In recent days, there has been a dramatic increase in the number of transactions in the a unit. The “economic cycle” at the beginning of 2019 was once again a hot topic for the media, owing to the fact that the chief economist of a securities firm had been more successful in predicting the 2007-2008 subprime mortgage crisis using the convulsive cycle theory, and had again predicted 2019 as a turning point for the chinese economy, a rare investment opportunity。
On this basis, many arguments have emerged about economic cycles and wealth:
"the trajectory of wealth in life is the cycle of hysteria."
“the opportunity available to a person in his life is only three times in theory.”
“the success of bill gates and jobs is not because of how good they are, but because they are in a cycle of prosperity.”
Is that true? Let us first look at what the basic elements of these economic cycle theories are。
I. Theory of the four economic cycles
The most well-known of the economic cycle theories is the convection cycle. The full name of the kampo cycle is the “condradiyev cycle”, a theory put forward by russian economist kondradiyev in 1926。
The theory suggests that there is a 50-60-year cycle in the economy。
The first 15 years of the cycle were recessionary。
Over the next 20 years, the emergence of new technologies has stimulated capital investment activities, and society has entered the investment phase, which has led to increased social productivity as new technologies continue to enter the field of application。
The boom brought about by the investment period has led to a significant expansion of enterprises and a substantial increase in social investment, which has been described as an over-construction period lasting about 10 years。
Overinvestment and the loss of advantages arising from the spread of new technologies, the start of the phase-out of inefficient enterprises, rising social unemployment, tight capital and a period of socio-economic disruption, have led to the next major recession, a process that lasts approximately 5-10 years。
The kondradiyev study was mainly based on his time-series analysis of the indicators of interest rates, wages, price levels, etc., from the end of the eighteenth century to the beginning of the first 100 years of the twentieth century in e. F. America. This result was more strongly supported in commodity prices。
Within a long convulsive cycle, several intermediate and short cycles are also considered embedded。
The mid-cycles are more prominent: the kuznets cycle and the jugra cycle。
The kuznets cycle theory was introduced by the american economist kuznets in 1930。
According to the theory, long-term fluctuations in economic activity in the united states, ranging from 15 to 25 years, were particularly evident in the construction industry, and thus the kuznets cycle was often referred to as the construction cycle. The kuznets study draws this conclusion mainly from an analysis of the time series between the beginning of the nineteenth century and the beginning of the twentieth century in countries such as the united states, the united kingdom, france, germany and belgium, for 60 jobs, production of major agricultural products and changes in prices for 35 major agricultural products。
Guerra's cyclical theory was introduced by the french economist guerra in 1862。
In his view, the market economy was subject to 9 to 10 years of cyclical fluctuations, a full cycle consisting of booms, crises and depressions, the recurrence of those three phases and the emergence of internal socio-economic factors, linked to factors such as the behaviour of the population, saving habits, etc., which could only be alleviated and not eliminated。
Short cycles generally refer to the kichin cycle theory, which was introduced by the american economist kichin in 1932。
According to the theory, the economic cycle is three to five years, and the long cycle consists of two to three short cycles. The primary source of research data for kichin is united states and british interest rates, prices, production and employment from 1890 to 1922. In his view, the short-term adjustment of 2-4 years, which he described as the “inventory” cycle, was a regular change in 40 months, when the manufacturer produced too much。
From the perspective of bear pett, the overall framework for an economic cycle is presented, namely, three kichin cycles comprising one chugra cycle and 18 kichin cycles consisting of a convulsive cycle。
Two, 100 years ago. Can you explain today
We have seen that the economic cycle theory described above was introduced mainly around 1930. The data used are essentially those on prices, residential consumption, savings, investment, etc., in the united kingdom, the united states and france over the previous 100 years or so. Even after more than 120 years, there are only two convulsive cycles. Are these models sufficient? It's worth exploring。
In addition, after more than 100 years, such factors as science and technology, social governance, population, environment, etc., are very different from previous ones, and do such models have the force of interpretation? It's also worth exploring。
Let's start with a few simple time series analyses and tests. At the time of the economic cycle theory mentioned above, there was no concept of GDP, which was used as an indicator for measuring a country's economy as a whole at the 1944 bretton woods conference. Thus, GDP can be seen as one of the indicators of volatility in economies。
We take the united states GDP data for 1960-2017, for example. As shown in figure 2, the united states economy, which has enjoyed steady growth over the long term, fluctuated in 2008, but then returned to a pattern of sustained growth. The regression analysis also showed a steady linear growth trend, with the sample solvency factor r^2 = 0. 93 well combined and no cyclical fluctuations over the long term。
The retrogressive analysis is characterized by the fact that historical data can be drawn up with great precision, but because the factors that affect the economy in the future cannot be foreseen and exhausted, problems are usually encountered in forecasting, especially when long-term projections are made。
We continue to use us GDP data as an example, where we select the decade 1960-1969 data for regression modelling (r^2=0. 97) and then use the model to forecast GDP data for 1970-1979 and 2008-2017, respectively, compared to real GDP. As shown in figure 3, we see that the model's projections for the next 10 years are closer to actual values, while the projection for the period 2008-2017 is nearly double that of real values, and is no longer of any projection value。
This is due to the numerous factors that determine economic growth, the fact that measurement models do not cover all variables and that, in the short term, more accurate projections can be achieved owing to minimal changes in technology, capital, labour, population and consumption habits. Now that technology is on the move to accelerate evolution, and the unpredictable political situation has also had an impact on the economy, which is a variable not covered by the economic cycle model, it is highly questionable whether the economic cycle model, which was born in the 1930s, is accurate in its socio-economic projections today。
Good luck with bill gates and jobs
A common view in the mass media about the convulsive cycle is that the growth of the wealth of enterprises and individuals depends on whether you are in the growth and prosperity phase of the economic cycle。
“the great achievements of bill gates and jobs are not their strength, but their step on the ideas of the times”. This view is similar to the “windwinds” that prevailed in previous years, exaggerating the impact of external macroeconomics on enterprise growth and ignoring the more important endogenous growth factors。
The 1995 nobel prize winner in economics, lot lucas jr., identified human capital as the driving force of economic development in all sectors, rather than external macro-conditions. In 2018, the nobel laureate in economics, rommel, in the lucas et al. Model, further noted that, because of the external nature of knowledge, when knowledge is an input element of production, it is characterized by incremental marginal gains, and firms can achieve sustained growth through the accumulation of knowledge inputs. These views refute the conclusion that economies have a specific cycle。
Foreign growth in a few small years among prominent domestic economists has also been criticized, noting that:
There's no big deal about doing a business and macro. Macro is good. Businesses can sail and run faster. The macros are worse, and enterprises also have a lot of opportunities. In the case of poor macro-levels, good firms are able to emerge and outperform industry averages。
In the new structural economics, lin has introduced the concept of “self-reliance”:
An enterprise with a normal level of regulation in an open and competitive market environment can be expected to obtain a socially acceptable level of normal profits without relying on government or external subsidies。
This also emphasizes that the growth of enterprises depends on internal drivers rather than external environments。
Let's look at specific corporate cases, figure 4 shows changes in the market value of microsoft and apple from 1987 to 2016. Microsoft was founded in 1975, and its first market value peaked in 1999, reaching about $500 billion. Apple was founded in 1976 and its first market value peaked in 2012, at about $600 billion. At the beginning of 2019, both had a market value of around $800 billion. Microsoft took about 24 years from its inception to its first peak in market value, and apples took about 36 years, and these companies are still at the top of global market value。
According to the theory of the convulsive cycle, both companies should move beyond periods of boom and recession, and businesses should show signs of recession. But the opposite is true, why is it that companies have not fallen but are still far ahead of other companies in the market? The home-grown growth theory, which clearly values the role of human resources and knowledge, is more interpretative than the convection cycle。
Has the economic cycle theory not worked
From the foregoing analysis, we see that the economic cycle theory does not provide a good explanation of contemporary economic developments, but we cannot deny the value of economic cycles。
The domestic sector, which is more pro-cyclical, is concentrated in the investment community. The more cyclical sectors are commodities, energy products and stock markets. Large-scale commodities, energy products, and the relatively slow technological upgrading due to the time period required for extraction and use, may show a more pronounced cyclical nature。
Equity markets have similar characteristics, and inadequate information in stock markets may lead to a cycle of irrational investment。
As figure 5 shows, we selected the average price and growth rate of the dow jones industrial index, 1900-2015. In terms of average prices (blue lines), the average price of the index was relatively stable until 2000 and after 2000 it was more volatile. For investors, price increases are more relevant than total prices. When we joined the indicator of the rate of change (red line), we found that the dow jones index has been subject to more marked cyclical fluctuations, with fluctuations of about 5-10 years。
Thus, we see some investment institutions espousing the economic cycle theory as legitimate, but it would be irresponsible to extend the economic cycle to sectors of the economy outside the investment field, emphasizing the need for enterprises and individuals to pursue cycles and winds, neglecting the accumulation of human resources and neglecting innovation。
V. What can economic cycles do
The economic cycle remains an important research component in the economics community, but the current trend is not to judge and define how many years a cycle will last, but to explore the causes of the economic cycle and use it to advise national economic policies。
Currently, three shocks are considered to be responsible for the economic cycle。
The first is from policy. According to the monetary schools, the economic cycle is the result of shocks from monetary policy. The representatives of the school, friedman and schwartz, pointed out that “changes in united states production have occurred after huge changes in monetary stocks”. When monetary policy tends to expand, the economy tends to rise and vice versa. The cyclicality of monetary policy leads to cyclical fluctuations in the economy。
We have collected data on GDP growth in the united states from 1982 to 2017 and on the supply of money in broad terms (m2), and figure 6 shows that changes in GDP growth lag by about 1-2 years. When we use the mobile average method to smooth GDP growth rates, we can see a relatively clear correlation between the economic cycle and the money supply, calculated at 0. 16, which means that there is a positive statistical correlation, but not significant。
This suggests that monetary policy interferes with the economic cycle and that the instability of monetary policy leads to economic volatility; similarly, the use of monetary policy by the state can be a positive intervention in the economic cycle and slow down economic depression。
The second shock is from the supply side. Such as natural disasters, climate change and technological advances can cause economic volatility. Such events were inherently unpredictable, but since human activities were interventionible and preventable to climate change and natural disasters, they were of interest to countries in formulating macroeconomic policies. For example, in 2018, the nobel laureate in economics, william nodehouse, was the one who brought the environment into economic analysis and contributed to the design of carbon emission reduction mechanisms。
The last is the shock from the demand side, that is, the economic volatility caused by changes in investment or consumption. At present, behavioural economics is being studied in this area. For example, in 2017, the nobel prize winner in economics, richard seller, proposed mechanisms for designing psychological and institutional design to guide decisions on consumption or investment, the results of which were applied in areas such as pension savings in some countries。
In general, the economic cycle exists objectively, but its duration is of little value in research as to when it will occur, and the impact of a large number of random variables makes it impossible to predict accurately. We should pay more attention to the causes of the economic cycle and what measures can be taken to avoid a crisis. For national governments, it may be universal education, raising the level of education and upgrading the human capital of the country; pursuing effective monetary policies; and focusing on the possible negative impacts of long-term factors such as the environment, natural disasters and the establishment of appropriate mechanisms for prevention. For enterprises and individuals, human capital and knowledge have always been decisive growth factors, with a focus on improving efficiency and promoting innovation as the basis for negative development。
