The Cycles of Economic Discontent

FLORENCE – The nineteenth century was mesmerized by the cyclical behavior of business. The French economist Clement Juglar became famous for establishing that business cycles ran for around nine or ten years. We have recently had our own cycles of exuberance and disintegration. But they are very different.

In the nineteenth-century world, people rapidly picked themselves up after downturns and went back to business as usual. In that sense, the phenomenon of the business cycle looked relatively permanent and unchanging. Nowadays, however, a cyclical collapse comes as a great surprise. In its aftermath, we start to reinvent our view of economics. Every ten years or so, we think that a particular model of growth is so broken that it cannot be resurrected. The world needed to be rethought in 1979, 1989, 1998, and 2008.

Keynesianism definitively ended in 1979, following the second oil-price shock of the decade. The coincidental combination of the election of Margaret Thatcher in the United Kingdom and Federal Reserve Chairman Paul Volcker’s interest-rate shock of October 1979 ended an era in which inflation had been seen as a solution to social problems. State action and monetary expansion as a means of buying off discontent were discredited, as was the West European welfare state.

The association of Europe – and of European social democracy – with Keynesian demand stimulus was more than a little unfair, in that the greatest proponent of the Keynesian view was the Republican American President Richard Nixon. But the political shift of 1979-1980, culminating in the election of Ronald Reagan, brought about a new opposition of the free market and innovation to social-democratic corporatism and centrism.