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Already a hundred years ago people noticed that economic growth tends to be cyclical and generally upward moving. Longer periods of accelerating economic growth followed sudden decreases. These cycles were usually about 9 years long. However people started to notice even longer cycles, particularly twenty year and fifty year ones. Latter were discover by Kondratieff and were subsequently called the Kondratieff cycles. As they are very hard to measure, because of their length, not much reliable data is available. Furthermore people have historically assigned too much weight to these cycles so they have become to be know with their own names based on the economic performance of Britain at the time: Industrial revolution from the 1750s; Victorian period between 1850-1873; Great Depression there onwards until 1896; Edwardian period until the first world war; and Inter-war period between the two world wars, to name the major ones. In this essay I am going to analyse the validity of these periods based on the actual economic data. The example data is chosen to be similar to the ones that fluctuate in short trade cycles, like inflation, unemployment etc. Using this data allows me to compare whether the Kondratieff cycles were only very strong trade cycles or something more. I am going to concentrate on the two major and contrasting periods - the Great Depression and the Victorian boom. My aim is to show that although some data shows different growth rates in these periods, this effect is largely because of the shocks that occurred in the economy, and furthermore the only types of data that can be said to follow the Kondratieff's cycle are the import prices and the prices to wholesalers.
It could be noted that during the Victorian period the average rise in prices and output was higher than in the preceding and following years. However closer examination reveals that the price increases were not continuous, most of it being at the beginning in 1853-57 and at the end of the period. Victorian period could just have been measured from the slump of a trade cycle to the boom, and the fifty-year period in between was not with any specific characteristics. Many things were also excluded from the price index that exaggerates the available data on price inflation. Some writers were also arguing that the major gold findings in 48 and 52 were a source of inflation, but Rostow has pointed out that the interest rates were mainly below 5% so that the money supply increases could not be that significant. Gold prices were completely exogenous to the economy, but the cycles are essentially internal - meaning that something is wrong with the economy. Another similar variable was the agricultural production that depended heavily on weather. There were mostly good years during Victorian period, so agricultural productivity was rising, but this can say nothing about the overall state of the economy.
However the wholesale prices rose almost continuously during the whole period. This is because the wholesale prices compromised mainly of the imported raw material prices and import prices were rising because of the recovery in Europe and the American Civil War. Gold findings did affect the economy in a bit more permanent way as bankers shifted to lower liquidity ratios causing a large credit expansion. Some writers said that the firms became more efficient during the recovery and the gold findings simulated the investment. Investment growth did not quite follow the overall growth pattern, but was lagged.
Living standards improved in general, but one must be very careful in generalisation as the income in different sectors varied considerably, profits and investment were increasing most rapidly. So it was the rich who benefited. Furthermore much investment was done abroad to empire government guaranteed loans that were paid back from the taxes when firms defaulted. This had a redistributive effect as the tax payers were industrialists and the middle class, but investment was done by upper class. So there was an increasing income inequality, which does not show up in the statistics, but actually decreases living standards.
Trade also expanded as the British foreign investment created much demand for the British goods, import dominated the demand in the whole Britain. However we cannot be sure about the increase in home demand. Industrial production growth slowed down after 1870. There was also a decline in major old manufacturing industries. The terms of trade also fluctuated during the period and did not follow the overall pattern of other variables in moving to a more favourable position at booms and vice versa.
It is hard to find exact data on unemployment and wages as the only data available is the trade unions one that is biased towards union members that had generally higher wages and less unemployment. Unemployment was falling in general and the trade union wage was rising, but these trends started before the Victorian era and continued on afterwards.
Next period, the Great Depression, was thought to be a time of economic decline. I must however mention that the average economic growth during these years was above 2% per annum which is quite high. The reason why this period was considered to be a depression was that the old staple industries declined causing very large local variations as England was regionally quite specialised. So when the economic situation changed due to more international trade some places found themselves in a boom and others had extreme unemployment. The nominal wage also rose, but because there was a substantial amount of inflation the growth in real wages was very modest.
Although the boom in 1872 was very big and created very much extra capacity that needed to be worked off, the slump was in 1879, which makes it difficult to describe the period as a single trade cycle, because trade cycles were much shorter usually. Individual cycles can also be identified in that period.
Some of the trends in the Great depression were indeed confined to the period. It is true that prices were falling throughout that period. But at the same time real wage continued to rise with the same pace, although this rise was not because of nominal increases, but because the fall in the general price level, or deflation. This might have changed the mood of working men as their pay did not increase, whereas the women who were doing shopping found that they could buy more. Unemployment shows also a remarkable trend being on average 4.6% in the Victorian economy, 5.8% in the Depression and 4% thereafter until the First World War. Foreign trade values, balance of payments, capital exports and wholesale prices, again, show the best expected trends. Export was depressed, imports were not growing as quickly as before, terms of trade moved against Britain and the deficit on the balance of payments account was growing rapidly. The last item was deflationary itself, so caused prices to stagnate. In cotton, for example, most of the production was to export, so no wonder this industry was depressed. Agriculture was depressed because the free trade brought with it lower cereal prices. Wholesale prices in general were also low, again because strong foreign competition.
Monetary causes also support the thesis that the depression is caused by the country running short of money as there were no major gold findings. But many vital factors do not fit the thesis - silver was already being used besides gold and the bankers reported no shortage of gold. Furthermore, Higonnet has found that the gold was abundant from 1890 to 96, so it is not right to view the Great Depression as a single period. Interest rates were lower than in the Victoria era and so were profits. So the Great Depression was more severe to the upper class.
There were too few investment opportunities for investors, comparable to the monetarist argument that there were excess savings in the economy. Professor Rostow has suggested that the flow of savings from abroad to be used as the home investment was the cause of depression in England. The argument was that the investment that had previously created demand for British goods abroad was now being used at home for non-productive investment or for investment that had a very long play-back time. Problem with correlating investment is that there was a peak in investment in 1880s and the investment did not really pick up after the depression was over. So the detailed analysis do not show the exact correlation and the unproductive investment is also very hard to define. More determinate correlation, according to Matthew, Feinstein, Smee, existed between the level of economic activity and the total factor productivity(TFP). TFP did not grow at all during this period and investment was below its historical trend. So we do get a definite correlation here, only difference between this correlation and the correlation between GDP growth and prices is the direction of causation. Whereas the depression probably caused low prices, then the low investment probably caused depression.
I have managed to show that there were numerous other measures besides the price that correlated with the economic growth. Kondratieff used the price to draw his initial conclusions about the 50 year cycle and was much criticised for that afterwards. Furthermore, many of the data do not give evidence to strong long-run cycles, so that several writers have thought to abandon the idea of periods altogether. I think that although the public opinion was greatly exaggerated during these cycles, it is not right to scrap the idea altogether. Foreign trade definitely followed the pattern, much better than prices. Although these cycles were largely caused by demand or supply side shocks these shocks cannot completely be considered exogenous and definitely had long-run effects. It is unfortunate that there is data only for the past few of the Kondratieff cycles, this however does not mean that there was no cycle at all.