. This could lead to reduced costs and improved
production efficiencies. In a
competitive market structure, this will likely result in lower average prices. As prices decrease, consumption could increase and aggregate output also. Increased levels of output leads to more learning and scale effects and a new cycle starts.
Example of a virtuous circle in management
An investment in your employees’ ability to provide superior service to customers can be seen as a virtuous circle. Effort spent in selecting and training employees and creating a corporate culture in which they're empowered can lead to increased employee satisfaction and employee competence. This will likely result in superior service delivery and customer satisfaction. This in turn will create customer loyalty, improved sales levels, and higher profit margins. Some of these profits can be reinvested in employee development thereby initiating another iteration of a virtuous cycle.
Example of a vicious circle in management
A harvesting strategy can be an example of a vicious circle. Rather than reinvesting in
employee development, new
product development, and
market research,
management could decide to harvest their
investment by reducing
costs then increasing
dividends or increasing
executive compensation. The consequence of this could be reduced employee
wages, minimal
training, an outdated product line, and a failure to understand the needs of the
customer. This will likely result in employee dissatisfaction, employee incompetence, and high employee turnover. This could cause poor service delivery, customer dissatisfaction, high customer turnover, and loss of
market share. Reduced
sales and lower
profit margins may require a further reduction in investment thereby initiating another iteration of the vicious cycle.
Other examples
Other examples include the
poverty cycle and
sharecropping.
The contemporary
subprime mortgage crisis is a complex of vicious circles, both in its genesis and its manifold outcomes.
External sources
- Schlesinger, L. and Heskett, J. (1991) Breaking the cycle of failure in services, Sloan Management Review, vol. 31, spring 1991, pp.17 - 28.
- http://william-king.www.drexel.edu/top/prin/txt/gro/gro21b.html - An introduction to 20th century virtuous circle theory.
- Rational Choice with Passion:Virtue in a Model of Rational Addiction
- In this link the author uses Aristotelian virtue as a mediator between passion and reason in the construction of utility/consumption functions in an esoteric part of consumer behaviour theory related to decision making in addictive situations.
- China: A Stabilizing or Deflationary Influence in East Asia? The Problem of Conflicted Virtue - In this link the author is using virtue in the sense of a positive outcome (balance of payments surplus) that conflicts with long term regional growth and stability.
- http://www.bioenergycentres.com/resources.shtml - an essay in 3 parts by Polarity Therapist Andrew Harry, Bath, UK. Defining The Virtuous Cycle as an integrated healing process.
Further Information
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