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A Self-Generating Model of Long-Swings for the American Economy, 1860–1940

Published online by Cambridge University Press:  11 May 2010

Charles M. Franks  and
William W. McCormick
Charles M. Franks
Affiliation:
University of Colorado
William W. McCormick
Affiliation:
University of Colorado
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Extract

In this article we investigate the nature of long-term fluctuations (commonly called long-swings or Kuznets cycles) in the general level of activity of the American economy over the period between the Civil War and the Great Depression. We conclude that a stable socio-economic structure of long-term economic change was in existence over this entire period. This structure defines a concurrence of relationships between certain economic and demographic variables which in combination determined the dynamic pattern by which economic growth proceeded. Our findings should be of interest to the economic historian studying the general process of economic growth in a capitalist economy.

Type
Articles
Information
The Journal of Economic History , Volume 31 , Issue 2 , June 1971 , pp. 295 - 343
Copyright
Copyright © The Economic History Association 1971

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References

The authors extend thanks to Professor Barry Poulson both for introducing us to a study of Kuznets cycles and for reading the manuscript and giving some helpful suggestions. However, all results are solely the responsibility of the authors.

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12 An estimating technique is currently being developed that will not only establish restrictions on the structural system (i.e. zero coefficients), but will also separate the multicolinear relations embodied in each equation of the structural system.

13 It is not presumed at this point that long cycles, however defined, do in fact exist. The only assumption involved in the above system is that economic changes over certain periods can be represented by a closed endogenous model. Thus, if such a self-enclosed system fails to indicate a long-swing pattern which is inherent in some of the original data series, then one can infer that long-swings in economic growth must be the result of accidental features in the course of economic history rather than any intrinsic economic mechanism, or the mathematical analytic model is not adequate to capture the phenomena.

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15 Note that if the minimum lag in all equations is q then the first q predicted values of the system prediction process will be identical to those of the pointwise prediction.

16 The Janus quotient is presented in Wold, H. O. A. (ed.), Econometric Model Building (Amsterdam: North-Holland, 1964), ch. vGoogle Scholar, “The Janus Quotient: A Measure for the Accuracy of Prediction,” by A. Gadd and H. Wold, pp. 231–35. For the Theil coefficient see Theil, H., Economic Policy and Forecasts (Amsterdam: North-Holland, 1958).Google Scholar

17 Wold, Econometric Model Building, p. 235.

18 For example a regression over 41 points with 19 parameters giving an ESS of 0.0016 and an R2 of 0.999985 over the E period, gave a Janus quotient of 2,380 as compared with an ESS of 1.88 and a Theil of 0.013 over an F-period of 20 years.

19 Theil, Economic Policy and Forecasts.

20 The system referred to below as the “best” system, although it is chosen as the best of the alternatives examined statistically, should be considered as the best representative of a class of systems and not as an absolutely unique “best” system.

21 Abramovitz, Hearings, pp. 411–43.

22 Abramovitz, “The Nature and Significance of Kuznets Cycles,” p. 241.

23 Ibid., p. 247.

24 Ibid., pp. 242–43.

25 Kuznets, Capital in the American Economy, pp. 316–60.

26 S. Fabricant found evidence of long-swings in the productivity indices estimated by Kendrick. See Fabricant, S., Basic Facts on Productivity Change, Occasional Paper 63 (New York: N.B.E.R., 1959), pp. 37–41.Google Scholar

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28 Easterlin, Richard A., Population, Labor Force, and Long Swings in Economic Growth, the American Experience (New York: N.B.E.R., 1968), p. 47Google Scholar

29 Ibid., pp. 42–74. The sustained downswing in economic activity is explained by similar interactions, except that decreasing rates are substituted for increasing rates.

30 Fabricant, Basic Facts on Productivity Change, pp. 42–45.

31 Schmookler, Jacob, “The Level of Inventive Activity,” Review of Economics and Statistics, XXXVI (May 1954), 183–90.CrossRefGoogle Scholar See also Schmookler, J., “Economic Sources of Inventive Activity,” The Journal of Economic History, XXII (March 1962), 1–20.CrossRefGoogle Scholar

32 Samuelson, Paul A., “Interactions Between the Multiplier Analysis and the Principle of Acceleration,” Review of Economic Statistics, XXI, No. 2 (May 1939), 75–78.CrossRefGoogle Scholar

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34 Ibid., pp. 187–88; pp. 676–700.

35 Abramovitz, Hearings, p. 432.

36 Williamson, J. G., American Growth and the Balance of Payments, 1820–1913 (Chapel Hill, N.C.: University of North Carolina Press, 1964), pp. 89–188.Google Scholar

37 Actually during the early part of the period between 1869 and 1914 the balance of payments was normally negative; thus, the upswing in the Kuznets cycle produced a progressively more pronounced negative level in the balance of payments.

38 Adelman, Irma and Adelman, Frank L., “The Dynamic Properties of the Klein-Goldberger Model,” Econometrica, XXVII (Oct. 1959), 596–625CrossRefGoogle Scholar

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41 Adelman, Irma, “Long Cycles—Fact, or Artifact?”, The American Economic Review, LX, No. 3 (June 1965), 446.Google Scholar

42 The series is taken from Easterlin, Population, Labor Force, and Long Swings in Economic Growth, pp. 204–09.

43 The annual GNP series is taken from Kuznets, Capital in the American Economy, p. 555.

44 The same technique was used to give an annual series of Gross Producer Durables and Cross Construction back to 1869.

45 The crucial distinction between pointwise and systemwise prediction is defined and discussed in Section II.

46 On the basis of the relative success of Variant VI, simple periodic lag shifts of the form (5–6–7–8) (9–10–11–12), etc., were examined for the purpose of discovering any simple periodicity of this nature. These trials were unsuccessful.

47 One further line of investigation was to search for mixed-lag periodicities of the type (1–2–3–6–7–8), (1–2–3–4–12–13–14–15), (7–8–9–14–15–16), etc., but without acceptable results.

48 Hacker, Louis M., The Triumph of American Capitalism (New York: Columbia University Press, 1940), ch. xxiv.Google Scholar Also see Hacker, L. M., The World of Andrew Carnegie (New York: J. B. Lippincott Co., 1968), pp. xxvii-xxxi.Google Scholar

49 For a discussion of the socio-economic effects of the Civil War see Engerman, Stanley L., “The Economic Impact of the Civil War,” Explorations in Entrepreneurial History, III, No. 3 (Spring/Summer 1966), 176–99.Google Scholar

50 Ibid., pp. 179 ff.

51 North, Douglass C., Growth and Welfare in the American Past (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1966), p. 26.Google Scholar

52 Historical Statistics of the United States, Colonial Times to 1957 (U.S. Department of Commerce, Bureau of the Census, 1961), p. 56.Google Scholar

53 Easterlin, Population, Labor Force, and Long Swings in Economic Growth, pp. 60 ff.

54 Professor Adelman generated undulations roughly similar to the long-swings observed in economic data by applying stochastic shocks to the Klein-Goldberger model. See Irma Adelman, “Lone Cycles—A Simulation Experiment,” pp. 152–81, in Hoggatt, Austin C. and Balderston, Frederick E. (eds.), Symposium on Simulation Model: Methodology and Applications to the Behavioral Sciences (Cincinnati: South-Western Publishing Co., 1963).Google Scholar

55 Frisch, Ragnar, “Propagation Problems and Impulse Problems in Dynamic Economics,” in Readings in Business Cycles (Homewood, Illinois: Richard D. Irwin, Inc., 1965), pp. 155–85.Google Scholar

56 Another study which closely simulates business cycles by applying stochastic shocks to the Klein-Goldberger model is Irma, and Adelman, Frank L., “The Dynamic Properties of the Klein-Goldberger Model,” Econometrica, XXVII (Oct. 1959), 596–625.Google Scholar