Tune into the Long Wave to Analyse the Cycles and Trends

By Smith, David | Management Today, January 1994 | Go to article overview

Tune into the Long Wave to Analyse the Cycles and Trends


Smith, David, Management Today


ECONOMICS

David Smith sees signs that the current downwave could give way to a lasting upswing

Long-term economic forecasting is usually thought of as being in broadly the same category as long-term weather forecasting. Just as the latter is likely to be of very little practical use in telling one whether to pack an umbrella or a sun-hat at some given date in the future, so the former is prone to becoming badly unstruck on the question of whether the economy will be booming or in a slump in a few year's time.

I cannot speak for whether forecasting, but perhaps long-term economic forecasting has been unfairly maligned. The long-term forecaster has two useful weapons at his disposal -- the trend and the cycle. Thus, I can say with reasonable confidence that, on the basis of trend growth for the UK economy of about 2.25% a year, Britain's real gross domestic product in the year 2000 will be some 13% to 15% above its level at the beginning of 1994. I would also venture to suggest that between now and the millennium, the business cycle will have produced another peak in economic activity, probably around 1996, and another trough, perhaps in 1998 or 1999. So, safe in the knowledge that no one is likely to ring me up and complain in six years' time, I would predict that the economy will be enjoying a short-term cyclical upswing in the year 2000.

There are other, even safer, predictions. I would be surprised if, by that time, concern over the size of Britain's manufacturing base, and with its underlying budget deficit, had been eliminated. And, as discussed elsewhere in this issue (see p30), I would not anticipate a return to full employment, on the post-war definition of 3% unemployment or less.

So much for 'safe' long-term forecasts. What intrigues me, however, is whether there are very long-run economic cycles at work, lasting 20-25 years in both the upswing and downswing phases, in both Britain and elsewhere. The idea of long cycles in economic activity, usually associated with the Russian economist Kondratief, has fascinated economists. Some have attributed such cycles to climatic events, although this analysis was perhaps more relevant when world production was predominantly agricultural.

Cycles have been identified which are linked to phases of monetary expansion, themselves driven by, for example, discoveries of gold and other precious metals, or by wars. The Austrian economist, Joseph Schumpeter, cited waves of technological innovation as the basis of long cycles in economic activity.

The appeal of long-wave analysis is that, superficially at least, it fits the facts. …

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