The End of the Business Cycle?

WAVES TO RIPPLES

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 modern economies operate differently than nineteenth-century and early twentieth-century industrial economies. Changes in technology, ideology, employment, and finance, along with the globalization of production and consumption, have reduced the volatility of economic activity in the industrialized world. For both empirical and theoretical reasons, in advanced industrial economies the waves of the business cycle may be becoming more like ripples.

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.

CYCLING THROUGH HISTORY

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.