economic cycles

Riding the Cycles

Cycles are fundamental to life. Seasons mark out the year. Daily, monthly and annual rhythms rule the way we live. And larger patterns of feast and famine – the seven years of plenty followed by seven years of lean – have been recognised since biblical times.

This is the context in which career plans have to be made.

Business Cycles are normal
Almost every generation experiences major economic upheavals.  And these thirty-year generational cycles typically contain the peaks and troughs of three ten-year cycles as crisis gives way to phases of recovery, innovation and renewed growth.

The financial crash of 2008 has resonated round the West for nearly 10 years, creating economic and political strain, but now there are signs of an upturn all parts of the world.

Recovery
Whenever there is recession there will be recovery – although financial crises take longer to heal. Sustained expansion fuelled by debt creates confidence and gives us a boom while panic and sustained contraction give us a recession when credit ceases to be available .

Things never return to just the same place but the pendulum swings back.

Cycle rack
In the last 150 years, thinkers have identified several types of cycle – lasting from two or three years up to more than 50 years. The causes are different but they overlap and interact.

  • Capital investment – Juglar (1860s) developed the idea that business cycles of 7-11 years are driven by the intensity of capital investment. An expansionary phase of rising prices gives way to a bust when prices peak and fall.
  • Inventory – Kitchen (1920s) postulated that 5-7 year inventory cycles emerge when lack of timely information leads to overproduction of goods. In the downswing, production is reduced while stocks are cleared.
  • Infrastructure – Kuznets (1930s) in the USA suggested that investment in infrastructure, often built in response to immigration and demographic change, gives rise to cycles of 15-25 years.
  • Technology – Kondratiev (1920s) identified the longest cycles – 40-60 years – in which long-term waves of development are unleashed by ‘tectonic shifts’ – war and peace, the emergence of new technologies.

The technologies that have launched prolonged waves of development range from coal, steam, railways, clean water and sanitation to electricity, petroleum, chemicals, motor cars, telephones and radio, not to mention aeroplanes, pharmaceuticals, computers and the internet.

These each gave rise to whole new industries and new business models that often wiped out the old in a process that Joseph Schumpeter termed ‘creative destruction’.

Are these principles still valid?
These concepts have been validated by research. Historical data for the USA and Europe correlate with the theory providing practical indicators that can be used to interpret the state of an economy.

Super-cycles
And the models also seem to describe what has happened in developing economies in recent years. As China has urbanised and industrialised in the last 30 years, we have witnessed a ‘super cycle’ of growth driven by just the kinds of capital investment and infrastructure expenditure envisaged in the cycle models. This may have much further to go as development rolls on to other countries.

Limits to growth
However, in his book The Rise and Fall of American Growth, Professor Robert J. Gordon argues that the kind of productivity growth unleashed by new technologies between 1870 and 1970 – from coal to computers – is not repeatable.

‘Tech’ is a great hope for the future but its impact on the growth of the US economy over recent years has been puny compared with what went before in the West. He fears that Tech will not provide the well-paid jobs and prosperity we hope for.

Quality vs Quantity
The cycle models generally work with GDP – a flawed measure that is difficult to apply and compare across different countries. Indeed GDP does not fully capture what is going on in advanced economies. It may not reflect the positive improvement in the quality and efficiency of products – nor indeed negative impacts such as environmental damage.

Capital investment still matters and infrastructure is essential but advanced economies increasingly deal in services and intangibles rather than sheer quantities of ‘stuff’.  The abundance of data has transformed supply chains and the ability to manage inventory cycles far more effectively than Joseph Kitchen could have imagined.

Political tide
Recession, globalisation and changing technology have put many workers under pressure in the last 10 years while the monetary policies deployed to prevent another great depression have redistributed wealth. More people are back in work but so far the ‘gig’ economy has often produced insecure, low-paid part-time employment rather than good quality, well paid work.

The strains that have found political expression in rising populism and the Brexit vote may well feed into future economic cycles.

Riding your own cycle
Meanwhile, it is expected that big data, robots and artificial intelligence will infiltrate almost every type of business activity and disrupt the organisations and institutions that give shape to working life.  Where once decisions were taken for you – about education, skills, health, finances, etc. – you will have to be self-reliant.

If many of the jobs of the future have not been invented yet, you need to be open minded and thinking creatively rather than imposing familiar patterns on new information. In career terms, you have to embrace the future and prepare for opportunities rather than clinging to the past.

Jo Ouston