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The long business cycle and what it means for the current economic downturn

Putting current events in the global economy into context of the long cycle and its development throughout history.

The increasing likelihood of another sharp fall in the economic growth rate of the global economy, and quite possibly even a significant contraction in this growth rate, similar to or even worse than that of 2007-9, is once again causing economists to turn their attention to the phenomenon of economic cycles and the periodic ruptures that accompany them.

Most economists attribute the recurrent crises experienced by all capitalist economies as due to unforeseen shocks. These shocks are conventionally framed as something external to the system and thus as something that could potentially be avoided.

However, this is a misunderstanding of crises and the economic system which gives rise to them. In fact, the capitalist system itself is not stable, but cyclic, and recurrent crises are inherent and necessary to its functioning. Crises are periods of destruction and regeneration; destruction of weak corporations and the regeneration of the system as a whole.

What is the long business cycle?

Business cycles are recurring but non-regular periods of expansion and contraction. Although many cycles have been identified in the academic literature, four have gained a certain degree of acceptance, distinguished from one another by the time periods they are seen as occupying – from trough to trough or peak to peak. The four cycles are the Kitchen (3-4 years), the Juglar cycle (7-11 years), the Kuznets cycle (20-30 years), and the Kondratieff cycle (40-80 years). Each cycle is named after the economist credited with its discovery.

The movements of the different cycles are interlinked, although their drivers differ. The Kitchen cycle is driven by changes in inventories, hence it is sometimes referred to as the “inventory cycle”. The Juglar cycle, which is the most widely studied of the four cycles, is driven by changes in fixed capital investments. The Kuznets cycle is linked to movements in property prices and associated developments.

Lastly, the Kondratieff, or long cycle, is driven by clusters of major technological changes that have widespread and lasting consequences. It is this cycle we are concerned with.

The table above provides indications of the time duration of the various long cycles that have been recorded, as well as the technological changes that drive them. Major groupings of technological developments are implemented at the bottom of the cycle and give rise to entirely new industries which lay the foundations of the entire economic system for the duration of the cycle. Some long cycles have also witnessed changes in global economic and political leadership, with the transfer of power taking place in the context of major wars.

The current cycle, which began just after the end of the second world war and was founded on the technologies of electronics, aerospace, plastics and nuclear energy, is now either coming to an end or already ended. It is being replaced by a new long cycle based on wireless communication technology, biotechnology, robotics, etc.

The observed displacement of the United States by China as the dominant economic power is arguably one of the by-products of this transition, in much the same way the commencement of the previous long cycle based on the combustion engine, electricity, etc., witnessed the displacement of the United Kingdom by the United States in the early part of the 20th century.

Although economic growth is a reliable indicator of the different phases of the shorter Juglar cycle, it is less so in the case of the longer Kondratieff cycle due to the rise of new economic powers during the course of the cycle, particularly in the downswing phase. For example, in the current long cycle, the rise of China has blurred the global long cycle downswing picture as painted by global economic growth.

Hence, long cycle analysts have focused their attention on inflation trends as a more reliable indicator of long cycle phases, since a rise and fall in inflation is characteristic of all capitalist economies irrespective of their stage of economic development.

Using inflation rates in the US to illustrate this characteristic, we can see how inflation rises during the upswing phase, peaking around the early 1980s in the latest cycle, then falling almost continuously since then to the present as it has done on previous occasions in the downswing. 

Why is the long business cycle important?

The mainstream academic community has generally cast doubt on the existence of the long business cycle, while many in the business community, particularly investors, have taken the phenomena more seriously. For those who accept its existence, it provides the basis for an understanding of the general economic environment conditioning the movement of key macroeconomic variables over the shorter Juglar cycle.

Of particular note in this regard is the increasingly weak short cycle recoveries in economic growth and employment in the advanced countries post-1980 (see chart below) as well as the continuous fall in inflation in these countries over this period. For investors these trends have important implications for asset allocations both in terms of classes and geographic location.

These long cycle trends can also be argued to have considerable social and political implications. It is certainly no coincidence that the recent rise of right-wing forces and increase in general political turmoil is coinciding with the movement towards the bottom of the current long cycle, as it has done in previous long cycle bottoms (viz., the 1930s), and notwithstanding the fabrication of official economic growth and employment statistics in many countries (see Shadow Government Statistics for the distortion of official US growth and employment data).

What cannot be hidden is the deleterious impact of these trends on the poorer strata in the advanced countries, making them increasingly susceptible to the xenophobic and nationalist messages of populists and their supporters in the mainstream media.

Where are we now in the long business cycle?

Persistently low inflation and anaemic economic growth as well as low employment levels in the advanced countries suggest that these countries, and the global economy as a whole, are somewhere near the bottom phase of the most recent long cycle, which began its upward movement in the late 1940s and, as noted above, peaked in the early 1980s. Governments of these countries appear to be intent on countering the deflationary tendencies that are characteristic of this phase as manifest in the extraordinary monetary and fiscal policies that have been adopted in these countries.

We have dealt with one of the consequences of the extraordinary monetary policies in a previous post, i.e., the phenomena of negative interest rates.

Below is a chart of the debt consequences of the fiscal policies adopted by the US when the long cycle approaches the bottom, notably going hand-in-hand with wars as an opportune vehicle for the government’s expenditure aiming to revive the country’s war-based economy. The current rise in debt carries an important second reason with it: an attempt to halt the transition of economic power to China.

Where do we go from here?

For the regeneration of the system there needs to be a destruction of capital, meaning the bankruptcy of the weak and inefficient companies in the weaker economies. This destruction is vital for the restoration of global profitability and the creation of the sort of global economic environment in which the new technological base of the global economy can be laid.

Trying to resist this destruction will only delay the process of regeneration. What governments should in fact be doing is retraining their workforces to help them adapt to the new technological base of the system, as well as creating social safety nets to mitigate the damage done to the more vulnerable sections of society. However, the increasing control of governments by a self-serving rich elite makes this an unlikely occurrence.


The table “Recorded long business cycles” was updated on 14 February 2024.

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