article first appeared in two parts in Investment
Insights for August and September 1984.
has always yearned to know his future. And, since it is an economic
law that demand tends to create supply, there have always been
gurus and mountebanks to meet that need, people who claim to have
a special handle on all that the future may hold in store. Soothsayers,
palm-readers, astrologers, crystal-ball gazers have poured in
to take advantage of the credulous and the gullible.
of soothsaying or prophesying have changed over the centuries,
but the basic tactics and strategy have remained the same. In
the more frankly mystical atmosphere of the Middle Ages, it became
common for gurus to arise and predict the Second Coming and the
end of the world, with seemingly stunning precision. If the guru
was shrewd enough, he made the date of the final days near enough
to whip up excitement, but not so near that it would actually
arrive and he would be caught out. Thus, the most famous of all
these forecasters of doom, Joachim of Fiore, who lived in the
late 12th century, predicted with absolute assurance that the
day would come about fifty years afterward. That was close enough
to develop a mighty movement of followers, but far enough away
not to prove an embarrassment.
suppose that the predicted day arrives and nothing happens? There
have been various classical techniques to deal with that problem.
The most obvious but the shakiest is to say, oops, I miscalculated,
but now I have corrected my calculations and the precise day of
the end of the world is eleven years and five months hence. Straightforward,
but a bit desperate, and it is risky for the guru ever to admit
error, for then his all-important aura of absolute self-confidence
and infallibility will have begun to slip. Far better to use a
fudge factor, which maintains one’s air of omniscience and adds
profundity to boot. “No, you see,” the guru will reply loftily
to his critics, “I was absolutely right; the end of the world
has begun, we have now entered the period of the
last days.” If the guru is lucky enough, that period can last
another century or so. And who is there to say him nay? The idea
is to reinterpret for the faithful what had previously
seemed to be clear and unmistakable language; a “day” has simply
become an eon or two.
the modern era, when all things “scientific” are in vogue, the
same sort of activity goes on, but now it comes cloaked in the
wondrous trappings of the high-tech. The predictions of our new
breed of soothsayers and crystal-ball-gazers – the managers
of the high-speed computers and the charts and the econometric
models – are just about as accurate as Joachim of Fiore.
But the fudge tactics have become more elaborate.
one thing, the task of the modern fortunetellers is less grandiose.
Most of them are not trying to develop a mass of faithful followers
who will gladly lay down their lives for the guru. They are simply
trying to attain the Good Life for themselves. But some of the
tactics are precisely the same. The favorite forecasts are those
that are close enough to be interesting but not so close that
anyone cares to remember when the time comes. Thus, a few years
ago there was published a rash of vogue books forecasting with
seemingly great precision the exact economic profile of the
Year 2000 – the population, the GNP, the unemployment rate,
etc. The books were publicized and sold, the authors made their
reputations as eminent futurologists, and then … and then what?
When the year 2000 finally arrives, will anyone care? Will anyone
bother checking up on the various forecasts? And if anyone does,
will the reading public bother? Surely not, for they will have
long since gone on to other years, other forecasts.
few years ago, I sat on a panel where one of the speakers, with
absolute authority and self-confidence, announced that his “researches
had shown” that nuclear war would arrive in the summer of 2010.
A gasp, a frisson of delighted fear, went through the large
and intent audience. But, when the year 2010 comes around, will
any of us still here remember, much less bother to call this man
on his prediction?
suppose that the forecast was short-term, or the predicted year
has arrived, and the prophecy is manifestly way off. Then what?
Then the modern gurus use the same fudge factor as the gentlemen
who predicted the last days. The guru will not miss a beat. “The
event I predicted has arrived, but it is temporarily being
masked by other factors.” The prediction has been subtly or not
so subtly redefined to fit the facts.
for over a decade I have been arguing with economists and investment
analysts who have been predicting imminent deflation, that
is, a general fall in consumer prices, or rise in the value of
the dollar in terms of goods and services. For over the same decade,
these predictions have been proved patently and 180 degrees wrong.
Inflation, whether steep or slightly less steep, has marked every
year during this period. Yet never have I seen the slightest faltering
in the enthusiasm or the absolute self-confidence of the deflationist
soothsayers. Often they will use the fudge factor: “Look, zinc
prices have fallen over the last six months. ‘Deflation’ has already
begun.” Or, “Deflation is here at last. It has just been ‘masked’
by the expansion of bank credit.”
the same way, the astrologers fudge on their predictions.
If you are a Pisces, they will proclaim that you are a mystic,
who loves water. If you say, “You’re right,” they will smile triumphantly
upon this confirmation of their analysis. But if you say, “Wrong.
I’m a skeptic who hates water,” they’ll say, “Ahh, that’s because
your Jupiter is rising, and you’re fighting your stars,” or some
such twaddle. The key point is that, with any guru worth his salt,
there is no way ever to prove him wrong. He will always
come up with the fudge factor. And, it should be clear to the
wise that a prediction that somehow can never be proved wrong
is worth far less than the paper it is printed on.
when anyone spends a lot of time predicting, on whatever grounds,
once in a while some of these forecasts are bound to be
proved right, just by chance. And so, in the world of economic
as well as astrological forecasting, the soothsayers trumpet any
successes they may have (“I predicted . . . !”) while quietly
burying their mistakes.
cycles began a mere two centuries ago. Despite the fevered hopes
of some enthusiasts who claim to have observed business cycles
going back to Methuselah, before the late eighteenth century there
was no such phenomenon. Of course, there were centuries in which
business improved and the economy progressed and there were other
centuries (the Dark Ages, the 14th and 15th centuries) when it
went into a long secular decline. But, within shorter time periods,
business pegged along in a rough straight line year after year.
Business was either good, bad or indifferent, but it tended to
remain that way steadily for many decades.
in a while, it is true, something drastic happened. The king,
as was the custom of monarchs, might need a lot of money quickly
and therefore confiscated all the gold or silver he could lay
his hands on. The result was a dramatic economic and financial
collapse. Or a war would take place, and business might boom;
or trade would be cut off in a war, and business collapse. The
point is that there was nothing cyclical or wave-like about these
events; and there was nothing esoteric or difficult to understand.
It was clear to every observer what the problem was; the cause
was exogenous, i.e., it came from outside the economic
system and was imposed upon it. Almost always, that outside and
disturbing force was government, and government intervention,
in one form or another, was the clear cause of the sudden boom
or more likely the sudden collapse. There was no need to conjure
up any obscure “business cycle theory”; the cause was obvious.
around the middle or latter part of the eighteenth century, something
happened. A new phenomenon struck the world, occurring first in
Britain, the most economically advanced country, and spreading
to other advanced countries as they entered the market nexus of
trade and finance. This phenomenon was a regular, continuing,
wave-like movement of business activity. Instead of business proceeding
on a straight line, it experienced a regular pattern of euphoric
boom, sudden crisis or panic, bust or contraction, and gradual
recovery, succeeded without pause by another boom. In contrast
to earlier years, observers of business could find no clear-cut
exogenous cause for these waves. They concluded that business
is marked by a continuing, perpetual cycle, and that the cause,
whatever it may be, comes from somewhere deep within the market
economy, i.e., is endogenous to the economic system.
economic theory developed and deepened, it became obvious that
there was an inherent conflict between standard “micro-economic”
theory, and factual observations of the business cycle. For theory
tells us that, in the market economy, there is a continuing tendency
to eliminate error and to “clear the market”; there is a tendency
then, for losses to be minimized. So how could there possibly
be periodic clusters of severe business losses, which constitute
the onset of the panic, crisis or depression? The conclusion that
most economists and observers unfortunately came to was that microeconomics
does not realistically apply to the “macro” level.
should be recognized that most business-cycle theories – Keynesian,
Marxist, Friedmanite, or whatever – and remedies are grounded
in the assumption that the cycle stems from some deep flaw in
the free-market economy. But if micro-theory is correct, then
it must apply to the “macro” sphere as well. The economy is not
some entity split between a micro and macro half; it is a seamless
web, inextricably linked together by the use of money and
the price system. Therefore, whatever applies to one part of it
must apply to all. The explanation for business cycles must somehow
be integrated with the explanation of the micro-economy.
of the worst things about the “business cycle” is its name. For
somehow the name “cycle” caught on, with its implication that
the wave-like movement of business is strictly periodic, like
the cycles of astronomy or biology. An enormous amount of error
would have been avoided if economists had simply used the term
“business fluctuations.” For man is all too prone to leap to the
belief that economic fluctuations are strictly periodic and can
therefore be predicted with pinpoint accuracy. The fact is, however,
that these waves are in no sense periodic; they last for few years,
and the “‘few” can stretch or contract from one wave to the next.
The periodic notion was unfortunately fed by the fact that the
early panics seemed to be ten years apart: 1837, 1847, 1857, but
pretty soon that periodicity broke down.
that point, those who had made their reputations as forecasters
of the cycle had two options: they could have simply given
up the idea of periodicity. But that would have detracted from
their aura of omniscience. And so, many of them introduced the
first big fudge factor: the idea that cycles, despite appearances,
are still strictly periodic, except that there are several
mystical cycles all occurring simultaneously beneath the
data, and that if you manipulated the data long enough, you could
find these simultaneous, parallel, strictly periodic cycles, all
going on at the same time. The apparently non-periodic
data are only the random result of the interactions of the strictly
doctrine is mystic for two basic reasons. In the first place,
very much like the “epicycles” of the Ptolemaic astronomers who
fought against the Copernican Revolution, there is no way ever
to prove the cycles wrong. If the cycles don’t fit the facts,
you can always conjure up one or two more “cycles” so as to make
a perfect fit. Note that the fit has to keep changing in order
to adapt to the new data that are always coming in. More epicycles
get folded into the data. Secondly, as we noted above, the market
is a seamless web. All facets of the market are interconnected
through the price system, and the profit-and-loss motive. Booms
and busts spread throughout the system; that is precisely why
they are important. It is absurd to think that one part of the
economy can peg along on a nine-year cycle, another on a three-year
cycle, and still another on a 25-year cycle, with each of these
cycles barreling along on a hermetically sealed track, not influencing
and modifying each other. In fact, there can only be one real
cycle going on in the economy at anyone time.
have seen already that there can be only one business cycle at
a time – the real, or evident one, the one that actually shows
up in all the data – and that this cycle is emphatically not
periodic. One of the mystical “cycles” that has been getting a
lot of play from time to time is the flimsiest “cycle” of them
all: the Kondratieff long cycle. The Kondratieff is supposed to
be a strictly, or at least roughly, periodic cycle of about 54
years, which allegedly underlies and dominates the genuine cycles
for which we have actual data. Even though, as we shall see, this
cycle is strictly a figment of its fevered adherents’ imagination,
there does seem to be some sort of cycle in the periods
when the "Kondratieff" captures the interest of financial and
and Out of Vogue
“Kondratieff" first made its appearance in the mid-1920s,
the creature of the Soviet economist Nikolai D. Kondratieff. Even
though it was translated into German at the time, it made no particular
stir until the mid-1930s, when the German translation was, in
abridged form, itself translated into English. The “long wave”
had a brief vogue in the late 1930s, only to disappear until the
1970s, and since then it has had another and even bigger run.
It seems clear that the times of fashion for the Kondratieff are
a function of the economic climate of the day. Orthodox, mainstream
economics had no explanation for the Great Depression of the 1930s,
and so the Kondratieff was offered as one “explanation” for this
phenomenon: “After all, we’re at a Kondratieff trough; what else
can one expect?”
World War II, Keynesian economics was in the saddle, and claimed
to be able to fine-tune the economy and eliminate inflation and
recession alike. The simultaneous inflation-and-recession
of 1973-75 inaugurated an era of many such “stagflations,” which
put an end to Keynesian dominance. Economists and financial analysts
were led to look to some other explanation of this unwelcome phenomenon.
And, lo and behold!, the old, forgotten “Kondratieff" was
trotted out: for weren’t we going past a “Kondratieff peak”?
Richardson & Snyder have now, for the first time, translated
and published the full and unabridged Kondratieff work in English,
so we are all in a position to judge the doctrine and the evidence
postulated a “long wave” of business that began somewhere in the
late 1780s – it is all very murky since there are almost
no statistical data for that period – and continues periodically
roughly every 54 years. Well, what about the trough points? No
question that the late 1930s – a “Kondratieff trough” –
was a pretty miserable period. But what about the other three
trough periods? What was wrong about the 1780s, for example? No
particular depression there. And if we want to be generous and
dismiss that “first trough” for lack of data or as only starting
the whole thing, what about the alleged second trough? Fifty-four
years from 1789 brings us to the “expected” trough year of 1843,
a year in which everything was smooth sailing. Let us be generous
and bend over backward for the Kondratieffites, and give them
their admitted 1849 as the trough year. Even so, 1849 was a perfectly
fine economic year, and in no sense whatever comparable to the
late 1930s! In 1849, we were in the middle of continuing prosperity.
third alleged Kondratieff horror point, or trough year, was 1896.
But, again, there was nothing terribly wrong with that year either.
Of all the trough years, or even trough zones, the only one that
we can really say was bad and depressed was the late 1930s: One
out of four!
what basis, then, do the Kondratieffites presume to bracket 1940
with 1896 and 1849 and 1789 as the terrible years of Kondratieff
troughs? Really, on one and only one ground: each of these years
was a trough point for the index of wholesale prices. All
the other alleged confirmations of the Kondratieff troughs were
simply of prices, or else of monetary phenomena reflected in prices.
wait! Is this really what we mean by a depression phase of a business
cycle? After all, we are not really concerned about prices first
and foremost. What really concerns us about a depression or recession
is not that prices used to fall, but that there were and are sharp
declines in production, clusters of bankruptcies and drastic increases
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?
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.
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
fell during most of the nineteenth century because prices always
tend to fall on the free market. The natural course of events
is for free market capitalism to pour forth an ever-increasing
supply of goods and services, ever more production, and ever greater
increases in the standard of living of everyone. If the government
and its banking system do not inflate the money supply too much,
prices will always tend to fall. But this does not mean
depression in any sense, because costs are falling also, and productivity
and production rising, so that business profits are in no way
hurt by the price decline. Think of the computer and calculator
industries in recent years, with their great rise in productivity
and fall in prices, coupled with high growth and profits, and
you will understand how this can work for free-market capitalism
over many decades and epochs.
if prices generally tend to fall, then what needs to be explained
is why prices sometimes rise. During the nineteenth century,
they indeed rose during Kondratieff booms. But dating the Kondratieff
cycles only at the peak and trough completely distorts the real
process at work. For prices did not rise continually from,
say, 1789 to 1814, or once again, from 1849 to 1866. On the contrary,
prices fell considerably, for example, from 1800 to 1812. The
only “Kondratieff boom” took place in the brief span 1812 to 1814,
i.e., precisely the years of the War of 1812 and the final years
of the Napoleonic Wars. These were years in which the United States
and Western nations inflated the money supply greatly in order
to pay for massive war expenditures. Hence, the increase in prices.
When the war and hence the need for war financing, was over, the
monetary and price boom collapsed.
there was no big price boom from 1849 on. In the United States,
prices remained fairly flat from 1849 until 1861; the price boom
lasted only during the few years of the Civil War, 1861 to 1866.
Once again, there was no mystery and no long Kondratieff cycle
at work. The war was short and devastating, and the U.S. government
inflated madly in order to finance the massive burden of war expenditures.
The monetary inflation drove up prices enormously, and then, after
the war spending was over, money and prices collapsed.
that there are important lessons from both the first and second
alleged "Kondratieff" boom periods. First, the “boom” covered
only a few years and not two or three decades. The peak-and-trough
focus on dating covers up the genuine economic reality. The booms
were therefore short and intense, not in any sense “Kondratieff
long booms.” And second, the cause of the booms and of the subsequent
contractions is all too clear. Namely, monetary inflation brought
about by war finance. The so-called "Kondratieff" is merely a
description of war and peace.
short, Kondratieff long “depressions” were really booms in everything
that counted except the fact that prices fell, and we have seen
that falling prices are perfectly compatible with economic growth
and prosperity. And Kondratieff long “booms” were really short
booms fueled by devastating wars.
what does Kondratieff say about his long depressions? Does he
say that they are only money and price phenomena? No, for
then he would scarcely dare to call them “depressions.” Kondratieff
asserts that the 1814–49 and 1866–96 periods were depressions
in the physical sense by engaging in what statisticians aptly
call “torturing the data.” In his now-classic work, translated
and published by Richardson & Snyder, Kondratieff presents
us with several physical time series: coal production in England,
mineral fuel consumption in France, and pig-iron and lead production
in England. He managed to approach (but never really obtain)
troughs, say, for 1896 as compared to the 1860s and 1870s, by
the simple device of taking out the trend.
rationale is that the tremendous upward trend of production throughout
the nineteenth century was somehow a phenomenon totally isolated
from the business cycle. In order, then, to get to the “true”
cycle masked by this trend, Kondratieff manipulated the data to
take out the trend. Moreover, he also divided the physical data
by population, so as to further eliminate much of the upward trend
by dragging it down by the massive growth in population – a growth
largely induced by the industrial expansion and economic progress.
Then, after extracting any possible iota of trend, he took a nine-year
moving average of the remaining data, so as to eliminate any non-Kondratieff
cycles that might be left.
Kondratieff himself summed it up: the physical statistics of production
and consumption, “taken as raw data, do not disclose the cycles
with sufficient clarity.” Therefore, “in order to bring out the
presence or absence of long cycles, it was necessary to use more
complex methods in processing the statistical series” (p. 33–34).
In short, in the vital area of physical series, of production
and living standards, the “Kondratieff cycle” does not and cannot
exist; it is a pure statistical artifact, a product of the fallacious
statistical manipulations that Kondratieff employed to get his
Kondratieff admits that his manipulations are unsound, that it
is in fact illegitimate to break down the market economy into
hermetically sealed “trends” and various kinds of “cycles” and
expect to arrive at a meaningful result. He concedes that “all
elements of the capitalist economy are organically interrelated”
(p. 33) and that therefore, eventually he would somehow
have to put it all back together. But in the meanwhile, all he
could do was to isolate and therefore falsify. The ideal of integration
was of course promptly forgotten.
summarize our analysis so far: for the nineteenth century – the
“first two Kondratieffs” – there was never any depression as
we know it: not in production, nor in employment or living standards.
The “Kondratieff depression” is based on (a) statistical fallacies
bordering on chicanery; and (b) the mistaken view that a price
fall must mean depression. To the contrary, prices naturally
tend to fall in a capitalist society. Furthermore, the “Kondratieff
booms” were not long booms at all, but short inflationary spurts
brought on by the creation of a great deal of money to finance
Kondratieff in the Twentieth Century
Kondratieff has been hailed by his current adepts as a prophet
of the future as well as analyst of the past. Does his cycle fare
then better in the twentieth century, before and after his own
time? On the contrary, it does not seem possible, but his “cycle”
is in even worse shape in our century. It is true that the alleged
Kondratieff boom of 1896–1920 for once seems to fit
the model, since prices were indeed rising throughout this entire
period. But here again, we have to disaggregate and not pay myopic
attention only to the years of peak and trough. The 1896–1914
era was the only peacetime period before 1945 when prices actually
rose steadily. But the reason was not some mysterious "Kondratieff"
force pushing them upward. The cause was much simpler: the burst
of the last great gold discoveries in Alaska and South Africa,
pushing up world prices in the first two decades of the twentieth
century. But, even so, the rise was scarcely enormous, averaging
2.5 percent per year, a figure we would nowadays consider almost
idyllic. The really massive inflation only took place during 1914–18,
the years of World War I, where once again inflationary war finance
drove up the world’s money supply and prices. And once more, the
boom stopped and was reversed upon the end of the war.
there is the alleged third Kondratieff long depression. At first
sight, this again seems to fit the model, since surely the 1930s
were an authentic depression in every sense, including physical
data. But what about the 1920–29 period, the biggest boom
decade in American history? How in the world can this period
be called a part of a long depression? If the 1920s were not a
boom period, what were they?
brings us to one of the Kondratieffites’ many problems. Peak and
trough dating is based on the wholesale price index, the longest
continuous time series available. But the Civil War peak dating
is a problem. While prices retreated from their wartime high,
there was definitely another economic boom until 1873, with prices
peaking and the Panic of 1873 touching off a recession. Similarly,
the post-War-of-1812 price peak was indeed 1814 or 1815, and yet
there was, at least in the U.S., a surging economic boom until
1818, succeeded by a dramatic collapse in the Panic of 1819. Kondratieff,
writing in the mid-1920s, found it easy simply to fuzz over the
peak dates, writing that his first peak came in “the period 1810–17,”
and the second in “the period 1870–75.” Add a few more years
for good luck on either end, and the anomalies of peak dating
can be glossed over.
Kondratieff had the good fortune to publish his work before the
cataclysmic 1929 peak. What now? It simply became too much of
an evident distortion to mumble something about a “1920–30″
Kondratieff peak. Instead, the Russian’s later disciples added
another critical part of the current doctrine, a way of “saving
the phenomenon.” There is not one Kondratieff peak, you see, but
two, and the period in between is the “plateau” before
the “secondary” and really big depression. Well, we now have the
“plateau” of the 1920s. It is a bit difficult to call this frenzied
boom period a “plateau,” but set that aside for purposes of discussion.
We can then patch up the 1866-73 period as another plateau before
alleged disaster. How about 1814–18? Three or four years
is scarcely the majestic plateau of the 1920s, but again let that
pass. If we are willing to fudge by shoving in some “plateaus,”
we can now try to absorb the damaging period of the 1920s into
our doctrine. Why in the world should there be this “plateau,”
which sometimes looks instead like a raging boom, after the
alleged main peak has passed? And in what sense has the peak then
been passed? Once again, ours not to reason why. Who knows?
Perhaps The Force, or whatever is supposed to fuel this mysterious
underlying long cycle, needs a few years or even a decade to get
a head of steam before it really does us in.
the Kondratieffites’ problems have only begun. Their real difficulties
come after the alleged Kondratieff trough of 1940 – the last
trough so far. The entire boom-bust “long” cycle is approximately
54 years in length. Allow a few years here and there. But still:
It has already been 44 years since the Kondratieff trough. A 44-year
boom! So where’s the peak? The peak is getting long overdue. Most
of the Kondratieffites confidently predicted that the peak would
arrive in 1974, just 54 years after the previous peak. Previous
peak-to-peak stretches had been 52 (from 1814 to 1866), and 54
(1866 to 1920). So where indeed is the peak? It is now 1984 and
counting. We are ten years past the confident prediction and we
still have inflation. The Kondratieffites have been forecasting
imminent deflation since the magic 1974 year, but still . . .
severe 1973–75 recession filled the hearts of the Kondratieffites
with joy: the peak had arrived on schedule! But inflation still
continued. The next big recession came swiftly, but still there
seemed to be always recovery, and inflation continued throughout.
What price Kondratieff now?
as in the case of Joachim of Fiore and other mystics, the Kondratieffite
gurus have hardly given up – instead they have rushed to
change the date. Or rather to announce: the peak already was!
The 1973–75 recession was the peak. For now we are on the
“plateau,” the false boom, and soon, very soon, we will get the
secondary depression, the Big Bang. Very soon now we will have
our 1819, our 1873, our glorious 1929.
here we are, ten years after the “primary peak,” so surely the
time for the Big Bang is Now. And yet, instead of that, the economy
seems to be bubbling along, recovering nicely. Inflation is still
continuing, despite all the propaganda about the problem being
is inevitably running out on the Kondratieffites. For there will
be no Big Bang, no repeat of 1929. Pointing to problems in the
economy, to stagnation, to stagflation, to falling commodity prices,
to secular rises in the unemployment rate, while interesting and
significant is not enough. It does not demonstrate the Kondratieff.
After all, there are always economic problems. The point
is that there is no permanent depression, and there is not, and
will not be, any deflation. The idea that we are right now in
the midst of a Kondratieff depression, but that the deflation
is being masked by inflationary bank credit, cannot be
the way out. For that is simply the mystic’s fudge factor so that
you can never prove him wrong, regardless of the evidence. No,
the Kondratieff is dead, and now it is simply a question of how
long it will take the Kondratieffites to lie down, to admit defeat
and slip away into the night. How many years will it take before
everyone sees that there has not been and will not be a “fourth
peak”? And without such a peak, there can be no cycle.
the criticism that “Kondratieff peaks” are simply the results
of war-borne inflation, the Kondratieffites have an answer: “Ahh,
but this analysis is superficial, for the wars themselves are
caused by the arrival of the Kondratieff peak!” Well, in a sense:
the War of 1812–Napoleonic War, the Civil War, World War
I, major wars all, came at (i.e., brought about) Kondratieff peaks.
Can we then say which was cause and which was effect – the
war or the cycle? Aside from the fact that we would again have
to postulate some mysterious force that drives men mad and on
to war during Kondratieff peak periods, there is one mighty counter-example
that destroys this theory totally: World War II, which came, not
at the end of a Kondratieff boom, but rather – in stark contrast
– at the end of a Kondratieff
example indicates another gross error in the Kondratieff analysis.
Where real cycles exist, in physics, astronomy or biology,
the scientist concludes that there are cycles after hundreds,
if not thousands, of mutually confirming observations. But in
the alleged “Kondratieff,” there are, at very most, only three-and-a-half
cycles. What kind of analysis builds a cycle theory on only three-and-a-half
“the Kondratieff cycle” is a myth and a chimera, why are there
business cycles at all? There is no space here to present a positive
solution to the business-cycle phenomenon. But we have already
seen (1) that since the market is interrelated and a seamless
web, there can be no multiple “underlying” and interacting cycles;
there is only one business cycle. And (2) the real business cycle
is in no sense periodic, but is a continuing, wave-like motion
that varies considerably in length and intensity.
can only sum up the correct answer to the problem of the business
cycle. We have already seen a hint of the solution: that inflation
and the inflationary boom are caused by bank credit expansion
generated by governments. In fact, government’s central banking
system provides the key causal element for all business cycles,
a cause exogenous to the market economy. Continuing government
intervention sets in motion business cycles by generating inflationary
booms. Because these booms distort the signals of the market place
in interest rates and in relative prices they bring about grave
distortions of production and prices, which must be corrected
by recessions and depressions.
short, government intervention cripples the market economy, and
recession or depression is the painful but necessary adjustment
by which the market reasserts itself, and liquidates the distortions
committed by the government’s inflationary boom. After each depression,
the government generates inflation once again, because it is the
government’s natural tendency to inflate. Why? Quite simply, whoever
is granted a monopoly of printing money (e.g., the Fed, the Bank
of England) will use that monopoly and print – to finance government
deficits, or to subsidize favored economic groups. Power will
tend to be used, and the power to create money out of thin air
is no exception to the rule.
so we see – and this is the great insight of the “Austrian” theory
of the trade cycle – that micro and macro economics are in harmony
after all. The free market does tend to adjust harmoniously
without boom and bust, without incurring clusters of severe business
losses. It is government intervention in the market that creates
the business cycle, and unfortunately makes the corrective adjustment
of recessions necessary. The cause of the boom-bust cycle is not
some mystical periodic Force to which man must bend his will;
the fault, dear Brutus, is not in our stars but in ourselves,
that we are underlings.
N. Rothbard (1926–1995), the founder of modern libertarianism
and the dean of the Austrian School of economics, was the author
Ethics of Liberty and For
a New Liberty and many
other books and articles. He was also academic vice president
of the Ludwig von Mises Institute and the Center for Libertarian
Studies, and the editor – with Lew Rockwell – of The