Econocycology: A Tool for Timing Activism and Fund Investment
Herbert William Bonner
[A paper presented at the Joint Georgist Conference,
University of Pennsylvania, Philadelphia, Pennsylvania, 1989]
This is a condensed preview of a 40-page paper with graphs and
tables, which looks at common business cycles, and surveys the major
events which affected the general welfare of the people in the
developing economics of Britain and the United States, from 4000 BC to
the present time. The survey leads to new conclusions about the effect
on the economy of monopoly privileges, debt and taxation, and their
limits. A Primary Economic Cycle, and an Ascending Wave are
hypothesized. An outline cyclical plan for reform, activism and safe
growth investment of funds, and three predictions of future major
events are preferred.
For everything there is
an appointed time, even a time for every affair under the heavens.
[Ecclesiastes 3:1]
I
Since time immemorial, man has sought to foretell the appointed time
for the fulfillment of his dreams and ambitions by many means, from
the twitching of chicken entrails, to econometrics. The political,
economic and financial advantages of being able to predict the future
by these immutable means would be of inestimable value to merchant,
investor, speculator, and government alike. Speculators in the
financial markets suffer wild mood swings from extreme greed to
extreme fear, baffled by ignorance and propelled by impatience, as
they study the twitchings of economic entrails through stale, skewed
statistics; economists advise their clients according to their erudite
interpretations of past business cycles, but with little success.
II
Great intellects addressed the study of the pattern of business
cycles. Henry George was well aware of them, for the fundamental theme
of his
Progress and Poverty (1879) was an inquiry into the cause of
recurring industrial depression. His brilliant and timelessly
accurate deduction was, "speculation in things not the production
of labor, but yet necessary to the exertion of labor in the production
of wealth." Other authors have offered a variety of less
plausible explanations. None has offered an explanation of their
relative regularity, other than attempts to make the shoe fit
by demonstrating some degree of correlation with observed phenomena.
Accordingly, the economic cycles have remained little more than
mysterious, often confusing, statistical curiosities, with popular
perceptions being confined mainly to fluctuations between good and bad
times.
III
Business cycles. The French Dr. Clement Juglar is credited
with being the first to speak of "business cycles." The U.S.
National Bureau of Economic Research (NBER), uses a definition put
forward by Bums and Mitchell. Briefly, it is a fluctuation of an
aggregate of economic factors of varying content, which usually
includes output, trade, employment, income and sales. The cycle is
not periodic and not divisible into shorter cycles of similar
character. The factors may be measured in several ways, and the
resulting estimate is subject to revision, and lags the event.
IV
Proprietary Cycles. Out of the many cycles that have been
proposed, Joseph A. Schumpeter grouped three into his schema: the long
Kondratieff cycle of 54 years average duration; the intermediate
Juglar of 9 to 11 years; and the short Kitchin of 40 months average
length. He superimposed three Kitchen cycles on each Juglar, and six
Juglars on each Kondratieff cycle. He concluded, empirically, that
synchronization of the three cycles indicated an exceptionally intense
phase, as seen during the 1930s. However, his tri-cycle (which
conflicts with the definition by Burns and Mitchell) did not perform
well for other intense phases, such as the boom of the 1979-81. These
cycles are illustrated more fully in the plenary paper.
V
The Kuznets cycle, named after Simon S. Kuznets, is not a
member of Schumpeter's triad. It is a "long swing" of about
15 to 20 years (roughly one third of a Kondratieff Wave, and twice the
Juglar cycle), mainly in building construction, but not works. He
analyzed other factors, including growth rates of GNP, capital
formation, population movement, employment, and incomes. Kuznets
recorded peaks in 1873, 1892, and 1913, and troughs in 1878 and 18%,
which match those recorded by the NBER, but missed many intervening
cycles.
VI
There are serious deficiencies in all the cycles studied, and in the
often erudite, complex mathematical explanations offered:
a. The cycles are presented as smooth, regular sine waves
alternating about a level horizontal axis, reflecting changes in "business",
e.g. prices and mortgage rates, which may be inimical to the "general
Welfare";
b. They are constructed from obsolete data drawn mainly from the
period before credit became universal, and which are secondary
products of fundamental, primary causative factors;
c. No explanation of those primary causative factors has been
offered;
d. No in-depth attempt to discover those factors has been noted;
e. British and American data do not indicate regular business
cycles.
VII
Data published by the NBER, show: -
- Between 1834 and 1983, there were 34 cycles averaging 52
months, ranging from 17 to 117 months in length; expansion phases
averaged33 months, ranging from 10 to 106 months; contraction
phases averaged 19 months, ranging from 7 to 65 months;
- Between 1945 and 1983, (post-World War II, when credit became
more widely available), there were 7cycles averaging about 66
months, ranging from 32 to 116 months peak to peak; expansions
averaged 51 months, ranging from 24 to 106 months; the average
contractions took 11 months, ranging from eight to 16 months; The
trend has been for the cycles and expansions to lengthen, the
contractions to shorten. The post-World War economic data are more
representative of today's economy than those of the 19th century,
when credit was not available to the masses.
VIII
The cycles mean different things to different groups, for instance:
the slave owner and the slave; the landholder and the tenant; the
exploiter and the exploited; the money lender and the borrower: the
rich and the poor. Those who have become extremely rich from
plundering the people through monopoly privilege, speculation, war and
crime, usually develop an arrogant belief that the economy exists for
their benefit alone; that the business cycles are measured best by
changes which affect their prosperity; arid that legislatures should
manipulate the economy to that end.
"...to form a more
perfect union, establish justice, - promote the general Welfare,..."
From the preamble to the Constitution of the United States, 1787.
IX
Fluctuations in the economy, except for those caused by
unmanageable natural forces, are symptoms of disease, often
accompanied by high fever, caused by the failure of government to "promote
justice and the general Welfare." The business cycles are
symptoms of the fluctuations in market strengths between business and
monopoly rentier rights (most visibly those in land); The economic
cycles are symptoms of fluctuations in market strengths between
labour and monopoly rentier rights. There is a subtle but important
difference between them, which is dealt with much more fully in the
plenary paper. The odds always favour the monopolists. For those
interested in reform which will eliminate recurring economic
depressions, consequent involuntary unemployment, poverty and social
problems, the general welfare of the people must be the only barometer
of change.
X
The PRIMARY ECONOMIC CYCLE. To ascertain if there were any
fundamental factors which caused fluctuations in the economic
condition of the people, a survey was made of the major events
affecting their welfare from about 4000 B.C., the beginning of the
Tribal Period in Britain. While making the survey, which is reported
in greater detail in Appendixes A and B of the plenary paper, it
became very clear that, contrary to traditional classification which
tends to obscure the economic effects of events, there are but two
major ages, THE AGRARIAN ERA, and THE DEBT ERA.
XI
The Agrarian Era, c. 4000 B.C. to 1840 A.D., was a period of
agrarian reform in reverse. In the beginning land was plentiful and
access was free or cheap for the growing population. General poverty
was unknown. Justice, the proclaimed goal of the U.S. Constitution,
and of modem agrarian reform, prevailed.
XII
After some long-term fluctuations above the subsistence level, the
general condition of labour reached a peak (about three and a half
times better than the subsistence level for a family of five) during
the Golden Age of labour in the late 15th century, never since
equalled. Tragically, it was due to a severe labour shortage caused by
the Black Death. After that, the few powerful landowners, who already
had seized the most valuable half of English land following the Norman
conquest, increasingly excluded the people from their common lands
through a series of Great Train Robberies, euphemistically called "enclosures."
During the next 100 years, the general condition of the people
plummeted, in a cruel PAUPERIZING NEGATREND, to well below the
subsistence level where it remained for the next 300 years. In the
end, land was scarce for the growing population and access cost all
but a bare living. Extreme poverty was common. Injustice, the target
of agrarian reform, prevailed.
XIII
The Agrarian Era represented a general downtrend modified by four
cycles averaging 250 years, ranging from 130 to 1,230 years. They were
too long and irregular to be useful as a predictive tool in
econocycology. As land monopolization had completed the pauperization
of the people by the 19th century, and has kept them there, it may not
be counted thereafter as a major fundamental causative factor of
cyclic changes in the general welfare. Later changes could be but
relatively small fluctuations about the subsistence level - of bad
times and not-so-bad times. Compared with the Pauperization Period,
these are more volatile microcycles best measured by sensitive tools,
such as statistics, but
caveat statisticus.
XIV
The Debt Era, 1700 to ????, began in England after the Bank of
England had been established to monetize the National Debt; to finance
the budget from future production; to provide financial services to
industry and commerce; and covertly to enrich the landowners. It
overlapped the last 140 years of the dying Agrarian Era, and coincided
with the beginnings of the agricultural, industrial, chemical and
electrical revolutions, generally grouped as the Industrial
Revolution. In the U.S. it began in 1913 when the Federal Reserve Bank
was established. These were the years in which Britain and America
emerged from developing to developed status.
XV
The Industrial Revolution and capital investment increased
productivity at an exponential rate, but did not improve the general
welfare of the people whose condition continued to fluctuate about the
subsistence level. Their slice of the ever-growing pie remained the
same. Manufacturers and merchants got nice big slices, which were
their due rewards. But the bulk of the rapidly growing pie was shared
by the holders of monopoly privileges (rentier rights) in land and
other things, their portions depending upon their relative strengths
in the market.
XVI
Taxation is not a primary factor. Distribution theory,
observation and statistical evidence demonstrate that, despite the
vast increase in taxation over the past 150 .years, the general
economic condition of most of the people has remained at a level where
they can barely get by from month to month, and only about 3% of the
population reaching age 65 can support themselves without the aid of
government handouts. Nothing but a concentration camp could drive it
lower: nothing but a complete, unlikely reversal of the causative
process - a de-monopolization of land and other rentier rights, or a
shortage of labor, could send it much higher. Taxation contributes to
short-term fluctuations of the cycles, only as major taxation changes
are cyclical. In the long term, taxation is at the expense of rent,
and may not be considered as a causative factor in econocycology.
XVII
The Debt Era mushroomed after the two World Wars, as the people
demanded more of the good things of life which they could not afford
to buy from their poor wages. The ease with which attractive interest
rates enabled wealth to be transferred from private to public hands
enticed governments to borrow and build up debt which many believe can
never be repaid. (The writer is not one of them.)
XVIII
Deferment of payment from current to future production increases
demand for both finance and production, which translates into an
expanding economy, higher interest rates and rent. Government
borrowing reduces current taxation, which has the same effect as
increased productivity, an advantage which is soon captured by
increases in rent and land prices. (Henry George,
Progress and Poverty, page 255 et al). Therefore,
deficit spending and debt financing is equivalent to a continuously
increasing subsidy to landowners.
XIX
As the expansion of the economy progresses, land prices, debt and
interest rates, increase exponentially, driven by anticipation. When
business no longer can meet these costs, slowdown, layoffs,
unemployment, bankrupties and foreclosures appear. The boom usually
collapses quickly, receding into a depression. Reduced business
activity and employment reduce the ability to pay high rents, land
prices, commodity prices and interest rates. They eventually sink to a
level where business begins to pick up again - the recovery phase -
which is usually slow to improve until the speculative fever returns.
And so, the PRIMARY ECONOMIC CYCLE IS COMPLETE. It depicts
fluctuations in land prices, debt, interest rates, and general prices,
all of which have an inverse influence on the general welfare of the
people.
XX
The shape of the primary economic cycle is not sinusoidal as
represented by other students, but is that of two "J"s
back-to-back with a flatfish trough in between, as explained in the
plenary paper. The average duration of the down leg of the T is
relatively short - about a year; the average of the up leg is about
four years; the intervening period varies from 0 to 5 years; the
length of the cycle ranges between Sand 10years, averaging 9 years,
close to that of Juglar's cycle. The general trend is a succession of
higher highs and higher lows, in an ASCENDING WAVE of irregular
fluctuations in land prices, or a suitable proxy, fluctuating
generally above an ascending trend line of lows.
XXI
Resistance to change - a sort of hysteria of the mind: a
synaptic short circuit due to deeply embedded conviction, greed or
fear, which takes time to clear, is the force which shapes the
business and economic cycles. In the financial field it takes about 18
months on average, although greed overcomes fear more slowly than fear
overcomes greed. It is the latter which causes "panics."
Usually six changes of direction, or fluctuations, are seen in the
major nine year interest rate cycle. Some of these fluctuations are
blips, which indicate phony recoveries and recessions. Of course, as
in any population distribution curve, we would find that a few people
change their minds more quickly, and a few more slowly than the
average. Among these we find the big winners, and the big losers,
respectively.
XXII
Psychological changes in mood are highly unpredictable, and the
accompanying cycological changes are equally so. Regular, periodic
cycles have never existed and it is unlikely that they every shall.
Nevertheless, the general trend, short term changes in direction, and
probable range of duration, may be a useful planning tool.
XXIII
CONCLUSIONS
The main conclusions drawn from the plenary paper are: -
a. Cycles occur more or less randomly, about every five
to 10 years, in an irregular, ascending "back-to-back J-wave,"
the trend-line of which indicates the portion of the national
production privately expropriated by monopolists of land and other
rentier rights: Regular, sinusoidal periodic cycles do not occur.
The cycles offer no guarantees, but a good, discretionary guide for
political activism and investment planning.
b. A primary economic cycle of fluctuations in total monopoly
prices is the only one which most accurately, but inversely,
indicates fluctuations in the general welfare of the people; land
prices, debt, or interest rates may be used as an approximate, but '
nevertheless suitable proxy;
c. The enrichment of the few by privileged monopolization of land
and other rentier rights to rob production and pauperize the people,
represents a 2,000 year long reaction to government efforts to tax
the unearned incomes of the monopolists. Since the beginning of the
Debt Era, especially after World War I, these monopoly privileges
have become institutionalized, more widely held, and more deeply
entrenched. All attempts to impose similar taxes will meet with even
greater opposition. Besides, a tax only on land values will make
other monopoly rights more lucrative. Funds now invested in equity
in land will flow to them, increasing their values, creating a
greater shortage of investment funds for real capital investment,
and driving up interest rates. A more balanced and politically
possible way needs to be exploited;
d. Budget deficits in both government and private sectors increase
land values. Balancing the budget will be equivalent to taxing land
values; and it is politically possible;
e. The mis-named Capital Gains Tax is mostly a tax on gains
from speculation in, and the disposition of monopoly rights in land
and other things. It is the only tax which does that, and does not
tax wages, real capital investment, and the profits of business. It
is the single tax which taxes all monopolies, as Henry George
suggested in Progress and Poverty, p. 410, and it is at
hand. It already taxes the disposition of monopolies at 33%. A small
increase would enable the budget to be balanced; an increase of aout
10% would enable all other taxes to be abolished.
XXIV
The study of cycology is little more than intellectual bubble blowing
unless we can learn from it the causes of changes in the general
welfare; how to prevent or reduce their effects; how to relate to the
current concerns of the people and the politicians; and how to build a
powerful, well-funded movement to get the indicated reforms
implemented by available politically possible means, preferably by
amending current legislation.
XXV
Georgist activists could benefit greatly from using cyclic
fluctuations in the general welfare of the people as a guide in
customizing their agenda and fund investment plans. An outline agenda
is suggested in the plenary paper.
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