Economics for everyone (episode eight)
By John F. Sase, Ph.D.
Gerard J. Senick, general editor
Julie G. Sase, copyeditor
“For well over a century business cycles have run an unceasing round. They have persisted through vast economic and social changes; they have withstood countless experiments in industry, agriculture, banking, industrial relations, and public policy; they have confounded forecasters without number, belied repeated prophecies of a “new era of prosperity” and outlived repeated forebodings of “chronic depression.”
—Arthur F. Burns, American economist and past chairperson of the Federal Reserve Bank
Many attorneys studied Economics in their undergraduate days. Both Macroeconomics and Microeconomics remain important subjects for managing one’s finances as well as for understanding the elements of many cases in corporate, small-business, personal-injury, and other areas of Law. During our past seven episodes of “Sufficient Affluence/Sustainable Economy: Economics for Everyone,” we have established some of these economic principles.
In earlier episodes, we considered entrepreneurs, such as attorneys who orchestrate resources efficiently in order to start their private practices. Consequently, we explored the basics of exchange through transactions that occur between the producers, who supply these goods and services, and the consumers, who demand what they need and want.
In our last episode, we investigated the role that central governments play in market economies. In these challenging times, we hope that we have provided a solid background for attorneys to develop primers for sharing with their staffs in their professional practices as well as with clients and jurors who are faced with cases that involve economic issues.
During this episode, we explore and hope to simplify the matter of Economic Cycles. Through this explanation, we hope that our readership gains a better understanding of Economics. Most attorneys with whom I (Dr. Sase) have talked understand the “feast-or-famine” cycle that those in the practice of Law experience. For some firms, their ups and downs in case-activity parallel our national Business Cycles. Other practices experience counter-cyclical activity because of the nature of the businesses or the occupations of their clients.
Cycles work properly in a functional economy. Elsewhere in the world, economies have been trapped in a dysfunctional system that does not allow natural ups and downs. Therefore, we begin our exploration of cycles with a sweeping overview of the economic history of the past four millennia. Through this, we want to provide the background and insight for a sharper-focused discussion of the short three- to four-year Business Cycle in which most of us make our financial decisions. Let us commence.
Economic Cycles of the Past 3,500 Years
Fortunately, we have informative data on Economic Cycles from as far back as the Sumerian Empire. As an undercurrent, interest rates provide us with a good indicator of understanding any Economic Cycle. In his book “History of Interest Rates” (Rutgers University Press, 1963), the American Economist Sidney Homer, partner of Solomon Brothers & Hutzler and known as the Bard of Wall Street, offers us both explanation and evidence in the form of interest-rate tracking over the long-run cycles of past empires. Homer measures interest rates, ranging from the Sumerian Empire through more recent ones. He explains that, even though interest rates remain in flux, they follow long-run trends downward as empires build to their points of maturity—their Golden Ages.
Conversely, as empires start their slow decay into the abyss of history, interest rates follow a long-run trend upward.
In economic terms, risk explains this phenomenon. Also, risk exists as the undercurrent of our economic cycles. We associate risk with uncertainty in the flow over time and at a given point of time.
The greater the uncertainty, the greater we perceive our level of risk. For us to undertake an increasing level of risk, our potential reward must grow correspondingly greater. Therefore, the interest rate must rise higher than it would under conditions of greater certainty.
Cultural-Epoch Cycles, of about 2,150 years (the axial precession of approximately 25,772 years divided by twelve), remains the longest fluctuation that we have measured meaningfully in economic terms. The major financial crises, which we observe within the Empire Cycles, connect with the deterioration of the empires themselves. The final phase of collapse often has come in the form of a siege from outside after the empire already has destroyed itself from within.
Nevertheless, most of us have a more immediate interest in understanding fluctuations and the occurrence of crises within smaller windows of time. However, our understanding of Cultural-Epoch Cycles and the shorter Empire Cycles within each of the former allows us to see the nature of the time cycles that we experience within our lifetimes. In order to understand Economic Cycles and Financial Crises in our age, we first must identify the major protagonist and antagonist—the Incorporated Company.
In their book “The Company: A Short History of a Revolutionary Idea” (Modern Library, 2005), Business Historians John Micklethwait and Adrian Wooldridge trace the development of our modern corporation from the Thirteenth Century through the present. The authors note that the way that we produce, trade, and invest within our epoch increasingly has resulted from the creation of corporate form. Since the Corporation of the City of London developed a millennium ago, the corporate form of business-entity has changed the way that we organize many of our human activities on a global scale. Furthermore, the progression of financial crises throughout recent centuries has attached itself to and conjoined with the development of the modern multi-national corporation. As a result, we cannot hope to analyze and to understand the nature and causes of these crises fully without first understanding the behavior of this dominant entity.
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