Great Wave

by Fischer, David Hackett;

  In a time of crisis, when so many possibilities were hanging in the narrow balance, much depended on the wisdom of our choices. Wise choices in turn required intelligent leaders and informed electorates. But intelligence and wisdom and even the information that we needed most were not much in evidence in national capitals throughout the world.

  As the great wave of the twentieth century approached its climax, the condition of many nations called to mind a Melville novel, or perhaps a Masefield poem. The ship of state raced onward, through high seas and heavy weather. All sails were set, and her helm was lashed to the course that she had long been steering. On the quarterdeck, several parties of myopic navigators squinted dimly at the dark clouds behind them. Somewhere below was their amiable captain, who wanted mainly to be loved by his sullen crew. The first-class passengers amused themselves in their opulent cabins, knowing little of the suffering in steerage, and nothing of the dangers that surrounded them. On deck amidships, a lone bookish traveler turned his collar against the wind, leaned precariously across the lee rail, and tried to read the signs in the sky.

  CONCLUSION

  Between Past and Future

  Chaos, Cosmos! Cosmos, Chaos!

  Who can tell how all will end?

  Read the wide world’s annals, you,

  and take their wisdom for your friend.

  Forward then, but still remember how

  the course of Time will swerve,

  Crook and turn upon itself in many a

  backward streaming curve.

  —Alfred Tennyson1

  WORKS ON THIS subject often end with a book of Revelations, or at least a chapter of Jeremiah, in which the reader is warned that we are heading for disaster—unless the author’s ideas are speedily enacted. These dark prophecies find a growing market with modern readers, who appear to have an insatiable appetite for predictions of their own impending doom.

  Even when prophecies fail, they are merely updated and sell briskly once again. They call to mind the career of the Reverend Samuel Miller, a Baptist minister in nineteenth century New England, who predicted that the world would end no later than December 31, 1843. When the fatal day approached, the Prophet discovered an error in his computations. He announced that the last trump had been rescheduled to March 21, 1844. His followers grew to many hundreds. They donned special “resurrection robes” and gathered to await the day of judgment. But Samuel Miller found another mistake in his arithmetic, and postponed the end of the world once again, this time to October 22, 1844. The faithful were undeterred. Their numbers rose so high that on the appointed day, business came to a halt in parts of New England. But Samuel Miller revised his numbers yet again and went on prophesying until his end arrived—without warning—in 1849.2

  Those who believe that the economic future has been revealed to them should remember the story of Samuel Miller. They might also reflect on the wisdom of John Kenneth Galbraith, who observes that “the most common qualification of the economic forecaster is not in knowing, but in not knowing that he does not know. His greatest advantage is that all predictions, right or wrong, are soon forgotten.”3

  Historians have special reasons for caution, for they will recall the fate of earlier attempts to know the future. They also have problems enough with the past. Further, they understand that predictions fail not because historical knowledge is limited, but because of the nature of history itself.

  We are not merely the objects of history but also its agents. The future is determined partly by free choices that people willfully make, often in unexpected ways. These human choices are not always rational. They flow from hopes and fears, truths and errors, memories and dreams. They are unpredictable, and sometimes unimaginable, before they are made.

  The history of prices offers many examples. No economic forecaster could have predicted (or even imagined) that a president as conservative as Richard Nixon would become a convert to Keynesian economics in 1971, or that a president as liberal as Jimmy Carter would adopt conservative fiscal policies in 1978, or that any president in his right mind would have embraced the “supply-side” nostrums called Reaganomics in 1981. Each of these individual choices made a difference in the history of prices. All of them were freely made—sometimes defiantly against reason, interest and the economic odds. As long as this is so, history will never be a predictive science.4

  Nevertheless, if powers of prophecy are denied to us, there are other important links between the past and future. The study of history can never tell us with certainty what will happen next, but it gives us the benefit of much hard-won experience in the past. It also helps us to know our intentions for the future. To those ends, let us review the patterns that we have found, and think of the choices before us.

  Price Revolutions: Structural Similarities

  This inquiry began with a problem of historical description about price movements in the modern world. Its primary purpose was to describe the main lines of change through the past eight hundred years. The central finding may be summarized in a sentence. We found evidence of four price-revolutions since the twelfth century: four very long waves of rising prices, punctuated by long periods of comparative price-equilibrium. This is not a cyclical pattern. Price revolutions have no fixed and regular periodicity. Some were as short as eighty years; others as long as 180 years. They differed in duration, velocity, magnitude, and momentum.

  At the same time, these long movements shared several properties in common. All had a common wave-structure, and started in much the same way. The first stage was one of silent beginnings and slow advances. Prices rose slowly in a period of prolonged prosperity. Magnitudes of increase remained within the range of previous fluctuations. At first the long wave appeared to be merely another short-run event. Only later did it emerge as a new secular tendency.

  The novelty of the new trend consisted not only in the fact of inflation but also in its form. The pattern of price-relatives was specially revealing. Food and fuel led the upward movement. Manufactured goods and services lagged behind. These patterns indicated that the prime mover was excess aggregate demand, generated by an acceleration of population growth, or by rising living standards, or both.

  These trends were the product of individual choices. Men and women deliberately chose to marry early. They freely decided to have more children, because material conditions were improving and the world seemed a better place to raise a family. People demanded and at first received a higher standard of living, because there was an expanding market for their labor. The first stage of every price-revolution was marked by material progress, cultural confidence, and optimism for the future.

  The second stage was very different. It began when prices broke through the boundaries of the previous equilibrium. This tended to happen when other events intervened—commonly wars of ambition that arose from the hubris of the preceding period. Examples included the rivalry between emperors and popes in the thirteenth century; the state-building conflicts of the late fifteenth and early sixteenth centuries; the dynastic and imperial struggles of the mid-eighteenth century; and the world wars of the twentieth century. These events sent prices surging up and down again, in a pattern that was both a symptom and a cause of instability. The consequences included political disorder, social disruption, and a growing mood of cultural anxiety.

  The third stage began when people discovered the fact of price inflation as a long-term trend, and began to think of it as an inexorable condition. They responded to this discovery by making choices that drove prices still higher. Governments and individuals expanded the supply of money and increased the velocity of its circulation. In each successive wave, price-inflation became more elaborately institutionalized.

  A fourth stage began as this new institutionalized inflation took hold. Prices went higher, and became highly unstable. They began to surge and decline in movements of increasing volatility. Severe price shocks were felt in commodity movements. The money supply was alternately expanded and contracted. Fi
nancial markets became unstable. Government spending grew faster than revenue, and public debt increased at a rapid rate. In every price-revolution, the strongest nation-states suffered severely from fiscal stresses: Spain in the sixteenth century, France in the eighteenth century, and the United States in the twentieth century.

  Other imbalances were even more dangerous. Wages, which had at first kept up with prices, now lagged behind. Returns to labor declined while returns to land and capital increased. The rich grew richer. People of middling estates lost ground. The poor suffered terribly. Inequalities of wealth and income increased. So also did hunger, homelessness, crime, violence, drink, drugs, and family disruption.

  These material events had cultural consequences. In literature and the arts, the penultimate stage of every price-revolution was an era of dark visions and restless dreams. This was a time of lost faith in institutions. It was also a period of desperate search for spiritual values. Sects and cults, often very angry and irrational, multiplied rapidly. Intellectuals turned furiously against their environing societies. Young people, uncertain of both the future and the past, gave way to alienation and cultural anomie.

  Finally, the great wave crested and broke with shattering force, in a cultural crisis that included demographic contraction, economic collapse, political revolution, international war and social violence. These events relieved the pressures that had set the price-revolution in motion. The first result was a rapid fall of prices, rents and interest. This short but very sharp deflation was followed by an era of equilibrium that persisted for seventy or eighty years. Long-term inflation ceased. Prices stabilized, then declined further, and stabilized once more. Real wages began to rise, but returns to capital and land fell.

  The recovery of equilibrium had important social consequences. At first, inequalities continued to grow, as a lag effect of the preceding price revolution. But as the new dynamics took hold, inequality began to diminish. Times were better for laborers, artisans, and ordinary people. Landowners were hard pressed, but economic conditions improved for most people. Families grew stronger. Crime rates fell. Consumption of drugs and drink diminished. Foreign wars became less frequent and less violent, but internal wars of unification became more common and more successful.

  Each period of equilibrium had a distinct cultural character. All were marked in their later stages by the emergence of ideas of order and harmony such as appeared in the Renaissance of the twelfth century, the Italian Renaissance of the quattrocento, the Enlightenment of the early eighteenth century, and the Victorian era.

  After many years of equilibrium and comparative peace, population began to grow more rapidly. Standards of living improved. Prices, rents and interest started to rise again. As aggregate demand mounted, a new wave began. The next price-revolution was not precisely the same, but it was similar in many ways. As Mark Twain observed, history does not repeat itself, but it rhymes.

  Sequential Differences

  Even as all price-revolutions shared a common wave-structure, they differed from one another in duration, magnitude, and range. These differences were not random variations. They comprised a coherent process of historical development from one great wave to the next. Since the twelfth century, price-revolutions have succeeded one another in a continuous sequence of historical change.

  Several sequential patterns of this sort can be identified. The most obvious was a change in rates of change. From one wave to the next, average annual rates of price-inflation tended to increase geometrically: 0.5 percent in the price-revolution of the thirteenth century; a little above I percent in the very long wave of the sixteenth century; nearly 2 percent in the shorter wave of the eighteenth century; and at least 4 percent in the price-revolution of the twentieth century. This acceleration was caused by the expansion of markets, and by the institutionalization of price-increases.5

  Second, as rates of change increased, a larger proportion of total price gains became concentrated in the later stages of each price-revolution. In the medieval price-revolution, absolute magnitudes of gain were comparatively even in their distribution through time. In the price-revolution of the twentieth century, more than half of the total increase in prices from 1896 to 1996 happened after 1970. Nine-tenths of it came after 1945. This pattern was caused by acceleration in rates of price-change from one price-revolution to another.6

  Third, the range of annual fluctuations diminished from one wave to the next. In the medieval price-revolution, these gyrations were very violent and dangerous, mainly as a consequence of changing harvest conditions. Food prices tended also to be less stable when people lived closer to the margin of subsistence. In each subsequent price-revolution, those movements became less extreme, and fluctuations were damped down. The growth of production created surpluses, which functioned as price-cushions. The expansion of markets and the improvement of communications also diminished the disruptive effect of local scarcities and seasonal oscillations.

  Fourth, from one wave to another, the final stage of cultural crisis became progressively less catastrophic. The medieval price-revolution ended in the massive famines and epidemics of the fourteenth century. The second wave culminated in the general crisis of the seventeenth century. This was the only period after the Black Death when the population of Europe declined, but not as much as in the fourteenth century. The third wave had its climax in an age of world revolutions (1776–1815), a time of many troubles, but population continued to increase. The price-revolution of the twentieth century has yet to reach its climax.

  Fifth, as each successive crisis grew less severe in demographic terms, it became more sweeping in its social consequences. Every general crisis caused a social revolution, and the radicalism of these events increased through time. The crisis of the fourteenth century did much to end villeinage in western Europe, and to transform societies based on conquest and subjugation into customary systems of orders and estates. The general crisis of the seventeenth century transformed political systems and expanded the rule of law in Britain, America and Europe. The revolutionary crisis of the eighteenth and early nineteenth centuries (1776–1815) made public institutions in America and Europe more responsive to the will of the people, and more protective of their individual rights. It also transformed systems of social orders into classes. The great wave of the twentieth century has not yet reached its end, but it has already caused the collapse of totalitarian systems of the left (eastern Europe) and the right (Latin America), as well as sweeping social and economic reforms in many nations. Every general crisis in modern history has improved the condition of ordinary people. It has also enlarged ideas of human dignity, freedom, and the rule of law. This tendency has become more powerful in each successive wave.

  To summarize, each price-revolution developed through five stages: slow beginnings in a period of high prosperity; a period of surge and decline; a time of discovery and institutionalization; an era of growing imbalances and increasing instability; and finally a general crisis. The climax was followed by a fall of prices, recovery of stability, and a long period of comparative price equilibrium. The social and cultural impact of these movements changed from one great wave to another. Velocity increased and variability declined. Each successive price-revolution became less catastrophic in its demographic consequences, but more sweeping in its social impact.

  Problems of Cause: Seven Models

  These descriptive patterns raise many causal problems. What set the price-revolutions in motion? What processes shaped their distinctive structure? Fernand Braudel, one of the few historians to consider these questions, pronounced them “impossible” to solve. Certainly it is true that conventional models of explanation in history and economics do not work well when applied to this problem.7

  Seven causal models are dominant in the historical literature: monetarist, Malthusian, Marxist, agrarian, neoclassical, environmental, and historicist. All have much to teach us, but none has solved the problem of explaining the origin and development of price-rev
olutions in a rounded way.8

  The most simple and straight-forward explanation of price-revolutions is the monetarist model, which holds that price levels are determined by the quantity and velocity of money in circulation. This explanation has major strengths, and has made an important contribution to knowledge. Much research has established beyond doubt that monetary factors make a major difference in price levels. But when monetarist models are introduced as the first cause of price-revolutions, difficulties appear. The timing is never quite right. The price-revolution of the sixteenth century, for example, began as early as 1475, thirty years before the first American treasure reached Europe, and fifty years before it began to flow in quantity.9

  Further, a monetarist model cannot account for many aspects of a price-revolution. It alone cannot explain the movement of price-relatives, or the disparity between prices and wage movements, or the difference in returns to labor and capital. It does not help us to understand why prices and interest rates tend to rise together in long inflations—the Gibson paradox, which is a major problem for monetarists.

  A monetary explanation cannot tell us why people choose to expand the money supply in the first place, or why they do so in some periods more than others. Increases in the supply of money are not suddenly visited upon history as Zeus came to Danae, in a shower of gold. People deliberately decide to change the size of the money supply, for one reason or another. In the history of these events there is always a prior cause.

  Moreover, the monetarist model works better for some periods than others. It does well for middle and later stages of price revolutions, but badly for early stages, and for periods of price equilibrium. Its explanatory power increases when it is used as an historical variable rather than a theoretical constant. In some periods, monetary forces are strong and overriding. In others they are weak and secondary.