This time is NOT different: part one
By Dr. John F. Sase
with Gerard J. Senick
“There are only a small handful of people who really understand what’s going on in the economy... and they all disagree!”
– Robert Eaton, former chairman of Chrysler
Over the next few months, we will explore the economic history of financial crises, events that continue to occur and reoccur. Throughout history, both rich and poor countries have muddled their way through a vast range of crises. These crises have included sovereign-government defaults on both domestic and foreign national debts, banking and financial market panics, and collapses due to piracy on the high seas and subprime mortgage meltdowns. In addition, there has been monetary inflation, due to everything from species-currency debasement, which reduced the gold and silver content of coins in favor of more base metals in recent centuries, to the modern corollary of printing more paper money within a network of sovereign fractional-reserve central banks.
Apart from a handful of octogenarians with sharp memories who can remember the Crash of 1929 and the subsequent Great Depression first-hand, most of our present generation has little recollection of such matters. Therefore, when the Subprime Mortgage-Backed Securities Bubble burst in 2008, we felt that we had encountered something unheard of in human history. In response to this episode, many Americans denied any connection to past crises. We stood around chanting “This time is different.” However, in their book of the same name, “This Time is Different: Eight Centuries of Financial Folly” (Princeton University Press, 2009), Carmen M. Reinhart and Kenneth S. Rogoff produce evidence that refutes our belief, evidence that is almost a millennium old. The authors cover sixty-six countries across five continents and eight centuries to create their argument that financial disasters are universal behaviors, rites of passage for all countries and nations.
Earlier in the Twentieth Century, Sidney Homer published his first edition of “A History of Interest Rates” (Wiley, 1963). Homer presents a readable account of interest-rate trends and lending practices that span more than four millennia of economic history. By including evidence from ancient Mesopotamia, Greece, and Rome, the Medieval Times, and Renaissance Europe, he offers a big-picture view of the rise and fall of empires against the backdrop of the fall and rise of their long-run average interest rates. Homer concludes that these rates move inversely to the rise and fall of empires.
The Great Muse
Many people consider economists a gloomy lot. Other less kindly critics view this field as one that attracts the chronically depressed. This may be true. However, we are not bereft of our colorful characters. For example, the nineteenth-century English author, jurist, philosopher, utilitarian economist, and legal and social reformer Jeremy Bentham could not have gone to his reward without some sense of humor. Leaving a large endowment to University College London, Bentham set forth in his will that his remains be wheeled solemnly into the Council Room of the school so that he may take his place at all regular meetings of the College Council. Since his earthly demise in 1832, the meeting minutes have recorded him as “present but not voting.” When not in attendance at meetings, Bentham resides as an Auto-Icon framed by a wood and glass case positioned in a main lobby of the college. He intended that his head should be part of his Auto-Icon, which includes his fully dressed and padded skeleton. However, when the time came to preserve Bentham’s head for posterity through a method of desiccation practiced by the Maori Tribe of New Zealand, the process went disastrously wrong. It robbed the face of most of its expression and left it decidedly unattractive. The college then substituted a wax head atop the body with Bentham’s real head reposing on the floor between his feet, both in his display cabinet and at meetings.
Unfortunately, the real head of Jeremy Bentham became a target for a roving band of Economics students from King’s College London. These rogues stole the head and held it for ransom. The final thread of tolerance by University College broke when officials discovered the head being used for soccer practice on their front quadrangle lawn. After this incident, the powers that be removed Bentham’s noggin and placed it in more secure storage. Today, Bentham’s fully attired skeleton, surmounted with the wax head, can be seen as he sits in his lobby cabinet.
However, let us turn to Jeremy Bentham the person as social reformer, utilitarian economist, and philosopher. Bentham is remembered best as a leading advocate for social reform and the reform of the British prison system, which had degenerated into inhumane work houses and hellholes. In searching for a solution, he designed the Panopticon, an institutional building in the round. Though Bentham conceived the basic plan as being equally applicable to hospitals, schools, poorhouses, daycares, and madhouses, he devoted most of his efforts to developing a design for a Panopticon prison, which he described as a new mode of obtaining “power of mind over mind.” The design concept consisted of a circular structure with an inspection house at the center. From this vantage point, the staff of the institution could watch the inmates housed around the perimeter without their knowledge of being watched. A real prison based on Bentham’s design was never built. However, there are twenty-five prisons internationally that are Panopticon-inspired, including one in Illinois.
As a leader of the intellectual movement in Europe and America during the late eighteenth and early nineteenth centuries, Bentham was joined by contemporary polymaths such as Johann Wolfgang von Goethe of Germany and John Ruskin of the Pre-Raphaelite Brotherhood in England. Furthermore, Bentham allied himself with fellow Unitarians, including Joseph Priestley, Harriet and James Martineau, and economist John Stuart Mill, all of whom were leaders in the movements for factory reform, prison reform, public health, temperance, rights of women, and the abolition of slavery. In accord with their beliefs, Bentham and many of his entourage crossed over into the Fabian Socialist organization that ultimately included Florence Nightingale, the founder of modern nursing; Prince Otto Bismarck, chancellor of the German Reich; Helena Petrovna Blavatsky, founder of the Theosophic Movement; Fabian essayist Annie Besant, who succeeded Madame Blavatsky as president of the Theosophical Society; Sir Neville Chamberlain, British statesman; scientist Charles Darwin; economists David Ricardo, John Stuart Mill, and John Maynard Keynes; writer Karl Marx; Benjamin Disraeli, the Prime Minister of England; and authors/philosophers Aldous Huxley and Bertrand Russell. The underlying common beliefs of this most influential group included an early rejection of the concept and philosophy of Materialism, perceived as the fundamental spirit of the current cultural epoch. This spirit of time grew throughout the Industrial Age of the nineteenth and twentieth centuries to permeate the global society and economy in which we now find ourselves.
In addition to the above tenets, members of this complex intelligentsia sought and embraced ancient teachings from Asia and disseminated the lessons of Buddha and other religious figures from India and Asia. For example, Madame Blavatsky traveled to India and remained there, gathering and studying ancient teachings, for a number of years. Upon her return from the east, she brought a new wealth of ideas to Europe and America and shared much of what she had learned through the Theosophical Society.
All of these events beg these questions: Why did this intellectual enlightenment from the east to the western world throughout the eighteenth and nineteenth centuries occur at that time in history? How does it affect the nature of and our perception of the complex system of economic cycles that periodically erupt into financial crises? The answer to the first question is simple. The trade that brought this intellectual enlightenment was economic in nature. Therefore, it forms the basis for our continuing story. The pivotal event was the creation of the British East India Trading Company in 1600 CE. The Company reopened the Asian sub-continent to the west after two millennia of very limited contact. In 1608, ships from the Company first arrived in India at the port of Surat. Two centuries of communication and trade with the west already had been established before Blavatsky and other Westerners traveled there.
German polymath philosopher and teacher Rudolf Steiner brought much of the older esoteric knowledge forward into the Twentieth Century; his writings continue to influence scholars to this day. At the dawn of the century, Steiner involved himself with the Theosophical Society in Berlin. In 1904, he started to break away from the spiritualist faction because he claimed that they had gotten into objectionable practices. For example, this faction was attempting to bring back the dead in order to use them to impersonate the relatives of clients at seances. Also, President Annie Besant began to present the child Jiddu Krishnamurti as the reincarnated Christ. Steiner formed the Anthroposophical Movement around 1909.
Important to our current discussion, Steiner dates and names the cultural epochs that began with Ancient India in the eighth millennium BCE. These epochs include Persian, Egypto-Chaldean, Greco-Roman, and Anglo-German, among others. All of these epochs are of equal length, approximately 2,200 years. Unfortunately for our present purposes, reliable data on Economics that is currently available dates only to the Sumerian civilization of the Uruk period of the fourth millennium BCE, the middle of the Persian cultural epoch.
In his article “How Interest Rates Were Set, 2500 BC to 1000 AD” (Journal of the Economics and Social History of the Orient, Vol. 43, Spring 2000), historian Michael Hudson tells us that readable, detailed data in Sumerian economic records only began to appear around 2500 BCE. At this time, which was during the Bronze Age, certain professionals, skilled tradespersons, and managers began to pay a recorded fee to the temples or to the palace. As this system of tithing promulgated throughout the ancient world, the recording of credits of advance payments made and debits of accrued obligations owed needed to be made. As a result, written contracts, pledges of collateral, affidavits of witnesses and sureties were recorded along with publicly regulated rates of interest.
“Letting the Days Go by / Let the Waters Hold Me Down / Letting the Days Go by / Water Flowing Underground / Into the Blue Again / After the Money’s Gone / Once in a Lifetime / Water Flowing Underground... / Same as It Ever Was / Same as It Ever Was”
– David Byrne, Lyrics from “Once in a Lifetime” by Talking Heads, Sire Records, 1980
Our takeaway from the observations made by Sidney Homer, Rudolf Steiner, Jeremy Bentham, and others is that mega-cyclic economic changes move in lock-step with the development and decay of empires, across the ages of our human past. Overarching observations of previous economies read as follows: Sweeping economic change reflects the skills and knowledge of a population, its production of goods and services, the behavior of markets and trade, and a myriad of other factors. These float atop an undercurrent of massive and lengthy cyclic changes in agriculture, planetary fluctuations, and our relationship to the sun and companion planets of our solar system against the backdrop of a universe in constant motion.
Prices and quantities of product, labor and wages, and money and interest rates form simple markers by which we may gauge fluctuations over lengthy periods of time. Though we may not yet possess the tools to measure the economic fluctuation of cultural epochs accurately, at least we have sufficient methods and data to measure the rise and fall of individual empires. In his “History of Interest Rates,” Sidney Homer offers evidence and explanation in the form of long-run interest rates over the lifespan of these empires. Dr. Homer measures interest rates, ranging from the Sumerian empire through more recent ones. He explains that, though interest rates remain in constant flux, they follow a long-run trend downward as an empire builds to its point of maturity-its golden age. Then, as an empire begins its process of slow decay into the abyss of history, interest rates begin to follow a long-run trend upward.
The simple explanation for this phenomenon in economic terms is risk. Risk is associated with uncertainty-uncertainty over time and at a given point of time. The greater the uncertainty, the greater the perceived level of risk. In order to undertake increasing risk, the potential reward must grow correspondingly greater. Hence, the interest rate must be higher than it would be under conditions of greater certainty.
The cycle of empires remains the longest fluctuation that we can measure in meaningful economic terms. The major financial crisis that we observe within the empire cycle is tied to the deterioration of the empire itself. The final phase of collapse often comes in the form of siege and sacking from without after the empire already has been destroyed from within. Nevertheless, most of us are more interested in understanding fluctuations and the occurrence of crises within a smaller window of time. However, given an understanding of cultural-epoch cycles and the shorter empire cycles within each of the former, we can begin to understand the nature of the temporal cycles that we experience within our own lifetimes.
In our discussion of economic cycles, the debate continues as to whether or not shorter cycles are tied to, or, ride upon, longer ones. The Social Science of Economics exists in the space between natural and spiritual sciences. Traditionally, the current permutation of Economics known as Neo-Classical leans heavily upon the concepts borrowed from physics and other natural sciences. The concept known as the Fourier Harmonic Series is one that we use to measure waves upon the ocean, currents of air, and harmonics in music and color. In Economic Cycle Theory, we apply this concept to the apparent periodicity (recurrence at regular intervals) of different economic cycles. We will treat the physics of harmonics as an analogy or metaphor when applied to series of economic fluctuations.
The concept of economic cycles is based upon a theory that attempts to explain changes in business against long-run growth and decay trends as observed in market economies. In determining an economic cycle, we include such variables as growth of Gross Domestic Products, aggregate household income, and labor employment rates, in addition to the factors mentioned earlier.
Economists divide the cycles into two main phases, booms and recessions. Associated with a strong economy, booms are measured as progressions above the long-run trend. In contrast, recessions are characterized by below-trend activity.
In the mid-Twentieth Century, Austrian economist Joseph A. Schumpeter and others proposed a typology of business cycles according to their periodicity. Considered by some economists to be components of the harmonic series of economic cycles, the prominent ones include, in descending length: 1) The Nikolai Kondratiev Wave, which reflects a long technological cycle of forty-five to sixty years. His initial Nobel Prize-winning measurements determined a fifty-eight-year cycle based upon long-term agricultural prices and wages; currently, the Wave has been adapted to measure changes in technology. 2) The Simon Kuznets infrastructural (building) investment cycle, which reflects changes that have a frequency of fifteen to twenty-five years. 3) The Joseph Kitchin inventory cycle, which is eight to nine years in length, and 4) The Clement Juglar fixed-investment business cycle, which averages 3.3 years.
Jay W. Forrester, the Germeshausen Professor in the Alfred P. Sloan School of Management at the Massachusetts Institute of Technology, has spent four decades studying business structure, economic cycles, and national policy. Within the past decade, Dr. Forrester and his colleagues have developed and assembled a system-dynamics model of the national economy. Preliminary studies indicate that production sectors generate three different modes of fluctuation in the economic system of the United States. These are similar to the forty-five-to-sixty-year Kondratieff cycle, the fifteen-to-twenty-five-year Kuznets cycle, and the three-to-seven-year business cycle in long-established Cycle Theory.
Forrester’s empirical results support earlier theories of Economic Cycles. Though Forrester’s empirical work focuses on the American economy, his methods can be applied to data from many other countries as well.
In simpler terms, Rudolf Steiner discusses complex changes as cycles of nature in his Agricultural Course lectures (14 June 1924). He explains that numerous, harmful pests, such as bugs and weeds, reappear at regular intervals of years. For example, dandelion growth is promulgated by solar rays reflected off of the moon. This year, the moon is closer to the Earth than it has been in three-quarters of a century. Many of us have noticed the large amount and size of the dandelions in our yards. Coincidence? We think not.
In his lecture, Steiner discusses the travesty of vine plantations that were subjected to the ravages of grape-louses in Austria and Central Europe during the 1880s. Experts were at a loss to find a remedy against the grape-louse. In time, this infestation displaced many peasant vine-tillers, reduced the output of grapes in the market, and led to the migration of numerous agricultural workers to the United States.
Today, we have various products such as pesticides to treat such problems. However, the appearance of cicadas (misnamed as locusts) remains a costly threat to agriculture. These cicadas are the Magicicada genus of thirteen- and seventeen-year periodicals of eastern North America. From an economic standpoint, not taking an active defense against the cicadas reduces production, displaces agricultural workers, restricts market supply of foodstuffs, and raises prices. However, active defense adds to the cost of production and also raises food prices in the end. Food costs represent more than 10% of income for the average American family. History tells us that the locust plague of 1915 resulted in the price of potatoes increasing six-fold that year. The Great Eastern Brood of cicadas that appeared in 2004 will appear along the East Coast, leading into the Midwest, in 2021. Perhaps, Nikolai Kondratiev was detecting these and similar agricultural fluctuations when he measured his fifty-eight-year economic cycle in the wave mentioned above. These agricultural cycles are important; we tend to ignore them because we have moved away from our agrarian roots in our rapid worldwide urbanization.
The German word zeitgeist means the spirit of the times or the spirit of the age. Zeitgeist is the general cultural, intellectual, ethical, spiritual, or political climate along with the general ambiance, morals, mood, and sociocultural direction associated with an era. Nature, or at least that portion of nature that is non-human, contributes greatly to the zeitgeist. However, human beings; our behavior; and our social, political, and economic structures also contribute to the spirit.
If we could, we might ask Jeremy Bentham and his compatriots whether they are the protagonists, antagonists, or mentors of the zeitgeist in our current cultural epoch. Perhaps they are all three, perhaps none of them. On the other hand, they might tell us that as collective humanity, all of us are the hero, mentor, and enemy within the mythos of this zeitgeist. We passed out of the former Greco-Roman Epoch and into the present Anglo-German Epoch during the early fifteenth century. Within this age of materialism, we have given birth to a new entity among us. It acts as if it were human. Since the late nineteenth century, it has gained human-like rights under national laws and in the marketplace. Whether or not Mary Shelley developed a metaphor for it with her creation of the Frankenstein monster, this new entity behaves in much the same way while it is understood and misunderstood by our global culture. Filmmaker Mel Brooks took Shelley’s metaphor a step further. See below...
“Ladies and Gentlemen, Madames et Messieurs, Damen und Herren, from What Once Was an Inarticulate Mass of Lifeless Tissues, May I Now Present a Cultured, Sophisticated Man about Town!”
– Gene Wilder as Dr. Frankenstein, Young Frankenstein (20th Century Fox, 1974)
In order to understand Economic Cycles and Financial Crises, we first must understand the major protagonist and antagonist-the Incorporated Company. In their book “The Company: A Short History of a Revolutionary Idea” (Modern Library, 2005), business historians John Micklethwait and Adrian Wooldridge trace the development of the modern corporation from the thirteenth century to the present. The authors note that the way we produce, trade, and finance within our epoch increasingly has been a result of the corporate form. Since the development of the Corporation of the City of London a millennium ago, this form of business entity has changed the way that we organize many of our human activities on a global scale. Furthermore, the progression of financial crises throughout recent centuries has attached itself to and conjoined with the development of the modern multi-national corporation. As a result, it is not possible to analyze and to understand the nature and causes of these crises without an understanding of the behavior of this dominant form of business entity.
Furthermore, we also must keep in mind that the major growth spurt in the number and size of corporations has occurred only within the past 250 years. At the time that British economist Adam Smith wrote his classic “An Inquiry into the Nature and Causes of the Wealth of Nations” (W. Strahan and T. Cadell, 1776), a large company employed only twenty-five people. By contrast, Walmart Corporation currently employs more than two million workers globally. Within the financial sector, the number of banks in the United States has decreased while their average size has increased. In 1920, there were almost 30,000 banks in the U.S. Today, less than 8,000 remain. The four largest institutions, Bank of America, J.P. Morgan Case, Citigroup, and Wells Fargo, control half of all bank assets in the United States.
In his book “Supercapitalism: The Transformation of Business, Democracy, and Everyday Life” (Knopf, 2007), former Secretary of Labor Robert B. Reich explains corporations. He states, “A final truth that needs to be emphasized – the most basic of all – is that corporations are not people. They are legal fictions, nothing more than bundles of contractual agreements.” Reich adds that “[T]he triumph of Supercapitalism has led, indirectly and unwittingly, to the decline of democracy.”
Nevertheless, in spite of the myriad views on the subject, we must find adequate tools to analyze the long series of financial crises that we have encountered in our country since the end of Colonial times. Furthermore, we must develop a language with which to discuss the nature and cause of these crises. Calling upon our muses in the forms of Jeremy Bentham, John Stuart Mill, David Ricardo, and others, we seek a method of systems analysis and an institutional view-a Chaos Theory that properly is called Dynamic Systems Theory. In addition, a corollary subset of Chaos Theory is Catastrophe Theory. As systems evolve, their various components interact and co-adapt over time. Often, significant events known as Chaotic Attractors occur. These attractors have major evolutionary consequences. For example, an asteroid striking the Earth may cause an Ice Age. This is a case of what evolutionists call Punctuated Equilibrium, meaning that such a catastrophe would have widespread ripple effects, for better or worse.
What do Economic Cycles mean to attorneys? These cycles and the fluctuations of income that accompany them influence the number of clients who can afford to pay both plaintiff and defense counsels. The fluctuations also affect the availability of credit and rates of interest for the credit that is used to finance litigation. In addition, these cyclical changes influence the ability of defendants or their insurance carriers to pay awards determined by jurors. Finally, attorneys who understand Economic Cycles can prepare themselves and their practices to weather economic storms. In our next column, we will apply what we have discussed about integrated systems. We will explore the nature and causes of the dozen economic crises that have struck the United States from the days of its Constitution in 1789 to the first great contraction that began in 1929, known as the Great Depression.
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A PDF copy of this article is posted at http://www.saseassociates.com/legalnewscolumn.html. We continue to post videos related to our monthly column on www.YouTube.com/SaseAssociates.
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Dr. John F. Sase of SASE Associates, Economic Consulting and Research, earned his MBA at the University of Detroit and his Ph.D. in Economics at Wayne State University. He is a graduated of the University of Detroit Jesuit High School. Dr. Sase can be reached at (248) 569-5228 and by e-mail at drjohn@saseassociates.com.
Gerard J. Senick is a freelance writer, editor, and musician. He earned his degree in English at the University of Detroit and was a Supervisory Editor at Gale Research Company (now Cengage) for more than 20 years. Currently, he edits books for publication and gives seminars on writing. Mr. Senick can be reached at (313) 342-4048 and by e-mail at gary@senick-editing.com.
