William Stanley Jevons (1835-1882), an outstanding logician, economist and statistician, was perhaps the greatest talent of his time. He developed the theory of Utility and was author of "A General Mathematical Theory of Political Economy." Unfortunately he died relatively young while bathing near Hastings but he left behind him an intriguing speculation.

In a work published posthumously, "Investigations in Currency and Finance," Jevons had noted a series of `Commercial Crises' or `Unquestionable Collapses' going back to the beginning of the eighteenth century. He found an average gap between them of nearly eleven years and associated it with the cycle of sunspot activity.

In fact causality is not the important point. Many cycles synchronise and it may well be that they all have a common cause. (The late Robert A. Heinlein wrote "The Year of the Jackpot" about what happened when all cycles bottomed simultaneously and what caused it.)

What matters is that the presence of a cycle, a wave or a rhythm was perceived. Plainly if cycles are present in the economy or financial markets, investors and analysts should know about them.

The Kondratieff Cycle

Much has been written to popularise the longest cycle which lasts about 54 years. This is an average figure, with the duration of the wave varying from 46 to 60 years. Nikolai Dmytriyevich Kondratieff (1892-1930?) worked in the Agricultural Academy and Business Research Institute in Moscow. His research covered the major economies of the time: the USA, Great Britain, Germany and France. He first considered wholesale prices and then looked at interest rates, wages and foreign trade. Finally he analysed data on the production and consumption of coal, pig iron and lead. He adjusted production figures to allow for population change and used a moving average (nine years) to remove statistical `noise.' Kondratieff thought that the presence of the long wave was probable but could not be specific as to its cause, deeming it to be inherent in a capitalist economy. He postulated that it could arise because of the wearing out of capital goods but he admitted that lack of reliable data curtailed conclusive verification. Critics have attacked his methodology.

What was dangerously unacceptable to his Communist masters was the idea that there was an inherent self-correcting mechanism perpetuating capitalism. He was banished to the Gulag where he was quickly condemned to solitary confinement. He became mentally ill and died.

Again, it was posthumous publication that drew attention to his work. His work was translated into English in 1935 (a German translation had been printed outside Russia in 1926 but it did not attract much attention at the time). There were two waves in wholesale prices during the nineteenth century in the USA of about 50 years each that could conform to Kondratieff's waveform. Both became identified as Kondratieff cycles and consequently his work was given prominence in America.

A 50- to 60-year economic cycle was observed by a Dutchman, Van Gelderen in 1913 although there is no evidence of a connection with Kondratieff. W.H.Beveridge (1879-1963), later Lord Beveridge, studied wheat prices back to the 1500's and is reputed to have deduced them back to 1260. He discovered many cycles, publishing his findings in 1921 and 1923 (three years earlier than Kondratieff). One of these cycles occurred every 50 to 60 years, with an average periodicity of 54 years.

The long wave rhythm, which varies from 45 to 60 years, has attained its periodicity from averaging a wide distribution. It is widely known as the `Kondratieff wave' or, less elegantly the `K-wave.'

The Kuznets Cycle

The next longest wave was discovered by Simon Kuznets, an American economist who carried out research on the U.S. real-estate cycle. He identified a cycle of 16.5 to 18 years. There was some criticism that this represented waves of population and migration and, as these subsided with declining immigration, so did the wave. However, there is a rhythm in this periodicity that is seen as a response to demographic factors. Kuznets was awarded the Nobel prize for his work and the wave was subsequently named after him. Many peaks and troughs in economic activity are attributed to its effects.

The Juglar cycle

Clement Juglar, French economist and a contemporary of Jevons (although there appears to be no connection in their work) studied the rise and fall in interest rates and prices in the 1860's. He found boom and bust waves of 9 to 11 years. Juglar also identified four phases to each wave: prosperity, crisis, liquidation and recession.

The Kitchin Cycle

There is an interesting story related in Edward R. Dewey's book, "Cycles: The Mysterious Forces that Trigger Events" about a group of investors on Wall Street in 1912. They had heard that Rothschild had analysed Consol prices and found in their fluctuations a secret series of curves which he used for forecasting price movements. The group engaged a mathematician to replicate the Rothschild formula. Reputedly success followed, particularly when the group adapted their investment strategy to a 41-month stock cycle. While this story has all the hallmarks of one of those early investing myths, the periodicity is interesting. In 1923, Joseph Kitchin published in the Harvard University Press an article entitled "Review of Economic Statistics," outlining his discovery of a 40-month cycle resulting from a study of U.S. and UK statistics from 1890 to 1922, At the same time as Kitchin was carrying out his investigation, a fellow Harvard professor, W.L.Crurn, found a cycle of 39, 40 or 41 months in commercial paper rates in New 2York. The Kitchin cycle is now taken as being about four years in duration. It is sometimes said to be based on a stocking/destocking cycle (in which case it will be interesting to see if it remains stable).

Superimposing the Cycles

When these four main cycles, Kondratieff (54 years), Kuznets (18 years), Juglar (9 years) and Kitchin (4 years) are considered, the relationship between them is obviously vitally important as the overall effect will be additive. Do they operate independently or is there some sort of synchronisation? Either way the phase of each at any given instant will have to be summed to arrive at a current position. More simply, the four waves can be added together to form a composite waveform.

Looking at the periodicities, it is tempting to assume that they are harmonics. A Kondratieff wave could consist of three lower degree Kuznets waves. Each Kumets wave could, itself, be made up of two Juglar waves. Similarly two (or three) Kitchin waves could form a higher degree Juglar wave. If each sequence or degree were in phase, more importantly if the downward arc of each was simultaneous so that the nadir of each was coincident it would explain disastrous slumps and consequent depressions.

Schumpeter suggested such a model. Contemporary opinion is that there is insufficient evidence decisively to determine whether or not the cycles do synchronise in this way.

In 1939, Joseph Schumpeter, the Austrian-born economist who moved to America, published a two-volume work, "Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process." In it he argued that long waves stemmed from innovation. A modern example could be `Just in Time' which appears to have first been used in the car industry before spreading throughout manufacturing. The work also incorporated Kondratieff's findings and helped publicise them. However, Kuznets, whose own work is mentioned above, was critical of such an explanation and was not convinced by the Schumpeter argument for cycles.

Indeed, the very existence of cycles is disputed. There are two extreme positions: the first, the exogenous theory, views fluctuations in the economy as being caused by disturbances outside the economic system; the other, the endogenous theory, seeks an internal or inherent explanation.

A favourite example of the former is the tie-in of sunspot activity with Jevons's findings which would explain those `commercial crises' as being caused by the effects of periodic sunspots on crops and consequently the economy.

Those supporting the endogenous case, who refer to long waves rather than cycles, consider that there is a natural order or evolution intrinsic in economic activity where expansion leads to contraction with both containing and nurturing the seeds of the other and thus leading to a quasi-regular alternation.

No matter whether they are thought of as waves or cycles, the pragmatists responsible for investment decisions should be aware of periodic recurrence. All of the above resulted from the work of distinguished economists. A host of other cycles affecting the economy and investment have been identified by these are not as well-known or deemed as significant.

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