ECONOMIC CRISES, ECONOMIC CYCLES

MICHAEL R. KRÄTKELANCASTER UNIVERSITY / TOHOKU UNIVERSITY

A NEW PHENOMENON – Regular crises, crises of plenty, crises of overproduction, overtrading • There had been natural catastrophies before• There had been crop failures • There had been epidemics • There had been crises in production (exhaustion of necessary

resources – f.i. wood)• There had been trade crises • There had been monetary crises (mostly as consequence of

counterfeiting and debasing of coins, shortage of coins, hoarding) • There had been financial crises (speculation crises)

The first bubbles: Dutch Tulip Mania 1636-37, English South Sea Bubble 1720

But the new crises since 1815 were different• Mass bankruptcies (chains of bankruptcies) • Bank runs, stock market crashs and monetary panics • Mass unemployment • Massive fall of commodity prices, of profits, of wages • But massive rise of interest rates • Massive loss and depreciation of capital (including

industrial and merchant capital• Mass poverty (at least in the industrial regions and

industrial cities)

A new pattern – the business cycle of boom and bust

• Regular sequence of prosperity – boom – crisis – depression • 1815 • 1825 • 1836/37 • 1847/48• 1857/58• 1866 • 1873 - a new kind of crisis and depression!

Crises and cycles – trade cycles, industrial cycles with a regular sequence of phases

Cycles and trends: Are the crises getting more serious? • Upward trend – the level of production, trade, finance enhanced from

cycle to cycle • The crises are getting more international, affecting more countries

and places • 1857: the first true ‚world market crisis‘, affecting both capitalist

industrialized countries and non-capitalist, non-industrialized countries • The length of the cycle seemed to remain rather stable: 7 – 10 years

(Juglar cycle)

Historical and empirical studies of crises and cycles in the 19th century

Thomas Tooke Clément Juglar

What they found in the data

• Thomas Tooke • Regular waves of rising and falling

prices, expanding and contracting credit • Modern business cycles are linked

to the industrial revolution• industrial cycles rule the trade

cycles • industrial cycles become world

market cycles • There are monetary cycles and real

cycles (with time lags between them)

• Clément Juglar • Ten crises in France between

1804 and 1882• Nine cycles of an average

duration of 8,7 years • Similar findings for the UK and

the USA • The modern crises are general

(affect all economic activities) and universal (affect many countries almost simultaneously)

Financial crises and cycles and crises in the ‚real‘ economy (manufacture, trade)

Panics and Mania‘s: 1857, 1866, 1873, 1901, 1907 …

Was Marx Right After All? The Great Depression of 1929 - 1940

The Great Depression – a social and economic catastrophy

Why the Great Depressions were different

• They last much longer than the ‚normal‘ crises of the ‚normal‘ cycle, some of them last longer than a whole ‚normal‘ business cycle.

• For instance: The first Great Depression started with a crisis period lasting from 1873 – 1879 (unheard of)!

• Their impact is much larger than the impact of ‚normal‘ crises and it lasts longer. • For instance: the losses of production (decline of GDP) during the Great

Depression of the 1930s in the USA alone were more than 30%, unemployment reached more than 24% of the workforce, prices fell by more than 23%; only after 1938 GDP reached 1929 levels, unemployment never fell below 10% until 1941; the contraction phase lasted 43 months, the recovery phase lasted 50 months.

• So typically, we have a very severe and deep crisis and recession at the beginning and a very slow, often erratic recovery (often interrupted by new crises (like 1938 in the USA)).

Not one Great Depression but four!

• 1873 – 1895 the first Great (or Long) Depression • 1929 – 1941 the second Great Depression • 1970 – 1982 the third Great Depression • 2007 - ? the fourth Great Depression • An irregular pattern? • Some Great Depressions are followed by Long Prosperities

– 1895 – 1914, 1945 – 1970 – but not all!

Since the second Great Depression: Crisis politics • Against the enormous devastating impact of the Great Depression: • national and international action! • International action failed, the world economic order (free trade)

and the world monetary order (the international Gold Standard) fell apart

• Austerity policy made the crises effects worse everywhere • New Deal in the USA (since 1933) – expansionary fiscal and

monetary policy, large scale public works, public investment • Keynesianism in the UK (theoretical), practical military

Keynesianism in Nazi – Germany • Crises of crisis management

Great crises and transformations of capitalism

• After every Great Crisis / Great Depression the capitalist world economy looked different! • After 1873 – 1895: the rise of great corporations, the rule

of ‚finance capital‘, the rise of ‚imperialism‘, another (the second) industrial revolution in full swing• After 1929 – 1941: the rise of (Keynesian) planned,

coordinated macroeconomic interventions by the state, the rise of the welfare state, the rise of institutionalized capital – labour cooperation, the third industrial revolution, the rise of ‚Fordism‘ (mass production and mass consumption), the rise of an universal credit economy

The Long Waves – or Kondratieff cycles The Russian Economist Nikolaij Kondratieff discovered regalur patterns of very long waves of business activity (50 to 60 years) Kondratieff was the founding director of the first Conjuncture institute in Moscow He had some precursors (Wicksell, Helphand, van Gelderen, Aftalion, de Wolff) Kondratieff published his findings in 1925 He thought the long waves to be „at least very probable“, but offered only tentative explanations Main idea: there are long investment cycles (similar to Marx‘ short investment cycles)

What the long waves look like

Long waves and world historical events

The long waves remain contested terrain • The empirical evidence has been criticized many times • There is much stronger evidence for long cycles in the

world economy, the evidence is weak (sometimes absent) for long waves at the national level • The main problem is the explanation of the ‚mechanism‘ of

the long waves (how do they actually work?)• But they remain of interest, because – as it appears –

Great Depressions occur when normal cycles and the downturn (depression) phase of the Kondratieff cycle coincide

2007 until today - the World in Depression It is not the last crisis in the history of capitalism, and it is not over yet!