The Business Cycle Returns with a Vengeance
Lord William Rees-Mogg
LONDON - I have always been interested in business cycles, and have read Irving Fisher, Kondratiev, Schumpeter and the other economists who have studied them. Indeed, as an academic publisher, I have actually published Irving Fisher and Kondratiev. There are, however, two different types of cycles, which one may instance as the pendulum and the earthquake.
The pendulum is a regular cycle, which can run like a clock. The earthquake is an irregular cycle. Pressure does build up over time and is then released. But neither the timing nor the scale of the earthquake are constant. One can predict of any earthquake zone that another earthquake will happen at some time in the future, but not when it will happen or how big it will be.
Obviously all business cycles are irregular, though less irregular than earthquakes. Joseph Schumpeter proposed a system of three business cycles, a short cycle of three-and-a-half years, a medium cycle of about 10 years and a long cycle of about 55 years. He called these Kitchins, Juglars and Kondratievs, after the economists who first detected them. In fact, business cycles were observed quite a long time ago and have been studied since the 1840s.
In 1878, William Stanley Jevons, the English mathematical economist, published a paper in Nature, then as now the leading English scientific journal, in which he discussed the depression which then affected the British industry, and indeed world trade.
Jevons quotes an earlier article, published by Dr. Hyde-Clarke in 1847. "We have just gone through a time of busy industry, and are come upon sorrow and ill-fortune; but the same things have befallen upon us often within the knowledge of those now living. Of 1837, of 1827, of 1817, of 1806, of 1796, there are men among us who can remember the same things as we now see in 1847. A period of bustle, or of gambling, cut short in a trice and turned into a period of suffering and loss, is a phenomenon so often recorded, that what is most to be noticed is that it should excite any wonder."
If we have traced the series of 10-year recessions back from 1878 to 1796, with the aid of Dr. Hyde-Clarke, we can trace it forward. In the British sequences, which he was using, recessions occur in 1887, 1893, 1902, 1912, 1921, 1931, 1951, 1961, 1973, 1982 and 1992. The gap in the middle is accounted for by the Second World War. Other countries have very similar sequences, though the recession may occur a year or so earlier or later. Indeed, most of the British recession years form part of a run of two or three years of poor trade.
Jevons himself thought that the impressive regularity of the Juglar cycle was caused by the 10.44 year cycle of sunspots. His argument, more plausible then than now, was that the activity of the sun influenced world agriculture, and that fluctuations in agricultural output were the underlying cause of fluctuations in world trade.
However, this theory led him to look back to the South Sea Bubble in 1720. He was struck by the fact that the crash of 1721, which followed the South Bubble, was 157 years before 1878, or exactly 15 cycles of 10.466 years. I am more impressed by the fact that this calculation would have enabled him to predict the 1929 crash, which occurred 208 years after the South Sea Bubble, or exactly 20 cycles of 10.4 years. Perhaps there is, or was, something in the sunspot theory after all.
We do not, however, need sunspots. In the last century, we have seen an approximate 10-year business cycle, which in the United States would have the dates 1921, 1931, 1951, 1960, 1973, 1982, 1992. A recession was brewing up in 1938, but rearmament took over. The evidence for this sequence extends back to the early 18th century. Its predictive value is much better than that of longer or shorter-term cycles.
What it does not predict is the severity of recessions. If one follows Kondratiev, one would expect an unusually severe recession every 50 years, but that has had no regularity. What may be true is that the 10-year cycle is needed to clear excesses of stocks, credit and speculation, but that the normal recession does not clear these excesses completely. Every once in a while, perhaps every fourth, fifth or sixth time, the burden of speculation has to be purged in a bigger way. We do not really know, but I shall look forward to the next three years with more than cyclical interest.
Certainly the world is due for a Juglar recession in 2001 or 2002. The United States and the United Kingdom have enjoyed continuous expansion since the recession of the early 1990s. Trees do not grow to the sky, nor does the Dow Jones Index.
Leading Politcal Commentary and Insight
Leading political editor Lord William Rees-Mogg is former Editor-in-Chief for The Times of London. Rees-mogg has been credited with accurately forecasting glasnost and the fall of the Berlin Wall - as well as the 1987 crash. His superbly-perceptive, and startlingly well-informed, but often controversial insights help The Fleet Street Letter readers peer behind the scenes of some of the most important political and economic issues facing the world today. He is co-founder with James Davidson of Strategic Investment, and co-author of The Sovereign Individual.
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