To everything there is a season and this is true of Economics
March 6, 2009 5:27 AM   Subscribe

Everybody knows the economy and thus the markets move in cycles. Economic expansion naturally leads to contraction, driven by credit and business cycles. But are economic booms followed by busts inevitable?

At Business School today we accept and even teach cycles, for example the Kitchin inventory cycle (three to five years in length, first postulated by Joseph Kitchin in 1923), the Juglar fixed investment cycle (seven to eleven years in length, discovered by French physcian Clement Juglar in 1860) and the Kuznets infrastructue investment cycle (fifteen to twenty five years in length, postulated by Nobel Laureate Simon Kuznets), but could there be longer wave cycles dominating and driving these higher frequency waves?

Nikolai Kondratieff was a Russian economist who favoured a holistic view, believing that efficient forecasts of economic activity and thus the markets had to integrate social and cultural trends. This broad perspective convinced him that amid the apparent chaos of the capital markets, long term unifying processes existed which could be leveraged for forecasting purposes. Kondratieff believed capitalism followed forty to sixty year cycles of economic growth followed by depression. These cycles are now known as "Kondratiev waves".

Kondratieff waves postulate four basic "seasons" to the economic cycle; Summer, characterised by sharp increases in the money supply, leading to investment and inflation. Spring follows as the money injected into the economy during summer drives an expansion in business activity. Autumn, which sees a peak in share prices and relatively high debt levels amid slowing business activity is followed by Winter, where we observe bankruptcies and cratering share prices.

To many followers of Kondratieff, the G20 are currently deep in winter [.jpg]. , and some have put together data summarising Kondratieff winters since the 1700's.

While there is not much academic research corroborating Kondratieff's work, during periods of economic stress we tend to see increased interest in wave theories.
posted by Mutant (32 comments total) 16 users marked this as a favorite
 
This is interesting stuff, but that last link seems like a pretty good debunking:

Let us then look more closely at the long contraction, or "long depression," phases of the Kondratieff cycle. To make any sense, they should in some way look and feel like depressions, like grim periods of decline in business activity. The first Kondratieff long depression was supposed to be the period 1814-1849. But these thirty-five years were by and large a period of great expansion, prosperity and economic growth for the United States, England and France, the three countries Kondratieff used for his statistical analysis. And what of the second Kondratieff depression, the period 1866–96? Was that in any sense a depression? For the United States, and to a large extent for Western Europe as well, this was the period of the most dazzling spurt of production and economic growth in the history of the world. Production and living standards skyrocketed. How in the world could three such glorious decades be called a period of secular decline?

Obviously, it is absurd to call these periods long-wave depressions. The point is that in real terms – production, activity, growth, employment – these "Kondratieff depressions" were all periods of gigantic growth and prosperity. The only sense in which the two nineteenth-century "Kondratieff contractions" were contractions at all is that prices, by and large, fell during those decades. And that is that.

But if only prices fell, while all real or physical units increased, this means that the Kondratieff contractions could only be considered depressions if we define periods of falling prices as depressions or declines in economic well-being. And here we have one of the many fundamental fallacies of the Kondratieff doctrine.

posted by anotherpanacea at 6:19 AM on March 6, 2009


Cycles, huh? Are we having one of those Critical Mass things going on now?
posted by Kirth Gerson at 6:20 AM on March 6, 2009


Slightly off-topic, but I'm curious: are economic professionals always as maligned during economic downturns as they are now?

I've not been around for very many economic 'winters', but I'm astonished by the amount of vitriol I see directed towards economists. And not just floor traders on Wall Street who made unfortunate decisions, but everyone from bank tellers to academics (and of course the people who work at the Federal Reserve).
posted by oostevo at 6:25 AM on March 6, 2009 [1 favorite]


I'm not worried, I've invested all of my money in Soylent Mutton.
Wait a minute... Soylent Mutton is Sheeple!
posted by dances_with_sneetches at 6:32 AM on March 6, 2009 [5 favorites]


oostevo: When you look at the incredibly short-sighted nature of what's brought on the current collapse, I think a large amount of the vitriol is justified. The whole "mortgages are safe, no matter who we give them to because home values always increase" was a damn lie and they either knew it, or were utterly incompetent. There's really no way around one of the two. Either they were liars, out for short-term gain, or they were utter morons who had no idea of how to read a simple graph on the internet.

Wanna tell me why me, a T-shirt printer, and a lot of my freinds, artists, musicians, etc. saw the housing bubble for what it was 3 years ago at least, while these "economists" were still shouting "Buy! Buy! buy!" from (nearly) every rooftop?
posted by Devils Rancher at 6:34 AM on March 6, 2009


The short answer to this is "no, booms and busts aren't necessary, and in a well-regulated environment will be mitigated and rare". But when everyone whose hands are on the levers that control those engines are Randroids genuflecting to the ideology of unfettered laissez-faire free-market capitalism, they're not only inevitable but entirely predictable.

The increased in "wave theories" during depressions is people looking around for some excuse that absolves them for what's gone horribly wrong. You never see wave theories when everything's spinning up, it's all free-markets-are-great-and-also-I'm-awesome.
posted by mhoye at 6:42 AM on March 6, 2009 [1 favorite]


Wanna tell me why me, a T-shirt printer, and a lot of my freinds, artists, musicians, etc. saw the housing bubble for what it was 3 years ago at least, while these "economists" were still shouting "Buy! Buy! buy!" from (nearly) every rooftop?

You might be confusing "economists" for "douchebags." It's a fine line.
posted by GooseOnTheLoose at 6:43 AM on March 6, 2009 [4 favorites]


Mutant, haven't you learned yet its impossible to get a reasoned and informed discussion on the economy on Metafilter these days?

Kitchen's cycles - "His most important work, published in 1923, was a study of cycles in Britain and the United States in the 1890–1922 period, where he discerned cycles of 40 months, long cycles of 7–11 years."

Wait? What? 7-11 years cycles with a 32 year study? I don't think this makes much sense.
posted by sfts2 at 7:26 AM on March 6, 2009


[DOUCHEBAG-IST]
posted by Devils Rancher at 7:27 AM on March 6, 2009


Wanna tell me why me, a T-shirt printer, and a lot of my freinds, artists, musicians, etc. saw the housing bubble for what it was 3 years ago at least, while these "economists" were still shouting "Buy! Buy! buy!" from (nearly) every rooftop?

What were they telling you to buy?

From Jan 2006 - Jan 2008:

Apple (AAPL) rose 150%
Google rose 58%
John Deere (DE) rose 154%
Freeport McMoran (FCX) rose 161%
Union Pacific Railroad (UNP) rose 49%
Potash (POT) rose 434%

If they were telling you to buy those things, they were right. There were a number of booms/bubbles operative in that three year window that you could have participated in. Tech. Ipods. Copper. Potash. China. Ag/industrial. Sure, housing collapsed, but look how long it took for that to work it's way through the system. Look how much money there was to be made simply in know that the end was coming, but not quite here yet.

Is it risky? Of course. But look at those 2-year returns. Nothing ventured, nothing gained.

The massive market selloff is something of a boom if you're short, right? That boom is going to bust eventually as well, and maybe soon.
posted by Pastabagel at 7:52 AM on March 6, 2009 [2 favorites]


Ugh, you need to move the sliders around on those google charts to get the jan 2006-2008 timeframe. My kingdom for a decent web charting tool.
posted by Pastabagel at 7:53 AM on March 6, 2009


What were they telling you to buy?

I was speaking specifically about the Real Estate people advising everyone on Earth to buy a house, because no matter what, they'd be able to sell the house at a profit -- that it wasn't so much a home, as it was an investment. I saw several home in my neighborhood flipped 2 & 3 times before anyone even moved in to them.

It's had shockwaves across the economy -- the construction boom, the goddam mortgage default swaps, that leverages the homes value 3, 4, 5 times, that were considered an "asset" because housing values always increased.

That is what I am talking about.

Aapl is still a fundamentally profitable company. I don't feel bad about their stock that I've bought & old over the years, though that was then. Wish I could buy in here in the next six months or so, but I'm poor, now.
posted by Devils Rancher at 8:08 AM on March 6, 2009 [2 favorites]


*leveraged the home's values*

I can do this typing thing.
posted by Devils Rancher at 8:09 AM on March 6, 2009


I had a macro econ professor who pointed out the roughly generational occurrence of recessions and depressions. His theory was that every generation brought a new bunch of punks who thought they could beat the system.
posted by cimbrog at 8:11 AM on March 6, 2009 [3 favorites]


There's a person who works on my research desk - a former bond trader - who subscribes to some variety of financial astrology. Yesterday they were talking after a meeting and said something like "Tuesday is going to be awful" and I'm thinking "What's are you talking about? None of the numbers coming out that day are high impact." When I press, they says it's a full moon along with something about Saturn. I should know by now, since they try to bring it up once a month.
posted by milkrate at 8:33 AM on March 6, 2009 [1 favorite]


Freeport McMoran (FCX) rose 161%

Capitalism with a conscience. please.
posted by Devils Rancher at 8:47 AM on March 6, 2009


I've heard of the economic waves and cycle theories before, but never "financial astrology", thanks for that milkrate - which leads to the Wikipedia category Astrology by type, an exotic wonder box.

In all fairness cycle theories are based on more than astrology. Unfortunately though they tend to be deductive ie. first envision a cycle, then go back through the historical record and find the evidence to support it. Of course history is so complex, just about any pattern can be teased out of it. The trick is inductive, looking at all the evidence, including contradictory evidence, and determining what it has to say, if anything.
posted by stbalbach at 9:12 AM on March 6, 2009


See also the Elliott wave principal, which is another cyclical theory of markets. It has a Grand supercycle, which is comparable to the Kondratiev wave (40-60 year cycle).
posted by stbalbach at 9:17 AM on March 6, 2009


Bruce Sterling's State of the World mentioned Carlota Perez, who has some interesting ideas on bubbles under her publications section. First comes the innovation, say the steam locomotive, then comes the financial prosperity as organizations lay down thousands of miles of track. Then comes the bust when the last mile is laid and those same businesses start imploding. She believes these cycles happen every 50 years or so.

As far as homes as investments, I don't even believe a house is an asset. It's a liability. Note I'm talking about primary residences, not rental units. Even if your house was paid off completely you still have upkeep costs, property taxes &c that you are responsible for. A house is a place to live, not an asset, doubly true if you have a mortgage.
posted by daHIFI at 9:33 AM on March 6, 2009


What were they telling you to buy?

Um, the quote you copied from devils rancher clearly says housing bubble, so I don't know why you're bringing up the stock market.
posted by ornate insect at 10:03 AM on March 6, 2009


"Wanna tell me why me, a T-shirt printer, and a lot of my freinds, artists, musicians, etc. saw the housing bubble for what it was 3 years ago at least, while these 'economists' were still shouting 'Buy! Buy! buy!' from (nearly) every rooftop?"

Economists don't typically try to predict markets nor give stock picking advice. I think you're confusing economists with financial analysts.
posted by krinklyfig at 10:11 AM on March 6, 2009


It's not about cycles. Duh. It's obviously about who's currently president. For example, this particle downturn in the stock market is in the process of being helpfully branded "Obama's Bear Market," because of course, this is the part of the natural economic cycle where suddenly all theories go out the window but the blame for what happens from day to day in the markets still doesn't lie with, you know, the individual people actually making trades there, but within the market's native distrust of liberal politicians like Obama.

And in other news, apparently something even smells foul over at the London offices of stalwart Merrill Lynch.
posted by saulgoodman at 10:17 AM on March 6, 2009


Economists don't typically try to predict markets nor give stock picking advice. I think you're confusing economists with financial analysts.

True. It was mainly the bobbleheads on TV that were doing the actual shouting, but Greenspan, Bernanke, et al. weren't really telling them to tone it down much. The few that actually tried got shouted off the TV screen.
posted by Devils Rancher at 10:37 AM on March 6, 2009


For example, this particle downturn in the stock market is in the process of being helpfully branded "Obama's Bear Market," because of course

What's good for the goose et cetera.

And I'll point out that the Prospect article was written after Bush was President for whopping nine days.
posted by Pastabagel at 11:11 AM on March 6, 2009


President "Bobby": Mr. Gardner, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives?
Chance the Gardener: As long as the roots are not severed, all is well. And all will be well in the garden.
President "Bobby": In the garden.
Chance the Gardener: Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.
President "Bobby": Spring and summer.
Chance the Gardener: Yes.
President "Bobby": Then fall and winter.
Chance the Gardener: Yes.
Benjamin Rand: I think what our insightful young friend is saying is that we welcome the inevitable seasons of nature, but we're upset by the seasons of our economy.
Chance the Gardener: Yes! There will be growth in the spring!
Benjamin Rand: Hmm!
Chance the Gardener: Hmm!
President "Bobby": Hm. Well, Mr. Gardner, I must admit that is one of the most refreshing and optimistic statements I've heard in a very, very long time.
[Benjamin Rand applauds]
President "Bobby": I admire your good, solid sense. That's precisely what we lack on Capitol Hill.
-Being There
(Goes back to watching TV)
posted by Strshan at 11:43 AM on March 6, 2009 [1 favorite]


Freeport McMoran (FCX) rose 161%

Let me guess...this company wasn't run by Morans?
posted by storybored at 11:45 AM on March 6, 2009


Huh. When I see people propose "cycles" like this, I wonder whether this has more to do with something inherent in human psychology that seeks to identify pattern where none, in fact exist than something actually real. Wouldn't this be easy to test? Some kind of power spectrum analysis on any of the time series of interest (DOW, S&P500, etc) could quickly tell you if there was true periodicity. The claim that there are cycles of 40 - 60 years strikes me as an impossibly vague, untestable and ultimately not that useful hypothesis.
posted by bumpkin at 11:52 AM on March 6, 2009


Strshan, I thought of exactly the same thing, but waited to see how the thread went before posting it.
posted by TedW at 2:23 PM on March 6, 2009


Freeport McMoran (FCX) rose 161%

Let me guess...this company wasn't run by Morans?


Nah -- just a bunch of exploitatious, pillaging murderers.
posted by Devils Rancher at 4:37 PM on March 6, 2009


Wanna tell me why me, a T-shirt printer, and a lot of my freinds, artists, musicians, etc. saw the housing bubble for what it was 3 years ago at least, while these "economists" were still shouting "Buy! Buy! buy!" from (nearly) every rooftop?

Confirmation bias.
posted by spiderwire at 5:31 PM on March 6, 2009


His theory was that every generation brought a new bunch of punks who thought they could beat the system.

John Xenakis has his Generational Dynamics theory, which basically posits waves of stupidity come every other generation.

This was a fpp some time ago.
posted by troy at 6:00 PM on March 6, 2009


Soylent Mutton is Sheeple

sez ewe
posted by Hat Maui at 3:47 PM on March 7, 2009


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