Western political economy since the Industrial Revolution has been a vibrant world of rapid growth and development, at least for countries in the industrial "core." But it has also been a world of continuing and sometimes enormous fluctuations in economic activity. Business cycles — expansions and contractions across most sectors of an economy — have come to be taken as a fact of life. But … for both empirical and theoretical reasons, in advanced industrial economies the waves of the business cycle may be becoming more like ripples. – Foreign Affairs
Dominant Social Theme: Modernity makes change and progress brings hope that destructive business cycles are on the way out.
Free-Market Analysis: This is a strange article because it acknowledges what anyone who has covered business cycles for a length of time knows well – that the demise of such cycles, while regularly predicted is never accurate.
Bill Clinton predicted an end to destructive business cycles right before the tech bubble burst in 2000. Ben Bernanke didn't see trouble looming in the housing market only a few months before the subprime crisis exploded first in the US and then Europe.
The article includes a few paragraphs dwelling on this lack of foresight and then goes right back to making the case that "modern" technology and forecasting will rend economic downturns obsolete. Here's more:
The dampening of the business cycle will change the global economy and undermine assumptions and arguments that political economists use to understand it. "History counsels caution," Alan Greenspan warned the Senate banking committee in February 1997, about "visions of such 'new eras' that, in the end, have proven to be a mirage." Greenspan is surely right to warn against too easily accepting that the present is fundamentally different from the past, but a growing body of evidence suggests that the world may indeed be witnessing important changes in how business cycles work.
Business cycles have been linked to big changes in international politics and economics over the last century. The depression at the end of the nineteenth century closed a historic era of advancing free trade and saw Germany and America move decisively toward protection. A shift in world economic power laid the groundwork for conflicts that would culminate in world war.
The Great Depression of the 1930s brought international protectionism and the near collapse of trade. The gold standard disintegrated after competitive devaluations, and competing monetary blocs developed. The depression tore apart international cooperation, preparing the way for the rise of illiberal nationalist ideologies − most prominently Nazism − that contributed, in turn, to another world war…
We can see here both the acknowledgement that statements about the end of business cycles have been made before as well a presentation of the destructiveness of business cycles. Both points are accurate.
What is far less accurate, in our view, is the idea that technology and "modern" financial techniques have rendered the cycle obsolete. The Internet itself has spawned a wave of free-market enthusiasm and a resurgence of what is called Austrian economics – which is a subjective science.
According to Austrian economics, human action makes forecasting almost inevitably inaccurate, and we would argue this is borne out by regular government failures whenever it comes industrial policy. But nonetheless, forecasting is an ever-bigger business, certainly from a political standpoint. We can see the increasing technocratic thrust of modern politics in the installation of so-called technocrats in the European Union – in Italy and Greece.
The trend is undeniable. Technocracy is the pursuit of policy via pseudo scientific tools; but if one accepts that human action's main characteristic is its unpredictability then political planning is ever doomed to failure. In fact, we can see this regularly in the five-year plans produced in communist and socialist countries that never come close to being realized.
As unpredictable as human action may be, there is one part of the human condition that history shows us repeats regularly in the modern world, and that is the exaggerated turning of the modern business cycle.
It is central banking that provides the mechanism for this exaggerated turning, as the more money that is printed, the more powerful an economic euphoria can become. Prior to central banking activism, there were various business cycles as well, but they tended to be regional and mild.
The modern business cycle is actually more vehement not less – as the crashes of 2000 and 2007 show us. In fact, it is difficult to understand how the argument can be made that business cycles are less exaggerated today than previously. Modern central banking tends to concentrate these crashes and thus produces greater volatility over a wider geographical area.
Again, the argument that the wonkishness of today is diminishing the business cycle is easy to understand. Asserting what is obviously inaccurate doesn't make it true.
The business cycle is alive and well. To reduce its power, diminish government involvement in the economy and central bank meddling with the money supply.
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