The Kondratieff Cycle: Real or Fabricated? by Murray = N. Rothbard

The Kondratieff = Cycle:=20 Real or Fabricated?

by Murray=20 N. Rothbard
by Murray = N.=20 Rothbard

DIGG=20 THIS

=20

This article first = appeared in=20 two parts in Investment = Insights for=20 August and September 1984.

Man=20 has always yearned to know his future. And, since it is an = economic=20 law that demand tends to create supply, there have always = been gurus=20 and mountebanks to meet that need, people who claim to have = a=20 special handle on all that the future may hold in store.=20 Soothsayers, palm-readers, astrologers, crystal-ball gazers = have=20 poured in to take advantage of the credulous and the = gullible.=20

Forecasting and=20 Soothsaying

Techniques of = soothsaying or=20 prophesying have changed over the centuries, but the basic = tactics=20 and strategy have remained the same. In the more frankly = mystical=20 atmosphere of the Middle Ages, it became common for gurus to = arise=20 and predict the Second Coming and the end of the world, with = seemingly stunning precision. If the guru was shrewd enough, = he made=20 the date of the final days near enough to whip up = excitement, but=20 not so near that it would actually arrive and he would be = caught=20 out. Thus, the most famous of all these forecasters of doom, = Joachim=20 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=20 followers, but far enough away not to prove an = embarrassment.=20

But=20 suppose that the predicted day arrives and nothing happens? = There=20 have been various classical techniques to deal with that = problem.=20 The most obvious but the shakiest is to say, oops, I = miscalculated,=20 but now I have corrected my calculations and the precise day = of the=20 end of the world is eleven years and five months hence.=20 Straightforward, but a bit desperate, and it is risky for = the guru=20 ever to admit error, for then his all-important aura of = absolute=20 self-confidence and infallibility will have begun to slip. = Far=20 better to use a fudge factor, which maintains one's air of=20 omniscience and adds profundity to boot. "No, you see," the = guru=20 will reply loftily to his critics, "I was absolutely right; = the end=20 of the world has begun, we have now entered the = period=20 of the last days." If the guru is lucky enough, that = period can=20 last another century or so. And who is there to say him nay? = The=20 idea is to reinterpret for the faithful what had = previously=20 seemed to be clear and unmistakable language; a "day" has = simply=20 become an eon or two.

The High-Tech=20 Gurus

In=20 the modern era, when all things "scientific" are in vogue, = the same=20 sort of activity goes on, but now it comes cloaked in the = wondrous=20 trappings of the high-tech. The predictions of our new breed = of=20 soothsayers and crystal-ball-gazers =96 the managers of the = high-speed=20 computers and the charts and the econometric models =96 are = just about=20 as accurate as Joachim of Fiore. But the fudge tactics have = become=20 more elaborate.

For=20 one thing, the task of the modern fortunetellers is less = grandiose.=20 Most of them are not trying to develop a mass of faithful = followers=20 who will gladly lay down their lives for the guru. They are = simply=20 trying to attain the Good Life for themselves. But some of = the=20 tactics are precisely the same. The favorite forecasts are = those=20 that are close enough to be interesting but not so close = that anyone=20 cares to remember when the time comes. Thus, a few years ago = there=20 was published a rash of vogue books forecasting with = seemingly great=20 precision the exact economic profile of the Year 2000 = =96 the=20 population, the GNP, the unemployment rate, etc. The books = were=20 publicized and sold, the authors made their reputations as = eminent=20 futurologists, and then ... and then what? When the year = 2000=20 finally arrives, will anyone care? Will anyone bother = checking up on=20 the various forecasts? And if anyone does, will the reading = public=20 bother? Surely not, for they will have long since gone on to = other=20 years, other forecasts.

A=20 few years ago, I sat on a panel where one of the speakers, = with=20 absolute authority and self-confidence, announced that his=20 "researches had shown" that nuclear war would arrive in the = summer=20 of 2010. A gasp, a frisson of delighted fear, went = through=20 the large and intent audience. But, when the year 2010 comes = around,=20 will any of us still here remember, much less bother to call = this=20 man on his prediction?

But=20 suppose that the forecast was short-term, or the predicted = year has=20 arrived, and the prophecy is manifestly way off. Then what? = Then the=20 modern gurus use the same fudge factor as the gentlemen who=20 predicted the last days. The guru will not miss a beat. "The = event I=20 predicted has arrived, but it is temporarily being = masked by=20 other factors." The prediction has been subtly or not so = subtly=20 redefined to fit the facts.

Thus, for over a = decade I have=20 been arguing with economists and investment analysts who = have been=20 predicting imminent deflation, that is, a general = fall in=20 consumer prices, or rise in the value of the dollar in terms = of=20 goods and services. For over the same decade, these = predictions have=20 been proved patently and 180 degrees wrong. Inflation, = whether steep=20 or slightly less steep, has marked every year during this = period.=20 Yet never have I seen the slightest faltering in the = enthusiasm or=20 the absolute self-confidence of the deflationist = soothsayers. Often=20 they will use the fudge factor: "Look, zinc prices have = fallen over=20 the last six months. 'Deflation' has already begun." Or, = "Deflation=20 is here at last. It has just been 'masked' by the expansion = of bank=20 credit."

In=20 the same way, the astrologers fudge on their = predictions. If=20 you are a Pisces, they will proclaim that you are a mystic, = who=20 loves water. If you say, "You're right," they will smile=20 triumphantly upon this confirmation of their analysis. But = if you=20 say, "Wrong. I'm a skeptic who hates water," they'll say, = "Ahh,=20 that's because your Jupiter is rising, and you're fighting = your=20 stars," or some such twaddle. The key point is that, with = any guru=20 worth his salt, there is no way ever to prove him wrong. = He=20 will always come up with the fudge factor. And, it should be = clear=20 to the wise that a prediction that somehow can never be = proved wrong=20 is worth far less than the paper it is printed on. =

Furthermore, when = anyone spends=20 a lot of time predicting, on whatever grounds, once in a = while=20 some of these forecasts are bound to be proved right, = just by=20 chance. And so, in the world of economic as well as = astrological=20 forecasting, the soothsayers trumpet any successes they may = have ("I=20 predicted . . . !") while quietly burying their mistakes.=20

The Business=20 Cycle

Business cycles began = a mere=20 two centuries ago. Despite the fevered hopes of some = enthusiasts who=20 claim to have observed business cycles going back to = Methuselah,=20 before the late eighteenth century there was no such = phenomenon. Of=20 course, there were centuries in which business improved and = the=20 economy progressed and there were other centuries (the Dark = Ages,=20 the 14th and 15th centuries) when it went into a long = secular=20 decline. But, within shorter time periods, business pegged = along in=20 a rough straight line year after year. Business was either = good, bad=20 or indifferent, but it tended to remain that way steadily = for many=20 decades.

Once=20 in a while, it is true, something drastic happened. The = king, as was=20 the custom of monarchs, might need a lot of money quickly = and=20 therefore confiscated all the gold or silver he could lay = his hands=20 on. The result was a dramatic economic and financial = collapse. Or a=20 war would take place, and business might boom; or trade = would be cut=20 off in a war, and business collapse. The point is that there = was=20 nothing cyclical or wave-like about these events; and there = was=20 nothing esoteric or difficult to understand. It was clear to = every=20 observer what the problem was; the cause was exogenous, = i.e.,=20 it came from outside the economic system and was imposed = upon it.=20 Almost always, that outside and disturbing force was = government, and=20 government intervention, in one form or another, was the = clear cause=20 of the sudden boom or more likely the sudden collapse. There = was no=20 need to conjure up any obscure "business cycle theory"; the = cause=20 was obvious.

Then, around the = middle or=20 latter part of the eighteenth century, something happened. A = new=20 phenomenon struck the world, occurring first in Britain, the = most=20 economically advanced country, and spreading to other = advanced=20 countries as they entered the market nexus of trade and = finance.=20 This phenomenon was a regular, continuing, wave-like = movement of=20 business activity. Instead of business proceeding on a = straight=20 line, it experienced a regular pattern of euphoric boom, = sudden=20 crisis or panic, bust or contraction, and gradual recovery,=20 succeeded without pause by another boom. In contrast to = earlier=20 years, observers of business could find no clear-cut = exogenous cause=20 for these waves. They concluded that business is marked by a = continuing, perpetual cycle, and that the cause, whatever it = may be,=20 comes from somewhere deep within the market economy, i.e., = is=20 endogenous to the economic system.

As=20 economic theory developed and deepened, it became obvious = that there=20 was an inherent conflict between standard "micro-economic" = theory,=20 and factual observations of the business cycle. For theory = tells us=20 that, in the market economy, there is a continuing tendency = to=20 eliminate error and to "clear the market"; there is a = tendency then,=20 for losses to be minimized. So how could there possibly be = periodic=20 clusters of severe business losses, which constitute the = onset of=20 the panic, crisis or depression? The conclusion that most = economists=20 and observers unfortunately came to was that microeconomics = does not=20 realistically apply to the "macro" level.

It=20 should be recognized that most business-cycle theories =96 = Keynesian,=20 Marxist, Friedmanite, or whatever =96 and remedies are = grounded in the=20 assumption that the cycle stems from some deep flaw in the=20 free-market economy. But if micro-theory is correct, then it = must=20 apply to the "macro" sphere as well. The economy is not some = entity=20 split between a micro and macro half; it is a seamless = web,=20 inextricably linked together by the use of money and the = price=20 system. Therefore, whatever applies to one part of it must = apply to=20 all. The explanation for business cycles must somehow be = integrated=20 with the explanation of the micro-economy.

The Cycles=20 Multiply

One=20 of the worst things about the "business cycle" is its name. = For=20 somehow the name "cycle" caught on, with its implication = that the=20 wave-like movement of business is strictly periodic, like = the cycles=20 of astronomy or biology. An enormous amount of error would = have been=20 avoided if economists had simply used the term "business=20 fluctuations." For man is all too prone to leap to the = belief that=20 economic fluctuations are strictly periodic and can = therefore be=20 predicted with pinpoint accuracy. The fact is, however, that = these=20 waves are in no sense periodic; they last for few years, and = the=20 "'few" can stretch or contract from one wave to the next. = The=20 periodic notion was unfortunately fed by the fact that the = early=20 panics seemed to be ten years apart: 1837, 1847, 1857, but = pretty=20 soon that periodicity broke down.

At=20 that point, those who had made their reputations as = forecasters of=20 the cycle had two options: they could have simply = given up=20 the idea of periodicity. But that would have detracted from = their=20 aura of omniscience. And so, many of them introduced the = first big=20 fudge factor: the idea that cycles, despite appearances, are = still strictly periodic, except that there are = several=20 mystical cycles all occurring simultaneously beneath = the=20 data, and that if you manipulated the data long enough, you = could=20 find these simultaneous, parallel, strictly periodic cycles, = all=20 going on at the same time. The apparently = non-periodic data=20 are only the random result of the interactions of the = strictly=20 periodic cycles.

This=20 doctrine is mystic for two basic reasons. In the first = place, very=20 much like the "epicycles" of the Ptolemaic astronomers who = fought=20 against the Copernican Revolution, there is no way ever = to=20 prove the cycles wrong. If the cycles don't fit the facts, = you can=20 always conjure up one or two more "cycles" so as to make a = perfect=20 fit. Note that the fit has to keep changing in order to = adapt to the=20 new data that are always coming in. More epicycles get = folded into=20 the data. Secondly, as we noted above, the market is a = seamless web.=20 All facets of the market are interconnected through the = price=20 system, and the profit-and-loss motive. Booms and busts = spread=20 throughout the system; that is precisely why they are = important. It=20 is absurd to think that one part of the economy can peg = along on a=20 nine-year cycle, another on a three-year cycle, and still = another on=20 a 25-year cycle, with each of these cycles barreling along = on a=20 hermetically sealed track, not influencing and modifying = each other.=20 In fact, there can only be one real cycle going on in the = economy at=20 anyone time.

We=20 have seen already that there can be only one business cycle = at a=20 time =96 the real, or evident one, the one that actually = shows up in=20 all the data =96 and that this cycle is emphatically not = periodic. One=20 of the mystical "cycles" that has been getting a lot of play = from=20 time to time is the flimsiest "cycle" of them all: the = Kondratieff=20 long cycle. The Kondratieff is supposed to be a strictly, or = at=20 least roughly, periodic cycle of about 54 years, which = allegedly=20 underlies and dominates the genuine cycles for which we have = actual=20 data. Even though, as we shall see, this cycle is strictly a = figment=20 of its fevered adherents' imagination, there does = seem to be=20 some sort of cycle in the periods when the "Kondratieff" = captures=20 the interest of financial and economic analysts.

In and Out of=20 Vogue

The=20 "Kondratieff" first made its appearance in the mid-1920s, = the=20 creature of the Soviet economist Nikolai D. Kondratieff. = Even though=20 it was translated into German at the time, it made no = particular=20 stir until the mid-1930s, when the German translation was, = in=20 abridged form, itself translated into English. The "long = wave" had a=20 brief vogue in the late 1930s, only to disappear until the = 1970s,=20 and since then it has had another and even bigger run. It = seems=20 clear that the times of fashion for the Kondratieff are a = function=20 of the economic climate of the day. Orthodox, mainstream = economics=20 had no explanation for the Great Depression of the 1930s, = and so the=20 Kondratieff was offered as one "explanation" for this = phenomenon:=20 "After all, we're at a Kondratieff trough; what else can one = expect?"

After World War II, = Keynesian=20 economics was in the saddle, and claimed to be able to = fine-tune the=20 economy and eliminate inflation and recession alike. The=20 simultaneous inflation-and-recession of 1973-75 = inaugurated=20 an era of many such "stagflations," which put an end to = Keynesian=20 dominance. Economists and financial analysts were led to = look to=20 some other explanation of this unwelcome phenomenon. And, lo = and=20 behold!, the old, forgotten "Kondratieff" was trotted out: = for=20 weren't we going past a "Kondratieff peak"?

Fortunately, = Richardson &=20 Snyder have now, for the first time, translated and = published the=20 full and unabridged Kondratieff work in English, so we are = all in a=20 position to judge the doctrine and the evidence for = ourselves.=20

Kondratieff = postulated a "long=20 wave" of business that began somewhere in the late 1780s =96 = it is all=20 very murky since there are almost no statistical data for = that=20 period =96 and continues periodically roughly every 54 = years. Well,=20 what about the trough points? No question that the late = 1930s =96 a=20 "Kondratieff trough" =96 was a pretty miserable period. But = what about=20 the other three trough periods? What was wrong about the = 1780s, for=20 example? No particular depression there. And if we want to = be=20 generous and dismiss that "first trough" for lack of data or = as only=20 starting the whole thing, what about the alleged second = trough?=20 Fifty-four years from 1789 brings us to the "expected" = trough year=20 of 1843, a year in which everything was smooth sailing. Let = us be=20 generous and bend over backward for the Kondratieffites, and = give=20 them their admitted 1849 as the trough year. Even so, 1849 = was a=20 perfectly fine economic year, and in no sense whatever = comparable to=20 the late 1930s! In 1849, we were in the middle of continuing = prosperity.

The=20 third alleged Kondratieff horror point, or trough year, was = 1896.=20 But, again, there was nothing terribly wrong with that year = either.=20 Of all the trough years, or even trough zones, the only one = that we=20 can really say was bad and depressed was the late 1930s: One = out of=20 four!

On=20 what basis, then, do the Kondratieffites presume to bracket = 1940=20 with 1896 and 1849 and 1789 as the terrible years of = Kondratieff=20 troughs? Really, on one and only one ground: each of these = years was=20 a trough point for the index of wholesale prices. All = the=20 other alleged confirmations of the Kondratieff troughs were = simply=20 of prices, or else of monetary phenomena reflected in = prices.=20

But=20 wait! Is this really what we mean by a depression phase of a = business cycle? After all, we are not really concerned about = prices=20 first and foremost. What really concerns us about a = depression or=20 recession is not that prices used to fall, but that there = were and=20 are sharp declines in production, clusters of bankruptcies = and=20 drastic increases in unemployment.

The Kondratieff=20 "Depression"

Let=20 us then look more closely at the long contraction, or "long=20 depression," phases of the Kondratieff cycle. To make any = sense,=20 they should in some way look and feel like=20 depressions, like grim periods of decline in business = activity.=20 The first Kondratieff long depression was supposed to be the = period=20 1814-1849. But these thirty-five years were by and large a = period of=20 great expansion, prosperity and economic growth for the = United=20 States, England and France, the three countries Kondratieff = used for=20 his statistical analysis. And what of the second Kondratieff = depression, the period 1866=9696? Was that in any sense a = depression?=20 For the United States, and to a large extent for Western = Europe as=20 well, this was the period of the most dazzling spurt of = production=20 and economic growth in the history of the world. Production = and=20 living standards skyrocketed. How in the world could three = such=20 glorious decades be called a period of secular decline? =

Obviously, it is = absurd to call=20 these periods long-wave depressions. The point is that in = real=20 terms =96 production, activity, growth, employment =96 = these=20 "Kondratieff depressions" were all periods of gigantic = growth and=20 prosperity. The only sense in which the two=20 nineteenth-century "Kondratieff contractions" were = contractions at=20 all is that prices, by and large, fell during those = decades.=20 And that is that.

But=20 if only prices fell, while all real or physical units = increased,=20 this means that the Kondratieff contractions could only be=20 considered depressions if we define periods of = falling=20 prices as depressions or declines in economic well-being. = And here=20 we have one of the many fundamental fallacies of the = Kondratieff=20 doctrine.

Prices fell during = most of the=20 nineteenth century because prices always tend to fall = on the=20 free market. The natural course of events is for free market = capitalism to pour forth an ever-increasing supply of goods = and=20 services, ever more production, and ever greater increases = in the=20 standard of living of everyone. If the government and its = banking=20 system do not inflate the money supply too much, prices will = always tend to fall. But this does not mean = depression in any=20 sense, because costs are falling also, and productivity and=20 production rising, so that business profits are in no way = hurt by=20 the price decline. Think of the computer and calculator = industries=20 in recent years, with their great rise in productivity and = fall in=20 prices, coupled with high growth and profits, and you will=20 understand how this can work for free-market capitalism over = many=20 decades and epochs.

But=20 if prices generally tend to fall, then what needs to be = explained is=20 why prices sometimes rise. During the nineteenth = century,=20 they indeed rose during Kondratieff booms. But dating the=20 Kondratieff cycles only at the peak and trough completely = distorts=20 the real process at work. For prices did not rise = continually=20 from, say, 1789 to 1814, or once again, from 1849 to 1866. = On the=20 contrary, prices fell considerably, for example, from 1800 = to 1812.=20 The only "Kondratieff boom" took place in the brief span = 1812 to=20 1814, i.e., precisely the years of the War of 1812 and the = final=20 years of the Napoleonic Wars. These were years in which the = United=20 States and Western nations inflated the money supply greatly = in=20 order to pay for massive war expenditures. Hence, the = increase in=20 prices. When the war and hence the need for war financing, = was over,=20 the monetary and price boom collapsed.

Similarly, there was = no big=20 price boom from 1849 on. In the United States, prices = remained=20 fairly flat from 1849 until 1861; the price boom lasted only = during=20 the few years of the Civil War, 1861 to 1866. Once again, = there was=20 no mystery and no long Kondratieff cycle at work. The war = was short=20 and devastating, and the U.S. government inflated madly in = order to=20 finance the massive burden of war expenditures. The monetary = inflation drove up prices enormously, and then, after the = war=20 spending was over, money and prices collapsed.

Note=20 that there are important lessons from both the first and = second=20 alleged "Kondratieff" boom periods. First, the "boom" = covered only a=20 few years and not two or three decades. The peak-and-trough = focus on=20 dating covers up the genuine economic reality. The booms = were=20 therefore short and intense, not in any sense "Kondratieff = long=20 booms." And second, the cause of the booms and of the = subsequent=20 contractions is all too clear. Namely, monetary inflation = brought=20 about by war finance. The so-called "Kondratieff" is merely = a=20 description of war and peace.

In=20 short, Kondratieff long "depressions" were really booms in=20 everything that counted except the fact that prices fell, = and we=20 have seen that falling prices are perfectly compatible with = economic=20 growth and prosperity. And Kondratieff long "booms" were = really=20 short booms fueled by devastating wars.

Torturing the=20 Data

But=20 what does Kondratieff say about his long depressions? Does = he=20 say that they are only money and price phenomena? No, = for then=20 he would scarcely dare to call them "depressions." = Kondratieff=20 asserts that the 1814=9649 and 1866=9696 periods were = depressions in the=20 physical sense by engaging in what statisticians aptly call=20 "torturing the data." In his now-classic work, translated = and=20 published by Richardson & Snyder, Kondratieff presents = us with=20 several physical time series: coal production in England, = mineral=20 fuel consumption in France, and pig-iron and lead production = in=20 England. He managed to approach (but never really = obtain)=20 troughs, say, for 1896 as compared to the 1860s and 1870s, = by the=20 simple device of taking out the trend.

The=20 rationale is that the tremendous upward trend of production=20 throughout the nineteenth century was somehow a phenomenon = totally=20 isolated from the business cycle. In order, then, to get to = the=20 "true" cycle masked by this trend, Kondratieff manipulated = the data=20 to take out the trend. Moreover, he also divided the = physical data=20 by population, so as to further eliminate much of the upward = trend=20 by dragging it down by the massive growth in population =96 = a growth=20 largely induced by the industrial expansion and economic = progress.=20 Then, after extracting any possible iota of trend, he took a = nine-year moving average of the remaining data, so as to = eliminate=20 any non-Kondratieff cycles that might be left.

As=20 Kondratieff himself summed it up: the physical statistics of = production and consumption, "taken as raw data, do not = disclose the=20 cycles with sufficient clarity." Therefore, "in order to = bring out=20 the presence or absence of long cycles, it was necessary to = use more=20 complex methods in processing the statistical series" (p. = 33=9634). In=20 short, in the vital area of physical series, of production = and=20 living standards, the "Kondratieff cycle" does not and = cannot exist;=20 it is a pure statistical artifact, a product of the = fallacious=20 statistical manipulations that Kondratieff employed to get = his=20 desired result.

Oddly, Kondratieff = admits that=20 his manipulations are unsound, that it is in fact = illegitimate to=20 break down the market economy into hermetically sealed = "trends" and=20 various kinds of "cycles" and expect to arrive at a = meaningful=20 result. He concedes that "all elements of the capitalist = economy are=20 organically interrelated" (p. 33) and that therefore, = eventually=20 he would somehow have to put it all back together. But = in the=20 meanwhile, all he could do was to isolate and therefore = falsify. The=20 ideal of integration was of course promptly forgotten. =

To=20 summarize our analysis so far: for the nineteenth century = =96 the=20 "first two Kondratieffs" =96 there was never any depression = as we know=20 it: not in production, nor in employment or living = standards. The=20 "Kondratieff depression" is based on (a) statistical = fallacies=20 bordering on chicanery; and (b) the mistaken view that a = price fall=20 must mean depression. To the contrary, prices = naturally tend=20 to fall in a capitalist society. Furthermore, the = "Kondratieff=20 booms" were not long booms at all, but short inflationary = spurts=20 brought on by the creation of a great deal of money to = finance major=20 wars.

The Kondratieff in = the=20 Twentieth Century

Nikolai Kondratieff = has been=20 hailed by his current adepts as a prophet of the future as = well as=20 analyst of the past. Does his cycle fare then better in the=20 twentieth century, before and after his own time? On the = contrary,=20 it does not seem possible, but his "cycle" is in even worse = shape in=20 our century. It is true that the alleged Kondratieff boom of = 1896=961920 for once seems to fit the model, since = prices were=20 indeed rising throughout this entire period. But here again, = we have=20 to disaggregate and not pay myopic attention only to the = years of=20 peak and trough. The 1896=961914 era was the only peacetime = period=20 before 1945 when prices actually rose steadily. But the = reason was=20 not some mysterious "Kondratieff" force pushing them upward. = The=20 cause was much simpler: the burst of the last great gold = discoveries=20 in Alaska and South Africa, pushing up world prices in the = first two=20 decades of the twentieth century. But, even so, the rise was = scarcely enormous, averaging 2.5 percent per year, a figure = we would=20 nowadays consider almost idyllic. The really massive = inflation only=20 took place during 1914=9618, the years of World War I, where = once=20 again inflationary war finance drove up the world's money = supply and=20 prices. And once more, the boom stopped and was reversed = upon the=20 end of the war.

Next, there is the = alleged=20 third Kondratieff long depression. At first sight, this = again seems=20 to fit the model, since surely the 1930s were an authentic=20 depression in every sense, including physical data. But what = about=20 the 1920=9629 period, the biggest boom decade in American = history? How=20 in the world can this period be called a part of a = long=20 depression? If the 1920s were not a boom period, what were = they?=20

This=20 brings us to one of the Kondratieffites' many problems. Peak = and=20 trough dating is based on the wholesale price index, the = longest=20 continuous time series available. But the Civil War peak = dating is a=20 problem. While prices retreated from their wartime high, = there was=20 definitely another economic boom until 1873, with prices = peaking and=20 the Panic of 1873 touching off a recession. Similarly, the=20 post-War-of-1812 price peak was indeed 1814 or 1815, and yet = there=20 was, at least in the U.S., a surging economic boom until = 1818,=20 succeeded by a dramatic collapse in the Panic of 1819. = Kondratieff,=20 writing in the mid-1920s, found it easy simply to fuzz over = the peak=20 dates, writing that his first peak came in "the period = 1810=9617," and=20 the second in "the period 1870=9675." Add a few more years = for good=20 luck on either end, and the anomalies of peak dating can be = glossed=20 over.

But=20 Kondratieff had the good fortune to publish his work before = the=20 cataclysmic 1929 peak. What now? It simply became too much = of an=20 evident distortion to mumble something about a "1920=9630" = Kondratieff=20 peak. Instead, the Russian's later disciples added another = critical=20 part of the current doctrine, a way of "saving the = phenomenon."=20 There is not one Kondratieff peak, you see, but two, = and the=20 period in between is the "plateau" before the "secondary" = and really=20 big depression. Well, we now have the "plateau" of the = 1920s. It is=20 a bit difficult to call this frenzied boom period a = "plateau," but=20 set that aside for purposes of discussion. We can then patch = up the=20 1866-73 period as another plateau before alleged disaster. = How about=20 1814=9618? Three or four years is scarcely the majestic = plateau of the=20 1920s, but again let that pass. If we are willing to fudge = by=20 shoving in some "plateaus," we can now try to absorb the = damaging=20 period of the 1920s into our doctrine. Why in the world = should there=20 be this "plateau," which sometimes looks instead like a = raging boom,=20 after the alleged main peak has passed? And in what = sense has=20 the peak then been passed? Once again, ours not to = reason=20 why. Who knows? Perhaps The Force, or whatever is supposed = to fuel=20 this mysterious underlying long cycle, needs a few years or = even a=20 decade to get a head of steam before it really does us in.=20

But=20 the Kondratieffites' problems have only begun. Their real = difficulties come after the alleged Kondratieff trough = of 1940 =96=20 the last trough so far. The entire boom-bust "long" cycle is = approximately 54 years in length. Allow a few years here and = there.=20 But still: It has already been 44 years since the = Kondratieff=20 trough. A 44-year boom! So where's the peak? The peak is = getting=20 long overdue. Most of the Kondratieffites confidently = predicted that=20 the peak would arrive in 1974, just 54 years after the = previous=20 peak. Previous peak-to-peak stretches had been 52 (from 1814 = to=20 1866), and 54 (1866 to 1920). So where indeed is the peak? = It is now=20 1984 and counting. We are ten years past the confident = prediction=20 and we still have inflation. The Kondratieffites have been=20 forecasting imminent deflation since the magic 1974 year, = but still=20 . . . nothing!

The=20 severe 1973=9675 recession filled the hearts of the = Kondratieffites=20 with joy: the peak had arrived on schedule! But inflation = still=20 continued. The next big recession came swiftly, but still = there seemed to be always recovery, and inflation = continued=20 throughout. What price Kondratieff now?

But,=20 as in the case of Joachim of Fiore and other mystics, the=20 Kondratieffite gurus have hardly given up =96 instead they = have rushed=20 to change the date. Or rather to announce: the peak already = was! The=20 1973=9675 recession was the peak. For now we are on the = "plateau," the=20 false boom, and soon, very soon, we will get the secondary=20 depression, the Big Bang. Very soon now we will have our = 1819, our=20 1873, our glorious 1929.

Well, here we are, = ten years=20 after the "primary peak," so surely the time for the Big = Bang is=20 Now. And yet, instead of that, the economy seems to be = bubbling=20 along, recovering nicely. Inflation is still continuing, = despite all=20 the propaganda about the problem being over.

Time=20 is inevitably running out on the Kondratieffites. For there = will be=20 no Big Bang, no repeat of 1929. Pointing to problems in the = economy,=20 to stagnation, to stagflation, to falling commodity prices, = to=20 secular rises in the unemployment rate, while interesting = and=20 significant is not enough. It does not demonstrate the = Kondratieff.=20 After all, there are always economic problems. The = point is=20 that there is no permanent depression, and there is not, and = will=20 not be, any deflation. The idea that we are right now in the = midst=20 of a Kondratieff depression, but that the deflation is being = masked by inflationary bank credit, cannot be the way = out.=20 For that is simply the mystic's fudge factor so that you can = never=20 prove him wrong, regardless of the evidence. No, the = Kondratieff is=20 dead, and now it is simply a question of how long it will = take the=20 Kondratieffites to lie down, to admit defeat and slip away = into the=20 night. How many years will it take before everyone sees that = there=20 has not been and will not be a "fourth peak"? And without = such a=20 peak, there can be no cycle.

Cycles of=20 War?

To=20 the criticism that "Kondratieff peaks" are simply the = results of=20 war-borne inflation, the Kondratieffites have an answer: = "Ahh, but=20 this analysis is superficial, for the wars themselves = are=20 caused by the arrival of the Kondratieff peak!" Well, in a = sense:=20 the War of 1812=96Napoleonic War, the Civil War, World War = I, major=20 wars all, came at (i.e., brought about) Kondratieff peaks. = Can we=20 then say which was cause and which was effect =96 the war or = the=20 cycle? Aside from the fact that we would again have to = postulate=20 some mysterious force that drives men mad and on to war = during=20 Kondratieff peak periods, there is one mighty = counter-example that=20 destroys this theory totally: World War II, which came, not = at the=20 end of a Kondratieff boom, but rather =96 in stark contrast = =96 at the=20 end of a Kondratieff = depression.=20

This=20 example indicates another gross error in the Kondratieff = analysis.=20 Where real cycles exist, in physics, astronomy or = biology,=20 the scientist concludes that there are cycles after = hundreds, if not=20 thousands, of mutually confirming observations. But in the = alleged=20 "Kondratieff," there are, at very most, only = three-and-a-half=20 cycles. What kind of analysis builds a cycle theory on only=20 three-and-a-half observations?

Why Business=20 Cycles?

If=20 "the Kondratieff cycle" is a myth and a chimera, why are = there=20 business cycles at all? There is no space here to present a = positive=20 solution to the business-cycle phenomenon. But we have = already seen=20 (1) that since the market is interrelated and a seamless = web, there=20 can be no multiple "underlying" and interacting cycles; = there is=20 only one business cycle. And (2) the real business cycle is = in no=20 sense periodic, but is a continuing, wave-like motion that = varies=20 considerably in length and intensity.

We=20 can only sum up the correct answer to the problem of the = business=20 cycle. We have already seen a hint of the solution: that = inflation=20 and the inflationary boom are caused by bank credit = expansion=20 generated by governments. In fact, government's central = banking=20 system provides the key causal element for all business = cycles, a=20 cause exogenous to the market economy. Continuing government = intervention sets in motion business cycles by generating=20 inflationary booms. Because these booms distort the signals = of the=20 market place in interest rates and in relative prices they = bring=20 about grave distortions of production and prices, which must = be=20 corrected by recessions and depressions.

In=20 short, government intervention cripples the market economy, = and=20 recession or depression is the painful but necessary = adjustment by=20 which the market reasserts itself, and liquidates the = distortions=20 committed by the government's inflationary boom. After each=20 depression, the government generates inflation once again, = because=20 it is the government's natural tendency to inflate. Why? = Quite=20 simply, whoever is granted a monopoly of printing money = (e.g., the=20 Fed, the Bank of England) will use that monopoly and print = =96 to=20 finance government deficits, or to subsidize favored = economic=20 groups. Power will tend to be used, and the power to create = money=20 out of thin air is no exception to the rule.

And=20 so we see =96 and this is the great insight of the = "Austrian" theory=20 of the trade cycle =96 that micro and macro economics are in = harmony=20 after all. The free market does tend to adjust = harmoniously=20 without boom and bust, without incurring clusters of severe = business=20 losses. It is government intervention in the market that = creates the=20 business cycle, and unfortunately makes the corrective = adjustment of=20 recessions necessary. The cause of the boom-bust cycle is = not some=20 mystical periodic Force to which man must bend his will; the = fault,=20 dear Brutus, is not in our stars but in ourselves, that we = are=20 underlings.

Murray N. Rothbard = (1926=961995), the founder of modern libertarianism and the = dean of=20 the Austrian School of economics, was the author of T= he=20 Ethics of Liberty and For=20 a New Liberty and many other books = and=20 articles. He was also academic vice president of the = Ludwig von=20 Mises Institute and the Center for Libertarian Studies, and = the=20 editor =96 with Lew Rockwell =96 of The=20 Rothbard-Rockwell Report.

Murray=20 Rothbard Archives