"The Kondratieff Cycle: Real or Fabricated?"

Murray Rothbard's 1984 review of the Kondratieff cycle opens with references to "Soothsayers, palm-readers, astrologers, crystal-ball gazers" and "gurus and mountebanks". Rothbard puts ten paragraphs into the "soothsayer" theme before getting around to business cycles.

Paragraph eleven was really good, except for one bit I have scratched out:

Business cycles began a mere two centuries ago. Despite the fevered hopes of some enthusiasts who claim to have observed business cycles going back to Methuselah, before the late eighteenth century there was no such phenomenon. Of course, there were centuries in which business improved and the economy progressed and there were other centuries (the Dark Ages, the 14th and 15th centuries) when it went into a long secular decline. But, within shorter time periods, business pegged along in a rough straight line year after year. Business was either good, bad or indifferent, but it tended to remain that way steadily for many decades.

In other words, things were slow in the Dark Ages, then better for a while, then slow again in the 14th and 15th, then better again. Sounds like a cycle to me. Reminds me of David Hackett Fischer's The Great Wave, a study of the history of prices. Though Fischer might insist that a wave is not a cycle, I am satisfied to think of the pattern described by Rothbard and Fischer as a business cycle somewhere in size between the Kondratieff wave and the Cycle of Civilization.

Rothbard says, quite plainly,

It should be recognized that most business-cycle theories ... are grounded in the assumption that the cycle stems from some deep flaw in the free-market economy. But if micro-theory is correct, then it must apply to the "macro" sphere as well. The economy is not some entity split between a micro and macro half; it is a seamless web, inextricably linked together by the use of money and the price system. Therefore, whatever applies to one part of it must apply to all.

He denies there is a natural cycle to be seen in the economic data. Completely without evidence, mind you. Economics by proclamation. Robert Lucas picked up on that load of crap, gave us the concept of "microeconomic foundations," then announced that the problem of depression-prevention had been solved, and had barely taken a breath before a new crisis was upon us. Thankfully, Lucas is not part of this tale.

Regarding those business cycles that began some two centuries ago, Rothbard writes

Then, around the middle or latter part of the eighteenth century, something happened. A new phenomenon struck the world, occurring first in Britain, the most economically advanced country, and spreading to other advanced countries as they entered the market nexus of trade and finance. This phenomenon was a regular, continuing, wave-like movement of business activity.

Rothbard attributes this regular, continuing, wave-like movement to "the government and its banking system". Not to "the market nexus of trade and finance." And not to the "seamless web" of money.

These waves to which Rothbard refers are what we think of as the business cycle -- a cycle about a decade in length. He refers, for example to "the fact that the early panics seemed to be ten years apart: 1837, 1847, 1857..."

Rothbard objects, quite reasonably I think, to the idea that business fluctuations are "periodic". What he objects to specifically, it seems, is the view that the cycles have regular timing. I agree absolutely. On the other hand he describes "a regular pattern of euphoric boom, sudden crisis or panic, bust or contraction, and gradual recovery, succeeded without pause by another boom." It is the regularity of this pattern that establishes the cycle, not the regularity of its timing.

Much of Rothbard's paper is an objection to the regularity of timing:

One of the worst things about the "business cycle" is its name. For somehow the name "cycle" caught on, with its implication that the wave-like movement of business is strictly periodic, like the cycles of astronomy or biology.

But this is an objection only to the presumed clockwork regularity of the Kondratieff wave, and not to evidence of its regular pattern. Rothbard wants to throw baby with bathwater, regular pattern with strictly timed recurrence. Five times he refers to the presumed cycle-length of 54 years.

If I were to describe to you a cycle, that description would have to include an estimate of the duration of the cycle: perhaps ten years (for the business cycle) or 40 months (the Kitchin cycle) or twenty years (the Kuznets cycle) or Kondratieff's longwave (50-odd years) or Fischer's Great Wave (a couple hundred years) or Toynbee's cycle of civilization (a couple thousand years). The clearest, simplest way to distinguish one cycle from another would be to identify different approximate cycle lengths.

But apparently Mr. Kondratieff once said "54 years," and Mr. Rothbard wants to hold him to it. Rothbard wants to rigidly define a 54-year period for the longwave, and then reject the longwave and everything about it because of this regular timing. Rothbard's argument is a total straw man.

Later in the article, Rothbard complains because Kondratieff fails to be specific enough with his dates:

Kondratieff, writing in the mid-1920s, found it easy simply to fuzz over the peak dates, writing that his first peak came in "the period 1810–17," and the second in "the period 1870–75."

Rothbard refutes his own argument.


One of those longwave depressions described by Kondratieff turned out to be the Great Depression. Rothbard himself says, "No question that the late 1930s – a 'Kondratieff trough' – was a pretty miserable period." But then Rothbard turns around and rejects the longwave because not every Kondratieff trough is equally severe:

But wait! Is this really what we mean by a depression phase of a business cycle? After all, we are not really concerned about prices first and foremost. What really concerns us about a depression or recession is not that prices used to fall, but that there were and are sharp declines in production, clusters of bankruptcies and drastic increases in unemployment.

I on the other hand would give the old Russian extra credit for finding his longwaves before the Great Depression ever happened.

Rothbard writes:

What was wrong about the 1780s, for example? No particular depression there. And if we want to be generous and dismiss that "first trough" for lack of data or as only starting the whole thing, what about the alleged second trough? Fifty-four years from 1789 brings us to the "expected" trough year of 1843, a year in which everything was smooth sailing.

Let us then look more closely at the long contraction, or "long depression," phases of the Kondratieff cycle. To make any sense, they should in some way look and feel like depressions, like grim periods of decline in business activity. The first Kondratieff long depression was supposed to be the period 1814-1849. But these thirty-five years were by and large a period of great expansion, prosperity and economic growth for the United States, England and France, the three countries Kondratieff used for his statistical analysis. And what of the second Kondratieff depression, the period 1866–96? Was that in any sense a depression? For the United States, and to a large extent for Western Europe as well, this was the period of the most dazzling spurt of production and economic growth in the history of the world. Production and living standards skyrocketed. How in the world could three such glorious decades be called a period of secular decline?

Me, I don't know. I got "Real GDP per Capita" numbers from Measuringworth, annual numbers for the U.S. that go back to 1790. I graphed the period 1790-1900 and had Excel put an exponential trend on it:

Graph #1: RGDP per Capita, and  Exponential Trend

Real output per capita starts out below-trend (in 1790) but five years later is clearly above-trend. It again drops below-trend around 1815. The distance below trend reaches its greatest between 1840 and 1845. Thereafter, output climbs back toward the exponential trend and finally rises above trend around 1865. After 1865, however, it falls below-trend again until around 1880. All of this matches up very well with the longwave dates laid out by Murray Rothbard.

Only after 1880, when output rises above-trend on the graph, does it contradict a longwave date. The longwave date Rothbard provides says that the long slump lasted until 1896.

Rothbard writes, "Kondratieff long "depressions" were really booms in everything that counted..." And yet it is easy to see from the graph that for long periods, output was either rising relative-to-trend or falling relative-to-trend. Such behavior may readily be called wave-like. And it fits Rothbard's Kondratieff schedule remarkably well.

It's not on the graph, but I'm wondering whether there was a financial boom after 1880, comparable to the financial boom we experienced in the past 30-odd years, that pushed total output up but created a different result in the non-financial sector.

As a matter of fact, there was a financial boom after 1880:

Graph #2: from Paul Krugman's Inequality and Crises PDF

Ironically, Rothbard writes:

The "long wave" had a brief vogue in the late 1930s, only to disappear until the 1970s, and since then it has had another and even bigger run. It seems clear that the times of fashion for the Kondratieff are a function of the economic climate of the day.

Interest in the Kondratieff wave goes in and out of fashion with "the economic climate of the day." The economic climate Rothbard describes is the longwave. But Rothbard chooses not to see it.