In pre-industrial times the phenomenon of economic fluctuations was tied to the agricultural cycle with crop failure causing severe hardship in agrarian-based economies. But as society became more industrialised, these cycles still persisted. John Bates Clark, an American economist writing at the end of the 18th century, said of them: “The modern world regards business cycles much as the ancient Egyptians regarded the overfl owing of the Nile. The phenomenon recurs at intervals, it is of great importance to everyone and natural causes of it are not in sight.” Society remained mystifi ed by economic ebbs and fl ows until in the second half of the 19th century economists analysing statistical data noticed there was a periodic rhythm to these ups and downs.
Historical analysis of the business cycle
One of the earliest investigations into patterns of economic activity was carried out in the 1880s by William Stanley Jevons, an economist, best known for his book The Theory of Political Economy. In a paper “The Periodicity of Commercial Crises and its Physical Explanation” published posthumously by H.S. Foxwell, Jevons noted that going back to the beginning of the 18th century, what he described as “commercial crises” occurred approximately every 9–12 years, with the average interval being 10.44 years. Although Jevons did not “believe that any of our economists have yet untied this Gordian knot of economic science”, he thought the cause of these crises was linked to the cycle of sunspot activity on harvests.
At around the same time a French economist, Clement Juglar, discovered from his analysis of movements in interest rates and prices in the 1860s that alternating periods of prosperity and liquidation recurred on average every 9–10 years. However, it was a German economist, Werner Sombart, who fi rst put forward the idea that these economic fl uctuations should not be seen as a series of periodic crises but rather as a continuous wave that followed a set pattern of boom and bust. In the United States, the approximately ten-year economic rhythm has continued almost unbroken throughout the 20th century. The year in which the downturn starts varies a little, but for the past half century it has always been in the first three years of the decade. Recessions can occur at other times in a decade, but there is no regular pattern – they may be the result of excessive policy adjustments or external economic shocks. So the approximately ten-year economic pulse which Jevons and Juglar identifi ed in the 19th century still appears to be beating regularly.
The long-term Kondratieff cycle
Working in the early years of the communist revolution, Nikolai Kondratieff, a Russian economist, was given the job of analysing the major capitalist economies – Germany, France, Britain and the United States – with a view to confi rming the Marxist theory that capitalism contains the seeds of its own destruction. (Much of Kondratieff’s work is based on Britain and France because before the mid-19th century these countries have “the most systematic statistical material”.) After analysing statistics on commodity prices, interest rates, wages, foreign trade and production of coal, pig iron and lead going back to the late 18th century, he came to the conclusion that long-term fluctuations were an inherent feature of the capitalist system. So although downturns would occur, they would eventually always be followed by periods of economic recovery, and these waves would last for approximately 50–60 years from trough to trough (a duration of 54 years is usually quoted but this is simply the average of the fi rst two long waves). Kondratieff anticipated that the length of each cycle would vary considerably. The fi rst wave he identifi ed was from 1789 to 1849, the second was from 1849 to 1896 and the third he dated from 1896 and predicted would end in the 1930s. He therefore accurately anticipated the 1930s slump and the subsequent recovery.
Kondratieff also made some empirical observations associated with these waves. The fi rst was that before the upward phase of each wave a signifi cant number of technical innovations and discoveries occurred. He also noted that what he described as big “social upheavals and radical changes in the life of society (revolutions, wars)” were more likely to occur during the upward phase of the long cycle. The French Revolution, the Franco-Prussian war and the fi rst world war all occurred during the rising phase of the cycle. His third observation was that the downward phase of the cycle coincided with periods of depression in agriculture. Lastly, intermediate cycles of between seven and eleven years occurred within the long wave. Kondratieff did not suggest a causal connection between these observations or that they could in any way explain the existence of the long wave. He admitted that he could not give a satisfactory explanation as to what triggered economic upturns, but postulated that they might be related to the period of time that it took for capital equipment to wear out and be replaced.
Kondratieff’s theory about long economic waves was published in a series of papers between 1922 and 1928. The idea that capitalism contained an economic “self-righting” mechanism ran counter to the views of the recently formed communist government and Kondratieff was put on trial. (Alexander Solzhenitsyn records in his book The Gulag Archipelago that Kondratieff was sentenced to solitary confi nement, became mentally ill and died in prison.) His work was, however, smuggled out of Russia and published in Germany in 1926. An abridged English translation appeared in The Quarterly Journal of Economics in 1935.
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