We Are Stuck on a Wheel of Misfortune
Byline: William REES-MOGG
Economists may question whether business cycles exist, but they certainly behave as though they do. Most investors talk of double-dip recessions, and discuss whether we are now trapped in one, at least in the United States and Europe.
I sometimes find myself quoting other commentators on the world economy. When I do, it is most likely to be Martin Wolf of the Financial Times. I quote him partly out of respect for his ideas and partly because I know global businessmen will also have read him.
Last week it was Wolf himself who was quoting two other commentators, Carmen Reinhart, who is a senior fellow of the Peterson Institute for International Affairs in Washington, and Kenneth Rogoff of Harvard. They call the present economic situation 'the second great contraction'. The first great contraction was the Great Depression of the Thirties.
There is a close resemblance between the Great Depression and the present one. The Great Depression fitted reasonably well the pattern of the 'Kondratiev wave' of economic activity occurring in 50-year cycles.
The Great Slump of 1932 was a cyclical depression that arrived on time; 2008 was a depression that arrived about 30 years after it was first expected, with the collapse of Lehman Brothers. Nevertheless, the current depression is looking only too much like the Thirties slump.
Kondratiev was the Russian economist after whom the business cycle was named by the Austrian economist Joseph Schumpeter, who did his main work on the subject in America in the Thirties.
Kondratiev's basic idea was first stated in 1926. He advanced the theory of a 50-year cycle: 'The material basis for long cycles is the deterioration, replacement and extension of the capital goods, with long production times and vast production costs. The replacement and extension of the stock of those items is not a smooth process but a jerky one.' Schumpeter put dates to Kondratiev's cycles. He saw cycles of prosperity in the periods from 1787 to 1800, from 1848 to 1857 and from 1898 to 1911, with depressions occurring from 1814 to 1827, from 1870 to 1884 and from 1926 to 1938.
One can trace these cycles back to the early 18th Century. The firm starting point is the depression that followed the South Sea Bubble of 1720. There were regularly depressions in Britain every 50 years between 1720 and 1930.
The study of the Great Depression of the Thirties led James Davidson and myself to write a book entitled The Great Reckoning. I do not think economic history can give all the answers, but it does give some.
Business life tends to have a rhythm. …