Long Wave
Economics Theory Page Long Wave
Economics Theory Page
The
following is the first cut abstract of a paper which I have
written, that was accepted for presentation at the World Sociology Congress in Montreal. The ISA
(International Sociological Association) has a splendid working
group focussed on Sociocybernetics and Social System
Theory.
Abstract Title: Social Causes of Periodic Depressions: When does empirical data become sufficient proof?
If there is a single shortcoming of the sciences at the moment, it may well be that the age of specialization has limits. I believe this to be especially true in the pursuit of understanding of long wave economics.
While few will dispute the existence of the phenomena, almost all studies I’ve seen to date, view the financial events in the narrow context of economic analysis. The difficulty with this approach, as I will demonstrate in this paper, is that the true causes of long wave cycles are not to be found within economics, but rather in large historical events.
Before I get to any proposed conclusions, I have to make a confession. I have a very peculiar way of looking at the world and where we are in human history. I haven’t cooked up a name for it yet, but it is a simple matrix approach to world-view development.
The approach is a pretty much common sense one. A little Maslow hierarchy, and some of the physical facts of life. The matrix I used in this study includes the key data elements of life regardless of time in history. These are food, shelter, transportation, energy, environment, finance, communications, and human relations. It’s an 8 by 8 matrix, with the elements lined up on the X and Y axes, and the Z axis extending from the infinite past to the future. (Ed: graphic not shown on web)
There are no null sets in the matrix. When the matrix poses a question like "What is the food of food?" there is an answer. In present times, cattle feed, or fertilizers, are possible manifestations at the intersection.
At intersections like transporting the transport systems, you find things like containerships loaded with cars, and even that special 747 of NASA’s with the Space Shuttle on its back.
Armed with this rather unconventional way of looking at history, I went back and tried to determine what the true factors were that could explain large-scale economic events. It wasn’t very difficult to do. What I discovered was that in fact exogenous events, which have an unexpectedly large impact on the relatively stable supply/demand/price model, appear to have the potential to cause a rapid and dramatic shift in supply/demand/price equilibrium, the central ingredient for financial panic.
Put another way, financial markets are not unlike a man walking on an icy path. As long as the incline of the path doesn’t change rapidly, the man’s gait is adjusted. However, if a man suddenly encounters a steep surface, he tends to slip and fall. Sometimes, with damaging results. He will likely get up and continue, but getting going is painful at first.
So it seems for the financial markets. They operate fine as long as the incline of the path is fairly regular or changes slowly. But should there be a sudden shift in either supply or demand, a fall may be precipitated. At times, these falls have been quite painful.
Looking at economic system internals to determine the cause of periodic crashes and panics makes about as much sense as studying the construction of various barometers and thermometers to see how they cause weather! As evident in the icy path example above, studying economic factors is like studying a man’s shoes. They may be where the "slip occurs", but they certainly aren’t the cause: there’s a much bigger mechanism involved: In the one case, the problem is outside the shoes, and in the other, outside the field of economics.
Along this line, I have come to the [working] conclusion in this paper that the true cause of past depressions may be generally ascribed to systemic displacements in the production (or consumption) of goods and services which – in turn – causes panic (or major slips) in markets.
Here are some examples:
Crash of 1929:
In a peculiar way, this panic was caused by the automobile. Prior to the auto, the US had 7 million horses supplying transportation. These horses occupied 225 million acres of land. As horses were quickly phased out, farmland was converted to commodity production of wheat and corn. This led to over-supply and rapidly falling prices. (1)
Bottom line: Short-term commodity over-supply occurred as farmers converted grazing land for horses into productive crop lands. Over time, the number of farms was reduced and creative ways were found to reduce over-supply. Cattle was fed grain, and hogs started eating really well, too. Concurrently, government price support programs were enacted.
Panic of 1873
Despite a focus on the role of the "railroad investment bubble", it appears a combination of several two factors caused this panic. The largest single factor I found was that as a consequence of the Civil War, 7 million blacks suddenly [and deservedly] became full participants in the Reconstruction Era economy. But, as one essayist has noted, Reconstruction was not a happy event for either a victorious North or the occupied South:
"Reconstruction came to an end with the Compromise of 1877, which dictated that the last Federal troops leave the southern states. With the departure of the Federal troops came the return of segregation, and Jim Crow laws were passed throughout the South to "keep blacks in their place." (2)
Bottom line: A short term labor over-supply, resolved by a partial return to segregation coupled with westward expansionism.
Panic of 1837:
Within economic circles, the battle over the charter of the United State Bank is cited as a precipitating event. My own research, however, shows again that there were two much more fundamental shifts in the mechanisms of production and consumption. One was new supplies of land via Jefferson’s Louisiana purchase of 1803, and the acquisition of Florida from Spain (1821). The second and larger displacing factor was the sudden replacement of labor in textile mills by the steam engine and the cotton gin (1793). This caused a dramatic drop in the cost of finished cotton goods, which did not fully recover until after 1840.
As my well known ancestor, Andrew Ure, noted at the time, the impact of the steam engine on production techniques and wages, both in England and here in the U.S., approached cataclysmic:
"It deserves to be remembered, moreover, that hand-working is more or less discontinuous from the caprice of the operative, and never gives an average weekly or annual product at all comparable to that of a like machine equally driven by power....
In hand-weaving ... the depreciation of wages has been extraordinary. Annexed are the prices paid at different periods in Manchester for weaving a sixty reed 6/4 cambric, as taken in the month of March each year; the weaver paying threepence out of each shilling, for winding his warp, for brushes, paste, etc. In 1795 39s. 6d. 1800 25s. 1810 15s. 1820 8s. 1830 5s. " (3)
Bottom line: The short term oversupply of labor was dispersed to the new West, in part facilitated by the Cumberland Road Project (which was not finished until the 1850’s), and the 1822-25 opening of the Erie Canal.
I think the period we are presently entering into will prove similar from an historical perspective. When one component of the supply/demand/price model shifts quickly, markets fail.
Pipeline Fill and The Next Panic:
In each of the three examples above, the supply or demand side of the equation has been quickly altered. In the 1929 Crash, it was a huge flow of grain coming to market. In 1873, it was the potential inclusion of a large new workforce. In 1837, it was displaced workers and falling prices from factory automation.
There’s no reason to believe that in the present circumstances, a different outcome should be expected.
In a very large sense, the world is encountering a phenomena experienced in manufacturing and retailing called "pipeline fill". The way it works, in most simple terms is this: When a new product comes to market through large retail distribution channels, such as a national retailer, the amount of stock required just to put 10 units in every store, is huge. But once the product is in stores, production drops back to a level roughly equivalent to consumer demand. This is called "sell through".
The world is presently just coming to the end of some very important pipeline fills in the short term. Take as one example, the auto industry. The worldwide demand for cars in 1998 is estimated at 60-65 million units. Capacity to produce cars exceeds 85 million units. It should come as no mystery that Kia, and other manufacturers, are taking their lumps.
Without due caution, pipeline fill usually results in a temporary glut. This causes price deflation.
To make matters worse, while pipeline fills are occurring in autos, computers, and perhaps airplanes, the South Asia countries and China have brought huge supplies of labor to the marketplace. Because of low wages, these producers are not yet consumers.
Because of these factors, I believe we can "slip on the ice" again and have a moderate sized crash. But, as before, we’ll get up.
Can the field of economics grow to become an interdisciplinary field with more emphasis on history and a better understanding of exogenous forces? To date, it seems just too much fun to apply formulas to explain why "the shoe is slipping on the ice" rather than consider how the path we are on could be improved to make slipping less likely.
Economics is one of those fields where in order to understand a set of railroad tracks, we stand to the side of the tracks and only look across them. We don’t look down the tracks to see if a train is coming, nor do we look up the tracks to see the trains that have been past most. Instead, we focus tremendous energy on latitudinal studies, measuring the height of the rails, the distances between tracks, and measuring the ties. Then everyone seems quite surprised when we look up at the next train as it suddenly bears down on us.
Proposed Conclusions:
Large areas of the world have low paid laborers who have almost unlimited access to U.S. markets. This has resulted in regional deflation, and over supply in many sectors. Contrasted to this, the more developed industrial nations have just engaged in a massive bail out of many LDC financial institutions and banks.
This causes increasing instability. Large bailout borrowing within industrial countries fuels inflation after a time lag. it also fuels blow offs in the market. But then comes time to pay the piper. Bailout money finds its way into the markets. They explode upward, but briefly. Ultimately, supporting the deflationary labor rates on the peripheral, cause inflation at the center of the business world. As this disparity and imbalance grows, another panic becomes inevitable.
When the markets suddenly awaken to increasing costs (the inflation effect) on the one hand and decreasing consumer purchasing (the deflation effect) on the other, the moment of panic is defined.
The pending crisis will mark the fourth such occurrence since the founding of the United States. Careful analysis of each panic not only reveals the repetitive nature of the "walk on a slippery path" analogy, but provide lessons later ignored by policymakers.
References:
Reference Links:
Banking - Solvency and Runs: Federal Reserve view on prevention of bank runs, cost of prevention. Clearinghouse participation impacts on bank runs (FRB Atlanta - Abstract).
Scope of Year 2000 (Y2K) Problem: Gary North's excellent Stock Market impacts of Y2K page. (Newest links last)
Scope of Asia Market's Meltdown: American Enterprise Institute's October '97 Economic Outlook Report.
General Day to Day stuff: New York Post Business Page.
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