Beware of the business cycle?

By Frank-Jürgen Richter

Financial Mirror, 14 November 2012

We often hear Ministers, especially Finance Ministers, saying we will “… work with the business cycle”: and the media moguls and global warriors all nod their heads sagely. But what do they really understand? Of course, for years we have seen that financial cycles move through boom and bust, through depressions to the better years, and most accept there are long Kondratiev waves of 50 years or more. In fact Joseph Schumpeter, as well as others, noted there were distinct waves of economic activity that now named after their proposers – the Kitchin inventory cycle, the Juglar fixed inventory cycle, the Kusnets infrastructure investment cycle, and as we noted, the Kondratiev cycle. These fluctuations with different cycle times form the foundation of modern economics.

So far so good; but let us return to the Ministerial speeches. This year, 2012, has seen important elections across the globe. China is undergoing its 10-year cycle of top changes with its consequential changes rippling through its hierarchies as new leaders emerge. And the us presidency race was determined by mid-November. European nations have passed through their elections and now all is mostly settled. But the global economy is not really growing as well as everyone wishes. As the elected representatives of the people change across the lands, the policies of the leaders seem to change – at least they opine that is so. But behind these new leaders in their Parliaments, Senates or Government Buildings rest their permanent secretaries and civil servants. They cannot alter the global situation in isolation as they are supposed to be politically independent, doing the bidding of their political heads and feeding their leaders with the results of new research and analyses. So it all comes back to the leaders and their understanding of ‘… the business cycle’.

At one time we might have accepted that the construction sector represented a ‘leading indicator’. More laying of roads, water and electricity supplies could support more commercial and private buildings which must later create greater Spending on fitments. While that initial construction was taking place, it was not commercially sensible to make too many tables, chairs or televisions as there would be no buildings in which to place them. Yet, prudently, a government ought to think ahead and risk stimulating quiescent sectors – for instance, the electronics industry needs to continually re-invent its products. Apple is a prime example with its Rolling-out of new i-Objects; and the Asian electronics industry always offers new smart-phones with facilities we did not know we needed. It takes a courageous manager or Minister to risk their reputation on a new venture with a potential pay-off some years ahead.

Economists looking back to the Rise of Capitalism following the two world wars up to the 1971 Bretton Woods collapse, the Oil Shock of 1973, and the collapse of the global stock markets in the mid-1970s have said it is important to restrain the business cycles from their excessive boom & bust activity. I would agree with that, yet presently we see that there is a far larger income disparity than ever before. What has gone wrong with the suggested restraint? Or are we simply observing the tail-end results of the greed boom that led to the present financial bust?

Following the Second World War, the American government offered education packages to their returning soldiers ranging from basic skills right up to degree level and research studies. Slightly lagged in time was a baby boom, and these children grew up into an economically booming nation as the better educated peoples greatly expanded the us economy. Those children promoted education as well as infrastructure growth – supervising in the 1960s what was the most massive growth in state and inter-state roads ever seen across the world – until the recent Chinese expansion of its rail and road networks. China too has expanded its education programme, but like Japan, concentrated perhaps too much on technological prowess rather than a broad spectrum of technology, science and social studies. Schumpeter was an economist; hence his views were upon economic cycles, but there are other cycles that refer to the human condition which ought not to be ignored. We ought not to concentrate too strongly on the Rise of the Machine and forget the Suppression of the Human.

Across the globe we see large disparities of wealth and of the raw ability of the people. It is a sad fact that universal education has suffered in many nations – they have not invested early enough, nor allowed their girls to be educated to high levels. The United Nations’ Millennium Goals stressed education simply as it is a long-term driver of general growth and well-being. However, education is one of the long [business] cycles, and is often forgotten by politicians in their rush to be re-elected in the near-term. It is an error made by democratically elected leaders as well as unelected Presidents; and it is an error that will be played out in the near future simply because ‘… the business cycle’ is unsupportable without a well-educated people.

The us and Europe lifted education and expansionist growth after ww2, and China has done so following Deng’s opening up. It is quite clear that the Asian and Western ‘business cycles’, though integrated by globalisation, are still somewhat out of synchronization: time will clear this up.

Frank-Jürgen Richter is founder and chairman of Horasis, a global visions community. Horasis hosts the upcoming Global China Business Meeting. Http://www.Horasis.Org