(continued)
Furthermore, we must keep in mind that the major growth-spurt of the number and size of corporations has occurred only within the past 250 years. In the year that the Scottish Economist Adam Smith wrote his classic book “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. Contrasting with today, Walmart Corporation employs more than two-million workers globally. Our financial sector has watched the number of banks decrease in the United States 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 Chase, 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 the nature of 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 “the 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 form of Economists Jeremy Bentham, John Stuart Mill, David Ricardo, and others, we seek a method of systems-analysis with an institutional view—a Chaos Theory properly called Dynamic-Systems Theory. As systems evolve, their various components interact and co-adapt over time. Often, significant events known as Chaotic Attractors occur. These attractors produce major evolutionary consequences. For example, an asteroid striking the Earth may cause another Ice Age. This concept emerges as a case that Evolutionary Economists refer to as Punctuated Equilibrium, meaning that such catastrophes would lead to 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 as well as influencing whether or not an award-amount is collectible. The fluctuations also affect the availability of credit and the accompanying rates of interest that are used to finance litigation. Also, these cyclical changes influence the ability of defendants or their insurance-carriers to pay awards determined by the bench or jurors. Finally, attorneys who understand Economic Cycles may prepare themselves and their practices to weather economic storms.
In order to achieve a higher level of understanding, we explore the nature and causes of the dozen economic crises that have struck the United States from the days of the implementation of its Constitution in 1789 to the first great contraction known as the Great Depression, which began in 1929.
To proceed, let us explore the nature of economic waves realized and measured by Russian-born Mathematical Economist Nikolai Kondratiev in 1922 and studied by many other economists since then. Observing back from the 21st Century is that each of these waves extends a length of fifty to sixty years. Given these estimates, each Cultural Age contains about forty average-length Kondratiev Waves.
The difference in wavelength rests on whether we are measuring industrial or agricultural data. Originally, Kondratiev measured his agricultural-based wave as 58 years. His latter industrial-based wave measures approximately 50 years. Of course, all but the most recent occurrences result from projections backward through recent centuries to eras of sparse quantitative data. We may theorize that the average cycle has shortened gradually over the past century in many countries due to rapid urbanization. Consider that 80% of the population grew its food in the United States during the early 1900s. However, following in the wake of the First World War, failures of farms and a growing demand for manufacturing labor led to a massive migration to cities. Over the decades, agricultural production has become highly mechanized. Today, less than 5% of the labor force grows food for our population. Also, economic and social changes have occurred concurrently with the evolution of sovereign governments as they redefine their roles in this millennium.
While searching through boxes of research material in my basement, I found an old fold-out timeline produced by the American Economist Leonard Porter Ayres for the Cleveland Trust Company in 1933. Ayres tracks all of the major and minor booms and busts in the U.S. economy since 1790. He identified thirty-seven downturns from 1790 to 1933. Ayres found that fifteen of them were too mild to warrant a name. By today’s standards, we would refer to these as Recessions.
Ayres labeled the remaining twenty-two downturns as Crises, Panics, and Depressions. Given this reckoning, the Crash of 1929 heralded in the twelfth and deepest Economic Depression in the U.S. He indicates that a First and a Second Post-War Depression followed the War of 1812, the American Civil War, and the First World War. Consequently, we refer to the collapse that began with the Stock-Market Crash of 1929 as the Great Depression. Initially, scholars referred to this episode as the Secondary Post-War Depression that followed World War I. For our readers who keep count, we have listed all of the twelve major Depressions and their dates:
1) The Embargo Depression—1807 to 1809
2) The Primary Post-War Depression (War of 1812)—1819 to 1821
3) The Secondary Post-War Depression—1826 to 1830
4) Debt-Repudiation Depression—1840 to 1845
5) The Secession Depression—1860 to 1862
6) The Primary Post-War Depression (Civil War)—1865 to 1866
7) The Secondary Post-War Depression—1873 to 1879
8) The Depression of 1884—1883 to 1886
9) The Silver-Campaign Depression—1896 to 1897
10) The War Depression (WWI)—1914 to 1915
11) The Primary Post-War Depression—1920 to 1922
12) The Secondary Post-War Depression—1929 to 1933
Now let us hear from our own Pulitzer-Prize-winning musical icon, Bob Dylan, on the subject:
“Now, a very great man once said / That some people rob you with a fountain pen / It didn’t take too long to find out / Just what he was talkin’ about / A lot of people don’t have much food on their table, / But they got a lot of forks ‘n’ knives / And they gotta cut something.”
—Bob Dylan, American singer/songwriter, “Talkin’ New York,” Bob Dylan (Columbia Records, 1962)
Don’t Fear the Reaper!
Overall, our Business Cycles inflate and deflate like balloons. As with a balloon that needs a strong burst of air in order to start its expansion, our economy needs a catalyst to begin the process of upward growth. When a balloon experiences excessive growth, it may burst. Our economy behaves similarly. Sustained growth beyond normal limits may cause the economy to go bust and to collapse as it did in the early 1930s. The preceding seven years of roaring growth through most of the 1920s concluded with a stock-market bust in October 1929. A ratcheting decline of the economy extended over the next three-and-a-half years to a level of near-complete collapse in 1933. Stock values of major industrial companies fell from record highs to 5% of their previous values before they began a slow recovery. Government contracts during the Second World War helped these industries to eliminate their pervasive one-third excess-capacity and sweeping unemployment.
Five Key Forces
A Business Cycle moves up and down over a course of years. On the long-term average, our Business Cycles repeat every three to four years. Each Cycle has four periods or phases. The repeated movement up and down is guided by at least five interacting economic forces. For general understanding, let us return to our analogy of a balloon inflating and deflating. However, reaching an understanding of the market-forces, which allow for normal rise and fall to occur, remains more of a challenge. In our following discussion, we consider five primary interrelated forces: 1) Production of consumer goods and services, 2) Consumption as the purchase of these goods and services, 3) Inflation as the speed and degree that prices and wages increase, 4) Inventories of finished goods ready for sale, and 5) Unemployment among those who have been working or remain available for work.
We view the Business Cycle of parallel and contrary motion of these forces as progressing through four phases: economic expansion, peak activity and affluence, recession as affluence falls, and the trough in which our economy “bottoms out” before restarting upward in the next expansionary phase. As expected, the five economic forces listed above rise and fall in reaction to one another through the four phases up and down periods of each cycle. Normally, these forces vary concerning each other throughout recurring cycles. Consumption of goods and services, production of them, and wage/price inflation tend to travel with one another in the same direction as our economy rises and falls cyclically. In contrast, inventories of finished goods and unemployment within the workforce tend to move opposite of the first three forces.
Expansion and Peak
When we state that the economy grows, we mean that our economic well-being rises throughout the expansion phase toward a peak. During this period, excess inventories disappear as they settle into a sustainable level in order to meet growing demand. Sellers liquidate inventory that is left from the preceding downturn and scrap items that become unsalable due to obsolescence or decay.
Meanwhile, producers generate fresh inventory in order to meet expected increases in demand for their products during the upturn. The need for replacement and expansion of present inventory leads to an increase in new production. In turn, increased production requires more hours of work, which means that unemployment and under-employment fall as laid-off or reduced-hour employees ramp up the workforce.
As our demand for skilled and semi-skilled workers increases, wages tend to rise competitively. These increases in employment and wages result in growing consumer-incomes. Collectively, this growth produces and affects consumption-spending as it cascades throughout the economy of rising price-levels. Eventually, consumption reaches a cyclical high-point in part by the replacement-demand for expensive durable goods such as automobiles, large kitchen appliances, and heating/cooling equipment, which we expect to last until the next economic cyclic-peak.
Toward the end of this climb, inventories approach satisfactory levels. Meanwhile, the hours of overtime worked fall while gains in prices and wages level off. Due to a decrease in take-home pay, the sale of all non-necessities stutters and begins a decline. Inventory levels rise as the downward trend of economic activity commences. As a result, production slows while layoffs increase and the rate of unemployment rises.
Recession and Trough
Among wage-earners, upward movement of hourly wages stagnates as price levels cease to increase. Average prices rarely fall, though we may remember that the Consumer Price Index dropped during 2009 for the first time in decades. Also, wage rates do not tend to fall. Due to legal restrictions in labor contracts for union workers, non-union workers in the region enjoy a positive spillover of collective bargaining. Effectively, hourly wage-rates rarely decrease. However, paid work-hours may diminish.
As household earnings decrease, consumption declines against a background of stagnant price-movement. As a result, consumers often downscale toward less-expensive substitutes in the food, beverage, and clothing categories of their household budgets. (Historically, substitution has meant a switch from domestically produced goods to less-expensive imported goods. These actions may lead to a long-run decline in the domestic manufacture of competing goods.) Meanwhile, household purchases of many expensive durable goods, such as new automobiles, washing and kitchen appliances, and entertainment devices experience delays until the next economic peak.
The more that consumption declines, the greater that the amount of inventories increase. In response, production declines. Resulting cutbacks in employment through furloughs and layoffs carries our economy down into a trough. As the earth of a farm rests throughout winter, our fallow economy reboots while many in the workforce seek to redevelop themselves through further education and job-training. Overall, asset-values realign to their firm foundation-value—a truer measure of long-term net worth. Necessity becomes the mother of invention as new creativity takes root and flourishes toward the end of this economic phase. Within the economic trough, the opportunity cost of time hits a low point. Investment of time toward research and education helps to develop new ideas, methods, and products that lend them to economic recovery as our Business Cycle repeats itself.
Wrap
We hope that our present discourse has enlightened and entertained our readership of Attorneys and others about the intricacies of Business Cycles as part of a larger cyclic system as they affect our economy. In our next episode, we will explore the policies that may be enacted to guide Business Cycles. Through this information, we hope to allay the fear of Recessions, which are part of the normal flow of the economy.
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Dr. John F. Sase teaches Economics at Wayne State University and has practiced Forensic and Investigative Economics for twenty years. He earned a combined M.A. in Economics and an MBA at the University of Detroit, followed by a Ph.D. in Economics from Wayne State University. He is a graduate of the University of Detroit Jesuit High School (www.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 over twenty years. Currently, he edits books for publication (www.senick-editing.com).
Julie G. Sase is a copyeditor, parent coach, and empath. She earned her degree in English at Marygrove College and her graduate certificate in Parent Coaching from Seattle Pacific University. Ms. Sase coaches clients, writes articles, and edits copy (royaloakparentcoaching.com).
