Monographs of official statistics : papers and proceedings of the colloquium on the history of business-cycle analysis.
Date: 2003-11-23
Institutions: Eurostat
Subjects: economic cycle, economics, official statistics, statistical method

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Monographs of
official statistics
Papers and proceedings 
of the colloquium on the 
history of business-cycle analysis

1

THEME 1
General
statistics

E U R O P E A N
C O M M I S S I O N

 
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Monographs of official statistics 
Papers and proceedings  of the colloquium on the 
history of business-cycle analysis 

Edited by: 
Dominique Ladiray 

Acknowledgements 

This publication has been realised thanks to the support of 2SDA company. It contains the  proceedings of the 

second colloquium on modern tools for business-cycle analysis. The subject of the colloquium was the history 

of business-cycle analysis. 

Project management and coordination were ensured by Gian Luigi Mazzi and Klaus Reeh.  

Eurostat would like to thank all the actors involved in the writing and preparation of this publication: 

The authors of the different papers of the publication 

·  

·  
·  

·  

·  

·  

·  

·  

Michel Armatte (Université Paris IX - Dauphine) 

Marcel Boumans (NIAS and University of Amsterdam) 

Alain Carry (CNRS) 

Alain Desrosières (INSEE) 

Jacky Fayolle (OFCE) 

Einar Lie (University of Oslo) 

Mary S. Morgan (London School of Economics and University of Amsterdam) 

J. Adam Tooze (University of Cambridge and Jesus College) 

The Eurostat support and organisation team 

·  

·  

Nelly Da Silva 

Jane Schofield 

2SDA team 

·  

·  
·  

Sylvie Da Silva (rereading of the text) 

Madeleine Larue (desktop publishing) 

Gabriella Manganelli (general coordination) 

The  views  expressed  in  the  publication  are  those  of  the  authors  and  do  not  necessarily reflect the opinion of 
the European Commission. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Introduction

Why a Eurostat colloquium 

about the history of business-cycle analysis?

Business cycles are always attracting a lot of public attention. The oldest example that I know of comes from

the Bible (Genesis 41,29). Joseph had to interpret the Pharaoh's dream and came up with a simple business-

cycle model: the total length of the cycle is 14 years, 7 abundant years followed by 7 lean years. In his capa-

city as political adviser Josef suggested to the Pharaoh not only a theory (at that time yet to be tested empi-

rically), but also a business-cycle policy to cope with the ups and downs. His 'Josephian stabilisation policy'

is in stark contrast to what has become 'Keynesian stabilisation policy'. Josef suggested public savings while

Keynes proposed public dissavings.

These days, no doubt, our business-cycle models and our stabilisation policies are a little bit more sophisti-

cated. This has also a lot to do with replacing dreams by statistics, of course not so much by agricultural sta-

tistics, but by a set of macroeconomic statistics.

We at Eurostat are fully aware that official (and non-official) statistics play an important role in dealing with

the business-cycle phenomenon. The business cycle has always been (remember the biblical example) and

will continue to be a theoretical construction. The cycle takes shape only through concepts and information,

these days less dreams and more statistics. We, the statisticians, are called upon by business-cycle theorists

and empiricists to provide the necessary information. Our statistics allow theorists and empiricists to discuss

the business-cycle phenomenon in many ways:

(cid:122) 

on the basis of reference cycles and diffusion indices derived as synthetic indicators from a large num-

ber  of  leading,  concurrent,  or  lagging  series  chosen  for  their  supposed  relevance  for  the  business

cycle;

(cid:122)

(cid:122)

on the basis of a macroeconomic aggregate such as gross domestic product or industrial production

as deviation from a trend;

as a degree of capacity utilisation in relation to full capacity compiled either by a full employment rate

combined with labour productivity measure or by capital stock combined with capital productivity mea-

sure or any combination thereof;

or last, but not least:

(cid:122)

as the result of a univariate or mulitvariate time-series analysis.

Both theorist and empiricist exert considerable influence on policy-makers. They do it directly. Most budgeta-
ry forecasts are based on a cyclical analysis. They do it also indirectly. Financial markets are very responsi-
ve to business-cycle analysis and policy-makers cannot ignore financial markets these days. The quality of
the work of theorist and empiricist is influenced by the quality of their statistical information. Statistics matter
and statisticians should be aware of their role.

We here at Eurostat are definitely very much aware of the importance of our role, but we are at the same time

also newcomers to the business of compiling regularly according to a strict schedule high-quality statistics for

business-cycle analysis. This has to do very much with the profound political and economic changes in the

EU. Economic and monetary union is now in full swing, 12 Member States have adopted the euro with notes

and coins now introduced. This is why the euro-area business cycle is about to become a phenomenon that

is attracting ever more the attention of theorists and empiricists. Euro-zone business-cycle analysis is on, but

5

euro-zone business-cycle statistics have yet to be as good as the national statistics used by business-cycle

analysts when looking at the phenomenon from a national angle.

For us, the statisticians, it is very important to have an understanding of the work and of the thinking of the

business-cycle  analysis  community,  of  theorists  and  empiricists  alike.  Only  a  good  understanding  of  their

needs  will  allow  us  to  suggest  relevant  statistics  and  prepare  them  adequately.  Such  an  understanding

should, of course, not be confined to current practices. A look at the history of business-cycle analysis is of

particular importance as this field is under permanent change. Modern business-cycle analysis started with

synthetic indicators, then came the more economic ones getting ever more sophisticated, now synthetic indi-

cators have become once again more fashionable, albeit with a different content. We have equally seen the

rise of time series analysis with each failure having led to a further methodological improvement. Everything

seems to go these days, therefore we have to offer something for everybody.

Business-cycle analysts will have to come to grips with the euro-zone cycle and we the EU statisticians have

to help them. Some quite difficult questions are awaiting a satisfactory answer in this context. Is the euro-zone

cycle best perceived as a condensation of national cycles? Or are national cycles mere variants of a euro-

zone cycle? What about lead-lag structures among economies? Consequently there are quite good reasons

to look at the history of business-cycle analysis when we are trying to meet the EMU challenge. I am very

happy that we were able to bring together a group of historians of renown and hope that EU statisticians, in

Eurostat as well as in national statistical institutes, will be able to profit from this colloquium.

Klaus Reeh

6

TABLE OF CONTENTS

Acknowledgments

Introduction

Jacky Fayolle
The study of cycles and business analysis in the history of economic thought

Michel Armatte
Cycles and barometers: historical insights into the relationship between an object

and its measurement

Alain Carry
Kondratieff on how to convince people that long-term economics exists

Marcel Boumans
Tibergen's busines cycle analysis

Einar Lie, Olav Bjerkholt
Business-cycle analysis in Norway until the 1950s

Alain Desrosières
The short-term economic analyst, the national accountant, the econometrician and the 

planner: controversies about forecasting in France and the Netherlands (1930-80)

Mary S. Morgan
Business cycle: representation and measurement

J. Adam Tooze
Macroeconomics denied: german business-cycle research 1925-45

3

5

9

45

75

109

127

149

175

191

7

EUROSTAT COLLOQUIUM

HISTORY OF BUSINESS CYCLE ANALYSIS

Luxembourg, 12 November 2001

THE STUDY OF CYCLES AND BUSINESS ANALYSIS

IN THE HISTORY OF ECONOMIC THOUGHT

Jacky Fayolle

Deputy director at OFCE Studies Department
Observatoire Francais de la Conjoncture Economique

E-mail: fayolle@ofce.sciences-po.fr

9

TABLE OF CONTENTS

1. Period I: positivist cohabitation

2. Period II: the agnostic breakaway

2.1 The inauguration and consolidation of an empirical traditions

2.2 Theoretical activism

2.2.1 Frisch: analysis

2.2.2 Haberler: synthesis

2.2.3 Schumpeter: the breath of history

3. Period III: professionalisation under the Keynesian influence

3.1 the master’s institutions...

3.2 ... and the doubts of his heirs

4. Period IV: the cycle between determinism and uncertainty

4.1 Disparate conceptions of the cycle

4.2 The difficulty of methodological tranparency

5. Outline of a contemporary view of the cycle problem

6. Bibliographical references

12

21

21

25

26

26

27

29

29

31

37

38

39

41

43

10

"In France, sad to say but unfortunately all too well confirmed by our numerous revolutions, our attitude to

government is hardly chivalrous.  We rely on and applaud it so long as it serves our purposes, or perhaps

more accurately, so long as it allows us to serve them ourselves, but as soon as things become difficult and

troublesome, most often through our own fault, we cease trusting it.  After having taken a wrong turning we

call upon government for advice, or – twisting and turning on our bed of pain – demand reforms that are some-

times absurd, which are always regarded as cure-alls and are only a pretext for showing our discontent.  The

ill-advised and dangerous habit of attributing every good to government during years of prosperity results, by

an effect of contrast, in its being accused and blamed for everything that goes wrong at times of crisis.  That

is the source of the public opinion fluctuations in France, which now exalt a dynasty and now overthrow it.  If

one were to make a list of governments which, over more than half a century, have survived adversity and

intense trade crises, the list would not be a long one".

Clément Juglar, Des crises commerciales et de leur retour périodique en France, en Angleterre et aux Etats

Unis [On trade crises and their periodic recurrence in France, England the United States], 1862.

"Section 2.  The Congress hereby declares that it is the continuing policy and responsibility of the Federal

Government to use all practicable means consistent with its needs and obligations and other essential consi-

derations of national policy, with the assistance and cooperation of industry, agriculture, labour, and State and

local governments, to coordinate and utilise all its plans, functions, and resources for the purpose of creating

and maintaining, in a manner calculated to foster and to promote free competitive enterprise and the general

welfare, conditions under which there will be afforded useful employment opportunities, including self-employ-

ment, for those able, willing, and seeking to work, and to promote maximum employment, production, and

purchasing power.

Section 4 (c).  It shall be the duty and function of the Council [of economic advisers of the president]… to

develop and recommend to the President national economic policies to foster and promote free competitive

enterprise, to avoid economic fluctuations or to diminish the effects thereof, and to maintain employment, pro-

duction, and purchasing power."

Congress of the United States, Employment Act of 1946.

Since the end of the 19th century the relations between theoretical investigation and business analysis have

not been intangible.  It is not the intention here to present a detailed history of economic thought on the sub-

ject, but to propose distinctions sufficient to indicate the successive relationships between economic theory

and the practical study of trade.  Each of the periods considered corresponds to a specific treatment of the

concept of a cycle.  As will be seen, the periods in question do not follow a strict chronological succession.

Each inaugurates traditions of thinking which are later abandoned and evolve, while overlaps are also quite

common.

11

1. Period I: positivist cohabitation

Until the major crisis of the 1930s there was no clear division between the two types of work, but rather, a

reciprocal influence that often became apparent.  Theoretical deduction and empirical induction cohabited in

some harmony under the aegis of a positivist view of historical events.

This tradition is rooted in the 19th century.  From 1862, Clément Juglar undertook an empirical identification

of business cycles and their successive phases, while inquiring into their causes1.  Although he does not use

the concept of a cycle, his emphasis on the systematic recurrence of business crises, on the recurrent mecha-

nism "of their development, explosion and liquidation", justifies the view, held by Schumpeter, that he was the

inaugurator of cycle analysis.  Juglar attributes to bank credit fluctuations in the form of discounts and advan-

ces a major role in generating the cycle, but has little faith in the ability of strict monetary control to reduce its

intensity: he expresses scepticism about the Peel Act of 1844, which related the issue of money by the Bank

of England strictly to its metal reserves.  He regards speculative price inflation and the play of the effects of

wealth in a society of notables still comparatively few of whom work for their living, as a key factor in propa-

gating excessive expansion which ultimately gives rise to overproduction2 .  When exaggerated development

of discounts leads to a decrease in bank metal reserves, crisis is not far away.  Once the crisis has struck,

the liquidation of goods and an excess of debts open the way to depression.  Juglar justifies the importance

he attributes to certain factors in the causal explanation of cycles in terms of the statistically observed regu-

larity  of  their  behaviour.    In  this  respect  he  emphasises  the  simultaneity  of  these  cyclic  manifestations  in

France and in England since 1800, and the increasing synchronisation with the United States.  He quantifies

the critical thresholds whose crossing heralds the crisis or, on the contrary, recovery3 .  This indeed outlines

the research programme of cycle analysis.  In 1880-1890 Juglar's work was to inspire a series of efforts to

measure fluctuations "barometrically" by means of a range of indexes sometimes deviating quite crudely from

the trend.  The purpose of these barometers is to detect symptoms that warn of turning points in economic

life, and the medical analogy is often shared by their authors.  These attempts have been discussed in the

international context at the International Statistics Institute.  Armatte (1992) and Vidal (2000) have given a

detailed account of them, which demonstrates how difficult it is under conditions prevailing at the time to esta-

blish barometers that give appropriate weighting to the real and nominal components of fluctuations.

Just after the first world war, the Harvard Institute4 became the driving force in the United States and the

world for the measurement and forecasting of short-term business fluctuations.  These were regarded as a

specific phenomenon, distinct from the general orientation of economic activity (the trend5)  and from seaso-

1 Juglar's founding work, Des crises commerciales et de leur retour périodique en France, en Angleterre et aux Etats-Unis, was publis-
hed in 1862 (Guillaumin, Paris).  It appeared in an expanded edition in 1889.
2 "Increasing luxury brings excessive expenditure, based not on income, but on the nominal estimation of capital according to the quo-
ted share prices." (1862, p. 5).
3 "It is therefore possible, solely by examining the discount and receipt figures over five or six years, to become aware of how near or
far away a crisis is" (1862, p.198).  "On examining the main items in the balances of the Banks of France and England, one will have
been struck by the regularity, the perfect agreement as it were, that is noticeable between them, despite the complete independence of
the two administrations that direct them and the different rules to which they are subject.  Whatever their constitution and with the often
restricted limits within which one of them, the Bank of England, has to operate, we find the same ups and downs and their periodic recur-
rence that lead successively to booms and busts of industry and trade" (1862, p. 203).
4 More exactly, the Harvard Committee of Economic Research at Harvard University.
5  The Anglo-Saxon language distinguishes between the concepts trend and tendency, which it is difficult not to translate in French by
the single word "tendance".  The term trend refers more to the long-term direction of economic movement, while tendency relates more
to the main orientation of that movement in the short term.  
Accordingly, the Anglo-Saxon word trend will be used freely, while the French term "tendance" will also be used when the context is not
ambiguous, in order not to abuse that anglicism.

12

nal and irregular fluctuations.  They must be extracted from chronological series representing the evolution in

time of economic variables using appropriate methods that have recourse to the techniques of moving ave-

rages or regression.  Such techniques are used to construct the "Harvard barometer" (or Harvard Index of

Business Conditions), the prototype of a system of cyclic indexes which has been published for the United

States  since  towards  the  end  of  the  1910  decade.    It  consists  of  three  synthetic  indices  whose  respective

cyclic movements show a regular correlation staggered by a few months, at least until 1925 (cf. Fig. 1).  In

periods of expansion, optimism about the future profitability of investments is manifested by a rise in the spe-

culation index A (reflecting the evolution of the average share price).  It provokes an increase in the demand

for products, which leads progressively to price increases and a growth of the business index B (which reflects

the volume of sales and the price level of goods).  As the expansion phase develops, the appearance of ten-

sions in the money market leads to an increase of interest rates manifested as a rise of the money market

index C (which represents the short-term credit level).  However, the weakness of fixed-income values by vir-

tue of the rise in interest rates then affects profitability expectations and leads to a recessive downturn, initia-

ting a process symmetrical to that of expansion.

The figure of Warren M. Persons, who led the Harvard Institute, exemplifies that period.  He was a "statisti-

cal economist"6 endowed with profound methodological culture, who paid great attention as much to opera-

tional requirements as to theoretical factors.  His articles, which give a detailed account of how the Harvard

barometer was developed, bear witness to the care devoted to the systematic treatment of the series availa-

ble in order to group them into a number of categories characterised by similar and synchronised cyclic beha-

viour: each of the barometer's three synthetic indexes is the product of this process of analysis and classifi-

cation.  Empirical equipment7 and techniques, new at the time, were put to use for analysing the correlations.

The  concept  of  cross-correlation  between  series  showing  a  shift  in  time  is  present.    Person's  approach  is

based firmly on an awareness of progress in statistical methodology and information, of which he gives a pre-

cise account in an article published in 1925, "Statistics and Economic Theory".  For its part, in the 1920s the

discipline of economics made good use of the progress in statistical theory achieved in the last decades of

the  19th  century.    That  progress  naturally  led  economists,  including  the  greatest  among  them  such  as

Marshall, who had hitherto remained distant and, rather, cultivated the deductive method, to devote attention

to what statistical influence could add to their thinking.  The laws of economics, which describe tendencies

and are identified by deductive reasoning, do not hold good independently of any perturbing influences (refe-

rred to as shocks in today's parlance), which alter their purity and whose discovery justifies recourse to sta-

tistical induction.  Of course, from the time when statistical economics matured to the point of favouring this

combination between theoretical deduction and statistical inference, the range of epistemological positions

became broader rather than narrower in relation to the nature and scope of the link that can be envisaged

between  these  two  approaches.    For  Wesley  C.  Mitchell,  who  quotes  Persons  and  who  will  be  mentioned

again in this review, the emergence of quantitative approaches supersedes older theories too speculative to

be  corroborated  or  falsified  by  a  statistical  line  of  argument,  and  compels  theoreticians  to  acquire  a  more

objective grasp of the behaviour and role of institutions.  At the same time, Persons stresses that the study

of cycles comes up against still unresolved technical difficulties (statistical characterisation of the periodici-

6 It is no exaggeration to apply the term to Persons.  In his article "Statistics and Economic Theory", Review of Economic Statistics,
1925, Vol. vii, he expresses himself as follows: "The term 'economic statistics' may be defined broadly, therefore, to include all the nume-
rical data of mass-phenomena which have an economic application" (p. 179).
7 Such as the equipment in the form of a screen, called "Illuminated Box with Glazed Top to Facilitate Comparison of Cycle Charts",
mentioned by Persons in his very complete article of 1919, "An Index of General Business Conditions", Review of Economic Statistics,
April 1919, Preliminary Vol. I, which presents the methodology and content of the Harvard barometer.  A later article, "An Index of General
Business Conditions, 1875-1913", Review of Economic Statistics, January 1927, Vol. ix, presents and discusses a "back-extrapolation"
of the barometer to the period preceding the first world war.

13

ties) and brings up theoretical alternatives that are difficult to settle by statistical demonstration alone, in par-

ticular because they relate to concepts too vague to be subjected to statistical measurement.  The problem

of falsifiability, in the sense used by Popper, is implicitly raised.

Since he is aware of these difficulties, Persons attaches great importance to the characterisation of the theo-

retical debate, to which he devoted an article in 1926, "Theories of business fluctuations", in the Quarterly

Journal of Economics.  Frame 1 shows an extract from that article, which is a listing, a classification of the

theories available, without attempting to draw any particular conclusion.  In fact, the conception of the three

synthetic  indexes  constituting  the  Harvard  barometer  bears  the  mark  of  various  theoretical  references,  as

several  contemporary  economists  pointed  out.    It  could  even  be  suggested  that  the  cultivated  theoretical

eclecticism that inspired the designers of the barometer led them to a more synthetic vision of the develop-

ment of cycles than any of the unilateral theories before them.  Fisher alerted them to the role of interest rate,

as judged with reference to its normal level, Mitchell about that of realised and expected enterprise profits.  In

effect  it  is  difficult  for  a  contemporary  economist  not  to  approximate  the  content  of  the  barometer  and

Wicksell's theory of cycles, based on comparison between the natural or normal interest rate (the anticipated

profit rate) and the monetary or nominal interest rate (the remuneration of bank credit)8.  Yet, Wicksell is igno-

red by Person's classification.

In  constructing  his  theory  of  the  alternation  of  inflationary  and  deflationary  phases,  Wicksell  was  directly

influenced by the experience of the "Great Depression" in the last quarter of the 19th century, which was cha-

racterised in particular by a lastingly high level of real interest rates.  The normal interest rate is the rate that

would balance the supply and demand for new capital if the lenders and borrowers could negotiate and agree

the discounted yield of new productive operations.  The economy's engagement in an inflationist or deflatio-

nist movement depends on the difference between that normal level and the monetary interest rate effective-

ly applied by the banks in a credit money economy.  If innovations that improve the normal rate result in its

rising above the monetary rate, the economy will undergo a burst of inflation because of the development of

investment  (since  it  will  be  profitable  to  borrow  from  the  bank  in  order  to  invest)  and  consumption  (since

saving in the form of bank deposits will be discouraged by the low monetary creditor rates).  This burst will

only decline when their balance constraints lead the banks to adjust to the level of the monetary rates: the

succession of consecutive expansions of the three indexes A, B and C is re-established.  Symmetrical move-

ments bring about a deflationist process.  This at least implicit Wicksellian reference nevertheless does not

express clearly how the level and variation of production are determined.  For that, it would be necessary to

wait for the Keynesian view to mature, and that lack was doubtless a factor in the vulnerability of business

approaches that mobilise the Wicksellian argument without knowing or saying so.

In  this  connection  it  is  interesting  to  note  the  attitude  of  the  German  business  analysts  of  the  Institut  für

Konjunkturforschung in Berlin, directed by Ernst Wagemann9, in the face of the fatal discredit suffered by the

Harvard barometer for failing to give a timely warning of the risk of reversal in 1929.  Until the Wall Street

crash in November 1929, the stability of the advanced index A had seemed to justify the persistence of opti-

8 Wicksell's terminology was not perfectly fixed, if only because Interest and Prices, published in Sweden in 1898, was not translated
into English until 1936 (Allen and Unwin, London), and also because it evolved in step with Wicksell's thinking.  He specified this, in par-
ticular, in his Lectures on Political Economy (1901-1906), in two volumes, which were translated into English (Routledge, London) in
1934-1935.
9 In French, one can consult Ernst Wagemann's Introduction à la théorie du mouvement des affaires, Paris, Félix Alcan, 1932.  This is
a  summary  of  his  "Konjunkturlehre",  Berlin,  1928.    Wagemann  generalises  his  approach  to  the  international  scale  in  Struktur  und
Rhythmus der Weltwirtschaft, Verlag Von Raimar Hobbing, Berlin, 1931.  An informed and interesting presentation of the German eco-
nomic analysts can be found in a text by Stéphane Lévy-Valensi, Ernst Wagemann et Adolph Lowe: l'apogée de la notion de conjonctu-
re, Miméo, Pierre Mendèds-France University of Grenoble, February 1997.

14

mistic forecasts (cf. Fig. 1, bottom graph).  In 1930 Persons, the creator of the barometer, still believed in a

fairly rapid recovery.  Although Wagemann notes this fault, he attributes it to the fact that the barometer could

not by itself sum up the movement of trade: it is only a barometer of profitability (to use a current term), which

has  to  be  included  in  a  broader-ranging  system  that  covers  the  economic  complex  more  completely.

Wagemann proposes a set of three barometers that correspond to the three phases of the capital cycle accor-

ding to Marx (money-capital, productive capital, commodities-capital):  the barometer of profits, which are the

source of a new accumulation of capital, combines the indexes already used by the Harvard Institute; the pro-

duction  barometer  corresponds  to  the  implementation  of  means  of  production;  the  barometer  of  outlets

reflects  the  degree  of  harmony  between  supply  and  demand  (see  Fig.  2).    This  set  also  anticipates  the

Keynesian cycle of demand-production-revenue, if the pole of effective demand and the realisation of profits

is stressed more than that of their formation as providing the impetus of the cycle.  For Wagemann the eco-

nomic situation is always "specific" because it interacts with a structure from which it cannot easily be sepa-

rated.

Thus, at the end of the 1920s German business analysts maintained a balanced attitude between empirical

investigation and theoretical awareness.  Adolphe Lowe, who collaborated with Wagemann, regarded cycles

in his articles of 1926 and 1928 as the result of an endogenous process that upsets the static equilibrium of

the economy.  He attributes a major role in this process to technological change.  He applies intense scruti-

ny to the relations between economic theory and business analysis: the latter, conscious of the plurality of cir-

cumstances, does not fit easily into the logical system of theories based on a static equilibrium concept and

interested in the change of that equilibrium when one particular variable is modified, all other things being

equal; the phrase ceteris paribus is inappropriate for business analysis, which has to deal with the complexi-

ty of the real dynamics of an economic system whose interdependent variables change at the same time but

at different rates.  From 1933 onwards Lowe took up a university career in England and the United States,

where in common with Hicks he developed an analysis of the "cross-link" that aims to illuminate the adjust-

ment processes brought about by a structural change.  These processes include the progressive adaptation

of the capital stock to a new course of balanced growth.

At the beginning of the 1930s, however, the theoretical-empirical efforts of the German business analysts was

left in isolation, due to the force of circumstances.  That was not the main direction in which business studies

were to move.

15

Frame  1.  Extract  from  the  article  by  Warren  M.  Persons,  «Theories  of  business  fluctuations»,

Quarterly Journal of Economics , November 1926, Vol. xli, pp. 94-128

In the lists which follow, the letters A, B, C ...are used to distinguish the several classes of theories. The

numbers 1,2,3 ...mention the writers. In arranging the writers who belong in the subdivisions, those only to

whom chief attention will be given in each subdivision are numbered, others being mentioned in parenthesis.

I - Emphasis on factors other thant economic instituions

A. Periodic agricultural cycles generate periodic economic cycles.

1.  W. S. Jevons and H. S. Jevons. 2. H. L. Moore. 

B.  Uneven expansion in the output of organic and inorganic materials is the cause of the modern crisis.

3.  Werner Sombart.

C.  A specific disturbance, such as an unusual harvest, the discovery of new mineral deposits, the out-

break  of  war,  invention,  or  other  "accident,"  may  disturb  economic  equilibrium  and  set  in  motion  a

sequence which, however, will not repeat itself unless another specific disturbance occurs.

4. 

Thorstein Veblen. 5. Irving Fisher. (A. B. Adams.)

D.  Variations in the mind of the business community (affected, of course, by specific economic disturban-

ces) are the dominating cause of trade cycles.

6.  A. C. Pigou. (Ellsworth Huntington, M. B. Hexter.)

II - Emphasis on economic instituions

E.  Given our economic institutions (particularly capitalistic production and private property) it is their ten-

dency to development which results in business fluctuations.

7. 

Joseph Schumpeter. 8. Gustav Cassel. 9. E. H. Vogel. (R. E. May, C. F. Bickerdike.)

F.  The capitalistic or roundabout system of production is the primary cause of business fluctuations.

10.  Arthur Spiethoff. 11. D. H. Robertson. 12. Albert Aftalion. (T. E. Burton, G. H. Hull, L. H. Frank, T.W.

Mitchcll, J. M. Clark.)

G.  Excessive accumulation of capital equipment, accompanied by mal-distribution of income, is respon-

sible for lapses from prosperity to depression.

13.  Mentor Bouniatian. 14. Tugan-Baranowsky. 15. John A. Hobson. (M. T. England, W. H. Beveridge, N.

Johannsen, E. J. Rich.)

H.  The fluctuation of money profits is the centre from which business cycles originate (eclectic theories).
16.  W. C. Mitchell. 17. Jean Lescure. (T. N. Carver)

J.  The nature of the flow of money and credit, under our present monetary system, is the element respon-

sible for the interruption of business prosperity.

18.  R. G. Hawtrey. 19. Major C. H. Douglas. 20. W. T. Foster and Waddill Catchings. (A. H. Hansen, W. C.

Schluter, H. B. Hastings, H. Abbati, W. H. Wakinshaw, P. W. Martin, Bilgram and Levy.)

16

Figure 1 : The Harvard barometer (Key to legends in the top part of Fig. 1):

(Key to legends in the top part of Fig. 1):

Harvard index of general business

conditions 1903-1914

A - Speculation

B - Business

C - Money 

17

Key to legends in the bottom part of Fig. 1:

Industrial share prices

Railway share prices

Bank debits, selected towns outside NYC

Wholesale goods prices

Short-term money rates

A - Speculation

B - Business

C - Money

Source: Ernst Wagemann (1932) 

18

Figure 2 : The German economic barometer 

Source: Ernst Wagemann (1932)

19

(Key to legends in Fig. 2):

THE GERMAN ECONOMIC BAROMETER

I.  Goods Side

a)   Production

New orders
Raw material imports
Production
Workforce employment

b)   Production and turnover

Production
Turnover
Interruption

c)   External trade

Net exports of manufactured goods including deliveries of reparations
Net imports of raw materials and semifabricated products

II.  Combination of moyen and goods

a)   Turnover in tangibles and prices

Retail prices (clothing)
Turnover in tangibles (clothing)

b)   Long-term credit and workforce employment

Long-term credits
Workforce employment (full-time)

III.  Money side

a)   Movements of Accounts
Credit transfers
Postal cheques
Notes in circulation

b)  Movement of Credit
Drafts issued
Credits from the issuing bank

c)   Money rates and interest rates

One-month money
Real values
Cyclic movement
Receipts from mortgage commitments

d)  The three markets

Commodities market
Shares market
Money market

e)   Commodity prices

Prices of tangible commodities
Cost of living index (excluding accommodation)
Wholesale prices index

20

2. Period II: the agnostic breakaway

2.1 The inauguration and consolidation of an empirical tradition

This second period opens with the empirical bias of the work of the National Bureau of Economic Research

(NBER) in America, which relates to the classical definition of a business cycle proposed by Arthur Burns and

Wesley Mitchell10 in their master work of 1946, Measuring Business Cycles: "Business cycles are a type of

fluctuation  found  in  the  aggregate  economic  activity  of  nations  that  organise  their  work  mainly  in  business

enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, fol-

lowed by similarly general recessions, contractions and revivals which merge into the expansion phase of the

next cycle; this sequence of changes is recurrent but not periodic; in duration business cycles vary from more

than one year to ten or twelve years, they are not divisible into shorter cycles of similar character with ampli-

tudes approximating their own".  This definition, morphological in nature, has remained an obligatory referen-

ce even in the most recent literature on cycle econometrics.  In effect, it combines the qualities of clarity and

flexibility.  It is not restricted solely to a macroeconomic point of view since it emphasises the sectorial plura-

lity of the cycle's manifestations, expressed as the conjoint movement of a large number of series: the cycle

is a phenomenon which spreads throughout the economy.  It proposes a simple and clear division of the cycle

into phases and associates a terminology with that division.  The succession of these phases defines a per-

iodicity whose reference dates correspond to the turning points of the cycle: the passage from expansion to

recession (peak), and the passage from contraction to recovery (trough).  Finally, Burns and Mitchell regard

the  cycle  more  as  a  statistical  than  as  a  mechanical  phenomenon:  over  the  course  of  history  successive

cycles constitute a population that can be studied using statistical criteria, which can reveal any regular fea-

tures that characterise them.

Without seeming to, the above definition involves important choices.  It remains silent about the question of

trend.  It does not make the problematic identification of the trend of a temporal series a prerequisite for reco-

gnition of the cycles affecting it: each new cycle develops on the basis of structural features specific to itself,

which determine the average level of activity over the cycle as a whole.  To make two separate cycles in the

same country comparable, it suffices to extract the difference between their average levels of activity.  Finally,

the definition does not aim to go into the distinction between several types of trade cycles, whether minor
(often assimilated to the three-year cycles noted by Kitchin11) or major (the Juglar cycles lasting around ten
years).  It deals with a unique, non-decomposable cycle, and this allows it to remain flexible about the dura-

tion that can be envisaged.

10 The career of Mitchell (1874-1948) symbolises the succession of the first two periods.  His work of 1913 (Business Cycles, University
of California Press) combines theoretical and empirical considerations.  It is a remarkable explanation of the sequential development of
a typical cycle.  His work of 1927 (Business Cycles: The Problem and its Setting, NBER), displays a certain distancing from theory without
abandoning it.  But the finding is that: "Between these two groups of workers, the theorists and the statisticians, there has been less com-
munion than their mutual interests require" (p. 189).  There is, however, a major continuity with the work of 1913: the emphasis placed
on the role of profits in the cycle ("Profits as the Clue to Business Fluctuations", p. 105).  Later, Mitchell was to devote himself to the
empirical treatment of cycles, within the NBER framework.
11 It was Schumpeter (1939) who gave the names Kondratieff, Juglar and Kitchin to the three categories of cycles, long, medium and
short, that he supposed to fit into one another.  It was in an issue of the Review of Economic Statistics of 1923 that the British statisti-
cian Kitchin and his colleague Crum each published an article pointing to cycles of the order of three to four years in the British and
American series of prices and interest rates between the last decades of the 19th century up to 1914.  Later, authors who returned to
the question such as Abramovitz, would attribute the responsibility for Kitchin cycles to variations of circulating stocks, while Juglar cycles
are more attributable to fluctuations of fixed capital investment.

21

The fundamental intention of Burns and Mitchell is to treat economic cycles as a reproducible phenomenon,

typical of competing market economies and able to be summarised in terms of stylised facts.  That aim is pre-

served by later, more detailed technical considerations which re-examined some of their assumptions.  In the

post-war period the vigour of growth trends, the apparent attenuation and the greater asymmetry of econo-

mic cycles  –  with expansion phases longer and more pronounced than recession phases  –  led to a rene-

wed tendency, in breaking down the series studied, to distinguish between trend and cycle: significant slow-

downs of economic activity do not always result in its absolute reduction; it is difficult to note and quantify

these slowdowns without identifying the long-term trend of that activity, below which the effective growth rate

can  fall  without  becoming  negative.    Henceforth  the  term  used  is  growth  cycles,  as  opposed  to  classical

cycles, which were the first incarnation of business cycles12.  The two points of view are not exclusive and

can be combined, but the privilege accorded to one of them affects the reading of economic cycles, in parti-

cular their dating (Frame 2).  In the United States the official chronology of these cycles has kept to the clas-

sical cycle point of view until now.  Unfortunately, this choice of a point of view, which can and must be done

clearly, is complicated by a blurring of terminology that depends on local custom and also on journalistic lan-

guage, and which is hardly ever faithful to the standardisation proposed by Burns and Mitchell.  This flexibi-

lity has at least one advantage, that of allowing business analysts to avoid endless repetition when they com-

ment on the movements of trade!

Frame 2: Classical Cycles and growth cycles

Diagram 1 depicts a duality in the division of a cycle, according to whether the turning points are regarded

as being the dates associated with the local peak and trough levels of the curve representing economic acti-

vity (points B and C on the time axis)  –  this being the image of the classical cycle  –  or the points cor-

responding to the maximum deviation from the long-term trend of economic activity (points A and D) – this

being the image of the growth cycle.  In the second case, therefore, the turning points correspond to times

when the growth rate of activity is momentarily identical to the trend rate, after having exceeded it for a time

and before falling below it in the case of a peak, and after having been below it and before exceeding it

again in the case of a trough.  When fully understood, this duality contributes to a detailed description of the

cycle: the historical examination of cycles, especially in the case of the United States, often reveals a "bloc-

kage" phase that corresponds to the interval AB, in which activity has slowed down markedly without having

already turned down towards its low point.  Division in accordance with growth cycles re-establishes a cer-

tain symmetry of the cycle when the trend of activity is towards growth: the length of the descending phase

BD increases relative to the ascending phase, in contrast to the classical cycle image in which it is reduced

to the interval BC.

12 The study considered to have inaugurated the growth cycle approach, was published by Ilse Mintz in 1969 at NBER and dealt with
the dating of business cycles in Germany during the 1950s and 1960s.

22

Diagram 1:  The dual location of turning points

Classical
Cycle

Peak

Trough

Peak

A

B

C

D

t

Growth
Cycle

Trough

In the case of an economy that has been growing for a long period, some significant trade fluctuations have

amplitudes too small to be recognised as classical cycles:  they are not reflected by an absolute decline in

activity.  In the upper curve of Fig. 2, after a well-marked classical cycle, such a fluctuation appears: it takes

the form only of what Anglo-Saxons call a "slowdown without recession", which does not interrupt the newly

begun expansion phase of the classical cycle.  On the other hand, the growth cycle image takes the form

of a succession of two distinct cycles, since the "slowdown without recession" is pronounced enough for

the effective growth rate to move below the trend rate for a time.

23

Diagram 2:  Duality of cycle division and terminological uncertainty

Slowdown
with recession

Slowdown
without recession

Peak
Pic

    Boom ou
Surchauffe

Récession
Contraction

Expansion ou
Essor

Dépression

Peak ou
Downturn

Slowdown
Ralentissement

Revival ou Recovery
Reprise

Trough
Creux

Trough
ou Upturn

This duality of the cycle division combines with terminological uncertainty to produce troublesome vague-

ness unless the conventions adopted are clearly expressed.  Diagram 2 indicates a number of terms that

are frequently used in practice: the term recession tends to be reserved for phases in which there is an

absolute decline in activity, otherwise one speaks of a simple slowdown, knowing, however, that a reces-

sion often starts with such a slowdown; the term 'contraction' has lost its precision in relation to the termi-

nology proposed by Burns and Mitchell, for whom a contraction represented a deepening of recession; it

is in fact sometimes used as the equivalent of recession, and one speaks rather of a depression or slump

to designate the aggravation phase of a recession, manifested by a particularly pronounced decline in acti-

vity.

This terminological uncertainty inspired a note of British humour in the journal The Economist: "But when

does a recession become a depression? A cynical answer is: when your neighbour loses his job it's a slow-

down (or, if you dislike him, a correction); when you lose yours, it's a recession; when an economic jour-

nalist loses his, that's a depression" (The Economist, "Depressing jargon", 23-29 January 1999).  

The pride of place accorded to growth cycles seems appropriate for economies characterised by a monoto-
nic (and most often positive!) growth orientation over a period of several decades.  It is also helpful for the
purposes of international comparison.  In effect, the heterogeneity of national growth trends affects the com-
parability of national cycles, even in cases when they are closely associated: a decline of activity in a matu-

re economy will have as its counterpart a slowdown in an economy that is catching up, so only the few very

large-amplitude movements will seem common to a large number of countries when the classical cycle stand-

point is favoured.  Bodies whose vocation is international comparison and which engage in a systematic sur-

24

vey of business all naturally favour the growth cycle point of view: in the post-war period that has been the

approach of the Center for International Business Cycle Research at Columbia University under the direction

of Geoffrey Moore, and of the OECD, which is a federation of the large, developed capitalist countries.

The statistical separability between trends and cycles does not imply an obligatory absence of reciprocal cau-

sality between the two components.  It simply means that macroeconomic regulation has a structural stabili-

ty that is strong and durable enough for the reappearance of analogous causes during the long-term growth

to result in a recurrence of typical sequences of short-term events in business.  Certainly, the separation bet-

ween trend and cycle is technically delicate to achieve: these two components of economic movement can-

not  be  observed  directly  and  must  be  extracted  from  overall  observation  of  that  movement  by  appropriate

methods.  The difficulty, intuitively, can be stated simply: the more the breakdown applied smooths the trend,

the more it amplifies the cycle, and vice-versa.  This difficulty is at the bottom of the methodological debates

that continue to this day and that recur whenever new methods appear.  The post-war technical innovations

relate to the implementation of empirical methods for the iterative estimation of the trend of series subjected

to examination, and logical rules for identifying the cycle's turning points.  The notion of turning points, which

introduce caesuras and rhythms into the pattern of trade over time, remains a central one in the growth cycle

approach.  The finesse of the task of identifying them, however, motivates a distinction (as made, for exam-

ple, by the OECD) between major and minor business cycles, which modifies the idea of the strict unity of the

cycle initially defended by Burns and Mitchell.

Application  of  these  modernised  methods  allows  the  production  of  a  large  group  of  stylised  actions.    That

group covers identification of the reference cycles of the GIP or the industrial production of various countries

and zones, characterisation of the degree of similarity and synchronisation of these national or zonal cycles,

and the observation of cyclic indicators in the regular behaviour that can play the part, in relation to these refe-

rence  cycles,  of  advance,  coincident  or  retarded  indicators.    This  empirical  synthesis  is  far  removed  from

contemporary attempts at theoretical synthesis and still attracts the initial reproach formulated by Koopmans

(1947) which has now become classical, that it is "measurement without theory": it relies on the number and

extent of observations rather than on the testing of theoretical specifications by statistical inference.  Thus,

the initial effort of the NBER, driven by Burns and Mitchell, launched a programme of evolutive research that

still persists today and continues to inspire and mobilise numerous practitioners of business studies all over

the world.

2.2   Theoretical activism

The major crisis of the 1930s stimulated the inventiveness of many economists, who while paying due regard

to the empirical dimension, concentrated their efforts on the construction of a theoretical point of view capa-

ble of taking into account the causalities that engender cyclic recurrence, but also the appearance of serious

depressions within that recurrence, which deprive it of any automatism.  This theoretical effervescence is plu-

ralist and does not yield a unitary synthesis13.  It does not lead to a generally accepted explicative model of

the cycle that legitimises the empirical and agnostic position  –  but for all that, it is a finding that remains lar-

gely true up to the present, as recently stressed by Diebold and Rudebusch (1999).  Three economists hold

pride of place here, because the originality of their respective approaches has left lasting traces: Frisch took
cycle analysis to greater depth; Haberler attempted an explicative synthesis; Schumpeter blew a breath of

history into the theoretical approach.

13 In a text that puts the history of the macroeconomic study of fluctuations into perspective, Olivier Blanchard (2000) has this to say
about that period: "Business Cycle theory was not a theory at all, but rather a collection of explanations, each with its own rich dynamics".

25

2.2.1 Frisch: analysis

Ragnar Frisch, who began his work on cycles by modifying the methods of distinguishing between trends and

cycles tried in the United States, was mainly known before the war for his writings of 1933-34 which regar-

ded the recurrence of cycles as the product of a sequence of impulses and a propagation process.  His thin-

king owed much to the Russian statistician Slutsky who had shown, at the end of the 1920s, that fluctuations

which appear regularly in a quasi-periodic way could be brought about by an accumulation over time of erra-

tic influences random in character.  The impulses or shocks ("the exterior impulse" or "erratic shocks") that

give rise to an economic cycle have a stochastic character and are therefore rather irregular; the propagation

mechanism ("the intrinsic structure of the swinging system") transforms the sequence of such impulses into

a succession of cycles whose length depends on the parameters of that mechanism, but whose amplitude is

influenced by the strength of the impulses; this mechanism is essentially based on the principle of the acce-

lerator, i.e. on the reaction of the level of orders and the production of equipment goods to the variation in the

production of consumer goods.  This basic principle is enriched by taking careful account of the production

times of capital goods and of the liquidity constraints that affect consumers.  The cyclic dynamic that results

from these interactions may be complex and can span across cycles of different periodicity ("long and short

business cycles"), which are not synchronised.

Frisch's point of view combines the exogenous and random character of the shocks with the determinist cha-

racter of the propagation process.  It is, besides, a point of view which was also adopted at the same time by

Irving Fisher, who localised shocks mainly on the money supply side: according to him, in the long term their

variations only have a nominal impact, but over a transitory period they give rise to price fluctuations which

themselves  produce  product  and  employment  fluctuations.    Frisch's  approach  has  undergone  numerous

developments until now.  Whereas cyclic turning points fairly spontaneously suggest the idea of non-linear

swings,  for  example  from  a  period  of  expansion  to  a  recessive  period,  Frisch  showed  that  an  account  of

aggregated fluctuations can be given in terms of a fairly simple representation of the economy in the form of

a linear system affected by shocks.  He emphasises the logical rigour that must inform the mathematical spe-

cification of the model representing this system.

2.2.2 Haberler: synthesis

While Frisch gives pride of place to analytical effort, it is to an attempt at synthesis that Haberler devotes him-

self  in  his  reference  review  of  theoretical  explanations  of  cycles  in  Prospérité  et  Dépression (1937,  1943).

Haberler takes each particular cycle theory seriously, but argues against it without definitively adopting the

adverse  thesis.    On  arriving  at  the  conclusion  of  that  exploration  without  prejudices,  he  embarks  upon  a

patient patchwork process intended to draw up a synthetic table of the possible causes of cycles, beginning

by freely borrowing partial elements from more unilateral theories.  Into the impulse of the expansion phase

Haberler brings the combined effect of the income multiplier and the investment accelerator, which gains from

the good performance of profitability.  The rate of expansion depends on the configuration of the financial cir-

cuits and behaviour.  On the lending market, the demand for funds that results from intended productive and

financial investments meets the supply, which sums provisions for depreciation, net savings, credit, and also

the mobilisation of idle cash reserves.  The interest rate depends on a comparison of the supply and demand
curves for funds, but their position is influenced by income level: the Keynesian lesson has been learned.

For Haberler the explanation of a turning point into recession is not monistic.  It calls into play the profitabili-

ty difficulties caused by increased costs at a time of high stress on the supply of production factors, and the

26

surprise  these  difficulties  can  constitute  for  entrepreneurs.    It  also  involves  the  stresses  on  bank  liquidity,

connected with the degradation of relations between creditors and debtors.  At the peak of expansion these

stresses induce a specific dependence of the interest rate in relation to the supply of money.  Yet, a downturn

into recession is not obligatory: it can be postponed by a capitalistic intensification of production processes

that reduces the pressure of wage and salary costs and provides outlets via investment.

The contraction phase shows phenomena symmetrical to those of expansion.  The recessive effect of the

multiplier and the accelerator does not have predefined limits, since the sensitivity of investment to pessimism

about expected demand may persist even when the need for capital renewal seems to make renewed invest-

ment necessary.  Contraction may go as far as a net de-investment.  The priority of securing liquidity leads

to a slide into deflation in which real and nominal magnitudes contract together.  The deflationistic process

wrecks buying power: money is desired as a reserve of value and a means to pay off debts, and no longer

as the wherewithal to purchase goods.  Relations between creditors and debtors undergo a general reorga-

nisation involving liquidations and transfers of assets.  This is a necessary stage for re-establishing the sol-

vency of the surviving debtors.

The possibility of recovery rests on the restoration of profitability, favoured by the relaxation of production fac-

tor markets and by the movement to restructure and concentrate capital.  Haberler focuses his attention on

a precise point: to what extent is the pronounced and durable lowering of nominal wages and salaries a fac-

tor that promotes recovery, or on the contrary, one that defers it?  He does not exclude an aggravation of the

contraction due to the lowering of wages and salaries, when the saving achieved on them in a given branch

also results in a diversion of purchasing power away from effective demand, in order for example to repay

debts.  Nevertheless, Haberler considers that eventually, sooner or later, the sustained lowering of wages and

salaries will result in the creation of conditions for recovery by restoring the general conditions of profitability

and liquidity throughout the economy: capitalists and bankers will not support recovery unless their enterpri-

ses regain accounts and balances that are judged adequate.  This painful adjustment can be eased by an

expansive public deficit policy.

Haberler's attempt at synthesis can clearly be contested when it favours one theoretical argument rather than

another, but its rigour and ambition remain remarkable.  It envisages an integration of multiple and partial cau-

ses within a single "epitome" of a cycle, a "virtual cycle", whose timing and morphology are a function of the

productive and financial structures that are prevalent in the economy considered.  Integration between real

and financial variables, approached head-on, is central in the explanation of cycles.

2.2.3 Schumpeter: the breath of history 

Joseph Schumpeter devoted prolonged thought to the cyclic form of capitalist development, from his early
work Théorie du développement économique (1912) (Theory of economic development) until the historical
and theoretical summation constituted by his work of 1939 on Business cycles.  While being attentive to sta-
tistical methods and observations, Schumpeter is nevertheless sceptical about the methodology developed
by Mitchell (with whom he corresponded): the statistical dating of cycles and turning points is too sensitive to
exogenous shocks, to irregularities of all kinds, that affect the endogenous development of the cyclic move-
ment without having other than a contingent relationship with it.  It is the logic of that development which inter-
ests Schumpeter, even though its direct observability is problematic.  The cycle is a phenomenon of devia-
tion from and return to an equilibrium situation and this theoretical point of view, deliberately absent from the
work of the NBER, determines the pertinent historical reading of statistical series: if one were able to spot real

situations close to equilibrium over the course of time, one would have a more correct picture of the trend of

economic development.  Since this is difficult, one can at least do one's best to achieve a "symptomatic" rea-

ding of temporal series, aiming to discern the signs of disequilibrium.

27

Equilibrium is a situation recognised as normal by economic agencies because it conforms to their expecta-

tions.  They expect it to persist and incorporate that expectation in their normal behaviour.  It is not necessa-

rily a static condition, but may be one of relatively steady growth characterised by stable parameters, such as

the savings rate, and one whose inflections are slow.  Deviation from equilibrium is of microeconomic origin

and is brought about by the efforts of entrepreneurs to innovate and by the provision of credit for that purpo-

se by bankers.  This is the product of a two-way bet on the future, that of the entrepreneur-innovator on his

creativity, and that of the banker on the capacity of innovation to create a pure profit that will enable his loan

to be repaid.  The entrepreneur-innovator and his banker constitute the driving partnership of capitalist dyna-

mics.  Implementation of innovations mobilises resources and generates a wave of expansion, during which

the  resources  available  are  redeployed  in  favour  of  entrepreneur-innovators  who  have  access  to  credit.

When the innovations reach maturity, the arrival of new products on the market modifies the normal equili-

brium of activities and prices, and the return to equilibrium  –  a modified equilibrium  –  adopts the path of

recession because previous and competing activities are eliminated.  The most elementary outline of a cycle

corresponds to this succession of prosperity, which engenders a move away from equilibrium, and recession,

which leads back to it.  But during this sequence, driven by innovative creativity, it is the nature of the equili-

brium itself that has evolved: the trend of economic development is not external to the cyclic movement, but

is its product.

This elementary outline quickly becomes more complex because the primary expansion directly associated

with innovations is amplified by a secondary wave, which consists in carry-over effects upon existing activi-

ties.  When credit is mobilised to finance not only innovations that bring productivity gains but also the indu-

ced development of existing activities, expansion is amplified still more and can degenerate into a speculati-

ve boom, at the risk of a more serious subsequent fall: the transformation from recession to depression can

be brought about by the need to eliminate overextension of production capacities and to correct speculative

drifts.  A four-phase cycle not unlike the NBER outline is obtained: the return to equilibrium by recession is

unstable, and the depression that follows brings activity to below the equilibrium level.  Once the imbalances

have been eliminated, recovery finally allows renewed expansion in the direction of the new equilibrium.  The

complete  cycle  corresponds  to  the  sequence  of  these  four  phases  -  prosperity,  recession,  depression  and

recovery - around the path of equilibrium which plays the part of attractor.  Schumpeter goes further.  Taking

into account the plurality and heterogeneity of the flow of innovations, he injects the elementary outline of the

cycle into a multicyclic concept of economic development which embodies, in an entirely geometric harmony,

short (Kitchin type) cycles, medium (Juglar type) cycles and long (Kondratieff type) cycles.

The systematic nature of Schumpeter's overall construct raises doubts or rejection (besides, he himself warns

against a dogmatic reading); this, however, should not cause one to underrate the pertinence of his analyti-

cal  intuition  and  the  importance  of  the  question  he  hands  down  to  practitioners  of  business  analysis.    For

Schumpeter the long-term tendency of an economy, its trend, has no intrinsic and pre-existing reality.  It is the

product of a development that hardly takes the form of a continuous and steady growth, but rather, that of an

evolution whose rhythms are imposed by cycles of various periodicities.   These cycles are brought about by

the very driving forces of the said evolution  –  the flow of innovations and the credit which finances them  –

and  their  interaction  progressively  delineates  the  trend  that  emerges  from  them.    An  ideal  forecasting

approach should make explicit ex ante the effect of routine and innovative behaviour that engender the trend

before it congeals into past history.  In practice such an approach is impossible, because it comes up against

the unforeseeability associated with the very nature of innovations.  Prediction relies more modestly on the

more or less extrapolative, more or less reasoned extension of the trend hitherto, which can always be plot-

ted ex post.  Schumpeter's evolutionary concept, which established his understanding of economic history as

a process of mutation and selection, did not seem to him incompatible with the identification of trends by sta-

tistical methods, provided one is not deceived by their forecasting deficiencies.

28

3. Period III: professionalisation under the Keynesian influence

During  the  first  post-war  decades  business  analysis  was  consolidated  as  a  specific  professional  practice

conducted in institutions with general interests (such as the Institut National de la Statistique et des Etudes

Economiques [National Institute of Statistics and Economic Studies], or INSEE, in France) or in specialised

bodies.  It fitted into national contexts that show appreciable differences: the Anglo-Saxon tradition of empiri-

cal business cycle analysis developed as far as the creation, maintenance and use of a group of advance,

coincident and retarded cyclic indicators.  Spreading to international bodies such as the OECD, for a long time

that  tradition  only  had  limited  practical  reverberations  in  France,  while  the  term  conjoncture,  derived  from

Latin, which emphasises the originality of the group of economic circumstances specific to a given period, is

used operatively only in the countries of continental Europe.  Practitioners of business analysis developed a

normative and didactic body of principles intended to guide the description, explanation and forecasting of

trade movements (in French economic administration this was the successive work of Alfred Sauvy, André

Vincent and Jacques Méraud).  They adopted a technical armoury that became more and more diversified

(from  surveys  of  business  opinion  in  companies  and  households,  to  three-monthly  national  accounts)  and

also more and more universal: instrumental unification contributed towards the attenuation of national pecu-

liarities.    They  fitted  their  approach  into  a  concern  to  assist  macroeconomic  decision-making,  intended  to

counterbalance the planistic tone of the period.

The NBER's agnosticism certainly took root.  The pragmatism of business analysts and their attention to cur-

rent events are a two-sided coin: they give protection against a theoretical speculation that is often prodigious

in subtle models, but not very conclusive; this can degenerate into a journalistic glibness, which uses repeti-

tive common ground to comment on the economic situation and which is too close to information that may be

revised.  Yet, new links were formed with economic theorists under the aegis of a culture inspired by Keynes,

which pervaded the quite new instruments of business analysts.  Surveys of business opinion are nothing else

than an instrument for measuring "gut reactions", the state of confidence and motivation to invest.  The fra-

mework of national accounting, which adapts itself to the short-term timescale with three-monthly accounts,

facilitates the adoption by analysts of a macroeconomic understanding with neo-Keynesian dominant featu-

res: the reference to basic quantitative adjustment mechanisms, such as the duet comprising the income mul-

tiplier and the investment accelerator, popularised by Samuelson (1939), imposes itself naturally.  The cons-

truction and use of macro-econometric models designed for forecasting, which materialise macroeconomic

knowledge in the form of a vast, coherent group of accounting and causal equations subjected to empirical

validation, was the crowning achievement of that process.  They constitute the tools for explaining and fore-

casting the complete range of global interdependences between the agencies and variables of a national eco-

nomy. The Keynesian inspiration was wedded to the modelling project instituted in particular, from the deca-

de 1930-40, by the Dutch analyst Tinbergen (1937).

3.1 The master's intuitions …

The Keynesian inspiration is not devoid of ambivalence.  Sensitive to the depth of the deflationist depression
of the 1930s, Keynes proposed a scheme for analysing sequences of economic events that lead to engulf-
ment in such a situation and demonstrated the need for public action of a structural nature to emerge from it.
It is this absence of distinction between the business situation and structure that largely constitutes the origi-

nality and interest of the General Theory.  Doubtless also, its limits: Keynes was the economist of a moment

in history, but a moment even so.  Among other things, the General Theory is a partial theory of business.

29

The best of Keynes's heirs, the Harrod-Domar duet to begin with, would be among the first to call attention

to this Keynesian incompleteness.

Keynes attributes a key role in the turning point that marks the end of the cyclic expansion, to the interaction

between the incentive to invest and disappointments relating to the effective return from investments.  These

disappointments trigger the recession and induce agencies to favour the preference for liquidity.  They open

the way to a deflationist slide into an equilibrium of under-employment: the lack of confidence among bankers

and entrepreneurs can inhibit recovery, even when monetary policy intends to encourage it by lowering the

nominal  interest  rates.    Businessmen,  traumatised  by  disappointments  related  to  demand  and  profits,  feel

uncertain about the future to such a point that they abandon investment projects whose profitability seems to

them too uncertain.  For Keynes, no principle is available for a spontaneous response to this weakness in a

capitalist market economy.  Cyclic chains of events are not automatic: their occurrence depends on the confi-

guration  of  expectations  and  the  quality  of  their  co-ordination,  via  the  institutions.    As  a  function  of  these

conditions, certain supposedly transitory moments of the cycle may degenerate into stable states: recession

becomes an equilibrium of under-employment.  This absence of automatism in the sequence of cycle phases

is a question that has been approached more technically by econometrists who are interested in the pheno-

menon of "duration dependence": to what extent does a phase of expansion or depression have greater chan-

ces  of  coming  to  an  end  the  longer  it  persists?    According  to  a  recent  review  by  Diebold  and  Rudebusch

(1999), phases of expansion, but not contraction, died more easily as they aged before the first World War,

while rather the reverse has been the case since the second World War, at least in the United States.

Keynes  discusses  in  particular  the  role  of  falling  nominal  wages  and  salaries  in  the  course  of  depression.

Certainly, capitalists benefit in the short term from that decline.  But if it leads to expectations of cumulative

decline, the economy will slide into deflation and under-employment since it is always in the interest of entre-

preneurs  to  wait  for  new  wage  and  salary  reductions  before  committing  themselves  to  investment  and  job

creation. What is important, according to Keynes's reasoning, is that the fall of nominal wages and salaries

has a negative effect on the overall economy, not only nor even mainly because of its immediate impact on

consumption, but because it results in a lasting disincentive for capitalists to invest.  It undermines the viabi-

lity of capital accumulation, both by increasing the cost of debts inherited from the past (Keynes revives the

argument in this connection developed by Irving Fisher in an article in 1933), and by increasing uncertainty

about the future.  It is therefore creditors and people of independent means who become dominant against

producers  and  wage-earners.    The  former  can  adapt  to  low  growth,  or  even  deflation,  if  this  results  in  an

excess of savings that favours the acquisition of securities rather than the development of activities.

Keynes delivered a lesson in method, which is a precious asset.  The representation of equilibrium and short-

term dynamics depends on assumptions about the rigidity of prices and the formation of expectations that

determine the nature of the interactions between the markets for commodities, securities and labour.  The

reasoning must be adapted to the originality of each business situation, to the modes of adjusting imbalan-

ces, and to the nature of the expectations that characterise it.  Emergence from depression does not happen

in just one way.  The Keynesian approach underscores the plurality and contingency of the conditions that

govern the evolution of the economy.  Hicks (1939) further formalised the Keynesian intuition via the concept

of temporary equilibrium, which indicates how the current equilibrium of an economy depends both on the

legacy of past history and on expectations about the future.

30

3.2 … and the doubts of his heirs

To create a more complete and accurate image of short-term business movements within economic history,

however, the Keynesian contribution should be brought up to date.  Since the post-war period, that was the

purpose of the series of articles by Harrod and Domar, who developed an open and always stimulating line

of thinking on the intrinsic instability of capitalist economies.  Whereas an investment level high enough to

mobilise the savings available is a condition necessary for full employment, maintaining it dynamically entails

making explicit the ways in which the new supply contributed by investments is to be absorbed.  The realisa-

tion of those investments must create enough income for the new production capacities not to supplant one

another, for lack of sufficient outlets.  One can therefore point to a "justified" or "warranted" growth rate that

balances the conjoint effect of the income multiplier and the investment accelerator: that equilibrium rate gives

rise to an incentive to invest that matches the new supply and demand generated by the new investment.  If

established, companies are induced to persist in the course of their spending at the same rate:  growth is self-

sustaining. But close to that rate, instability prevails: deviations from the equilibrium rate, even if small, origi-

nate  cumulative movements of expansion or depression.  This instability is connected with the predominan-

ce of quantitative adjustments influenced by expectations that render the incentive to invest volatile.  It is also

influenced by the asymmetry between the factors of labour and capital, between the endogenous character

of the path of balanced capital accumulation, which depends in part on the subjectivity of enterprises, and the

inertia of demographic processes, which does not allow spontaneous coincidence between that path and the

growth of full employment (see Frame 3).

Harrod and Domar were aware of the incompleteness of their thinking.  Concerning the growth model he was

presenting; Harrod (1948) expressed himself thus: "Although these equations clearly demonstrate the insta-

bility of an expanding economy, they do not on their own constitute very good tools for analysing the course

of depression".  It was an appeal for deeper reflection on the short-term instability of capitalist economies.

The nature of that deeper reflection could lead to other theoretical readings of this instability, in particular the

classico-Marxist affiliation, whether they emphasise the under-consumerism that threatens capitalism or the

menaces that affect the profitability of capital accumulation.  Domar (1947) expressed capitalist instability in

a very suggestive way: "This is remarkable characteristic of a capitalist economy: while in general unemploy-

ment is a function of the difference between real income and production capacity, most of the measures (i.e.

investment) undertaken to increase the national income at the same time increase production capacity.  It is

probable that the rise in national income will be greater than the production capacity increase, but the entire

problem lies in the fact that the rise in income is temporary and is gradually resorbed (by the multiplier effect),

while the capacity has been increased once and for all.  Accordingly, in relation to unemployment, investment

is at one and the same time a remedy against the disease and the cause of greater problems in the future".

The theoreticians of the glorious 1930s devoted a substantial part of their efforts towards making explicit the

factors that can embody or give rise to capitalist instability.  The aim became to set up theories of growth that

demonstrate the capacity of modern capitalist economies to keep, apart from short-term fluctuations, to a path

of balanced and steady growth, close to full employment.  Along such a path, those economies overcome the

impact  of  technical  progress  on  production  and  the  distribution  of  income;  investment,  employment  and

consumption develop at compatible and harmonious rates, accompanied by sizeable and steady increases

in the productivity of labour and by stability of the efficacy of equipment capital.  Solow emphasises the impor-

tance of the plasticity of the production function and of the combination between capital and labour, as a func-

tion of their relative cost, in warranting the path of balanced growth.  Kaldor recognises the local instability of

capitalist economies but attributes a key role to adaptation of income distribution in ensuring overall stability:

31

this is a reassuring view of the cycle, which normally participates in regulating the growth of modern capita-

list economies.  The theoreticians of the Fordist persuasion, who demonstrate the historical emergence and

institutional  consolidation  of  a  Taylorian  productivism  that  creates  salarial  incomes,  unite  the  Marxist  and

Keynesian  inspirations.    The  dynamism  of  capital  is  tamed  to  contribute  to  the  quantitative  and  qualitative

improvement of the salaried condition, to the point where one can speak of a "salaried society" to describe

post-war societies.  This taming depends on institutional mediations that orientate the action of profitability

criteria.  Those mediations take place mainly in Nation-States, which provides a strong basis for interventions

of economic policy, both to cope with economic shocks and to give impulse to the collective conditions for

growth.

The realities of the 1950s to 1970s nourished these attempts at "synthesis": business fluctuations became

subordinate to a powerful and virtually steady growth dynamic.  Until the beginning of the 1970s the options

of economic policy were discussed as a function of their efficacy in relation to maintaining that growth: mone-

tarists advocated rigorous control of the money supply to avoid sliding into inflation; neo-Keynesians laid most

stress upon budgetary policy and action on income distribution to warrant the path of balanced growth.

This positive and normative thinking, which standardised the disturbing Keynesian contribution and reduced

the inquiries of Harrod and Domar to those of apprentices with little experience of balanced growth, revealed

their transitory character with the difficulties of the 1970s.  The time to re-open the file on instability had returned.

32

Frame 3 : An analytical presentation of the Harrod-Domar model

The  presentations  of  the  so-termed  Harrod-Domar  model,  which  are  frequent  and  numerous,  are  not

always very satisfactory, no doubt because the model does not exist as such and reflects the personal syn-

thesis of their ideas proposed by one reader or another of Harrod and Domar.  Here, particular reference

will be made, with a little further development, to the reading proposed by Hahn and Matthews in a survey
of the theories of economic growth, which is already old but remains a reference text in the field14.  In effect,
it seems appropriate for highlighting the advantages still possessed by the Harrod-Domar model for busi-

I
s

Y

=

d

ness analysis. 

1 - The existence and nature of balanced growth 

It is first necessary to characterise the nature of a path of balanced growth at a constant rate indicated by

the  model  for  an  economy  that  produced  goods  by  means  of  technology  having  complementary  factors

(capital et labour) and that saves a constant fraction s de son income Y.  Endowed with the hypothesis of

a stock of productive capital appropriate to the level of  production, entrepreneurs strive to maintain that
proportion.  The investments they wish to make Id are proportional to the expected variation of the pro-
duct: 

Y ∆=∆

aY

d

I

Yv
∆=

a

(1)

where  v is the coefficient of capital under the normal conditions of technology implementation. 

At equilibrium, les expectations and the intentions of the agencies are realised.  The realisation of invest-
ment expenditure amounting to Id brings into play the income multiplier to determine the effective product
Y:

Y

=

d

I
s

(2)

For  equilibrium  to  be  established  completely,  the  effective  variation  of  the  product

Y∆ must confirm that

which had been anticipated: 

Y ∆=∆

aY

(3)

Dividing by  Y and using the expressions for  Y et for  Id taken from (1) and (2), one obtains the "guaran-
teed" (warranted) growth rate of the economy: 

g w

=

Y
∆
Y

=

s
v

(4)

The interpretation of this rate should not be misunderstood.  It is the rate that would prevail if all the condi-

tions for the economy to remain on its equilibrium path at all times were satisfied.  The positive dependen-

ce of that rate in relation to the saving effort    does not mean that  increased savings would spontaneous-

ly lead to more growth, starting from any arbitrary  initial situation.  It means that if the rate of saving is high

relatively to the unitary needs for capital  v , the equilibrium growth rate must be large enough for the invest-

ment induced to absorb the savings available, and growth will therefore take place at a constant rate.  This

is indeed a Keynesian reading of balanced growth at a constant rate. 

14  This survey was originally published in 1964 by The Economic Journal under the title "The theory of economic growth: a survey".
The French version, supplemented by an appendix, to which reference is made, was published in 1972 by Editions Economica under
the title Théorie de la croissance économique.

33

2 - Instability around the path of balanced growth 

The  balanced  growth  rate

g w =

s
v

is virtual : what chance does it have of becoming actual  if the star-

ting point is a situation of imbalance?   Will imbalances correct themselves, or propagate?  Analytically, one

must pass on from the recognition of a solution of balanced growth, described in section 1 above, to an

exploration of the dynamics of imbalance.  Hahn and Matthews did this by adopting a formalisation in conti-

nuous time, certain implications of which are developed here.  A variable with a dot over it designates its

derivative with respect to time (two dots indicate its second derivative):
tK(cid:5)

ment corresponds to the derivative

of  the  stock  of  capital

Kt

t =(cid:5)
x

dx
t
dt

. In what follows, invest-

with respect to time.  We begin from an

initial situation in which the effective coefficient of capital

coefficient v that is involved in the balanced growth rate.  

V
t

=

t

K
Y
t

differs  from  the  normal  or  desired

The  multiplier  of  income  and  activity  is  assumed  to  act  instantly,  such  that  at  any  moment  equality  of
savings and investment is achieved for a product level characterised by:

Y
t

=

t

(cid:5)
K
s

(5)

The effective gt growth rate

which is designated by  :

(cid:5)(cid:5)
K
t
(cid:5)
K

t

of  the

tK(cid:5)

(cid:5)
Y
t
Y
t

=

(cid:5)(cid:5)
K
t
(cid:5)
K

t

=

g

t

(6)

investment  is  thus  identical  to  that  of  the  product

Yt

Hahn  and  Matthews  then  introduce  a  discretionary  hypothesis  according  to  which  entrepreneurs  decide

upon  their  investments  by  striving  to  adapt  their  capital  stock  instantly  to  the  anticipated  growth

a
tg

and     taking into account the difference between the desired capital coefficient v and the effective coeffi-

cient Vt . This is a deliberately harsh version of the accelerator :

(cid:5)(cid:5)
K
t
(cid:5)
K

t

=

v
V
t

g

a
t

(7)

By combining (6) and (7), we obtain :

g =
t

v
V
t

g

a
t

(8)

Accordingly, after a few elementary transformations, the difference between the effective growth rate and
the warranted rate can be written: 

g

t

−

g

w

=

g

w

 −
Vv
t

V

t


+


v
V
t

(
g

a
t

−

g

)w

(9)

34

Hahn and Matthews make the assumption that the difference

a
g −
t

g

w

has the same sign as the difference.

tVv −

The ideal is this: if producers are, for example, short of capital (

tVv >

) because they have been

taken unawares by the recent amplitude of growth, they modify their expectations by anticipating a growth

ga above the trend of growth gw . In equation 9 the two terms of the right-hand part then act in the same

direction and lead to an effective growth rate higher than the warranted rate.  The first term represents the

impact of the effort to adapt the capital stock, the second term the impact of growth expectations.  A posi-

tive surprise concerning growth leads to growth more rapid than the balanced growth that would exist if

producers had revised their expectations by an appropriate amount. 

Moreover, this deviation from balanced growth is explosive: equation (8) shows clearly that the correction

of expectations is not sufficient to eliminate surprise relative to the effective growth, because an upward

revision of expectations itself feeds a still stronger effective growth due to additional needs for capital.  It

is the difficulty in making good this lack of capital that is the source of this instability.  In effect, in such a

figurative case how does the effective capital coefficient Vt vary?

By definition:

(cid:5)
V
t

=

t

(cid:5)
K
Y
t

−

Vg
t
t

(10)

which, taking (5) and (8) into account, becomes:

−=(cid:5)
s
V
t

vg

a
t

=

v





s
v

−

g

a
t


=


(
gv

w

−

g

)a

t

(11) 

Retaining the same assumptions about behaviour, the lack of capital (

tVv >

)  leads  to  an  expected

growth higher that the balanced growth and to a decrease of the effective capital coefficient Vt . The lack

of capital does not correct itself but is aggravated, because the combination of optimistic expectations and

the suddenness of the behaviour of the accelerator gives rise to product growth so rapid that capital can-

not adapt itself to the level required.  The impact on the deviation from balanced growth is summarised by

a modified form of  equation (9) , which uses the relation (11) :

g

t

−

g

w

=

g

w

 −
Vv
t

V

t


−


(cid:5)
V
t
V
t

(12)

If the effective capital coefficient falls when it is below the desired coefficient, an initial positive deviation

between the effective growth and the balanced growth will become progressively larger.

To  render  the  model  specific,  one  can  consider  the  example  of  a  simple  scheme  for  the  formulation  of

expectations in accordance with which producers extrapolate the growth they have just observed:

35

g

a
t

g
−=
dt

(13)

where  d is the time taken for the producers to adapt their expectations to the growth perceived.  Equations

8 and 11 become :

g

t

=

v
V
t

g

dt
−

(8’)

=(cid:5)
V
t

(
gv

w

g
−−

)dt

(11’)

Starting from a situation in which, at the same time, the recent growth rate extrapolated by the producers
dtg −

is higher than the warranted rate gw and the capital coefficient  Vt

is below its desired level  v , this

dual imbalance will spread and become aggravated.

The assumptions that govern  the instability of balanced growth in the Harrod-Domar model are clearly spe-

cific.  It would be unreasonable to wish to draw from them a general representation of business fluctuations

such as the conditions that govern long-term growth.  The model ignores the restoring forces that can ope-

rate over various  horizons.  But it enables the instability to be underscored, which may give rise to a busi-

ness cycle if economic activity goes through a phase that combines a marked reactivity of investments with

the perception, by enterprises, of capital insufficiency.  This is explained by the lag of expectations, even

subject to revisions, compared with the effective acceleration of growth.  These are modes of adjustment

which amplify an initial deviation from balanced growth.

3 - The interference of instability with natural growth

Finally, there is a last point dealt with by Harrod and Domar: what relationship is there between effective

growth, warranted growth and natural growth, which in the absence of technical advances corresponds to
the growth rate of the labour supply gn , of the demographic order? In the long term the question seems to
be very simple: equality of the warranted growth rate gw and the natural growth rate gn is not guaranteed
unless an explicit mechanism of demographic or economic adjustment is specified (Solow deals with this

by introducing the interchangeability of capital and labour).  Underemployment may increase in the long

term, or else growth may be rationed by a shortage of labour.  This long-term problem, namely that of pos-

sible chronic unemployment or rationing of growth, is a priori quite distinct from the vagaries of business

cycles. 

In  fact,  the  long-term  relation  does  not  prevail  independently  of  shorter-term  interactions  which  Harrod

refers to allusively: demographic growth influences the effective demand, which depends on the needs of
a larger number of individuals, and therefore the growth effectively recorded.  The effective growth rate g
is not independent of the natural rate gn.
A natural rate higher than the warranted rate does not imperturbably result in increasing chronic unemploy-
ment, but can bring about an increase of the effective rate and so give rise to a wave of expansion, by vir-
tue of the very economic instability described earlier. Conversely, low demographic dynamism is not auto-
matically favourable to full employment if it contributes towards suppressing effective growth.  But this is a
subject no more than touched upon in the articles of Harrod and Domar, namely that of the interaction bet-
ween demographic growth and business dynamics. 

36

4. Period IV: The cycle between determinism and uncertainty

During the last quarter of a century it has been economic reality itself that has shaken the habits adopted by

business  analysts.    Suppressed  during  the  glorious  1930s,  uncertainty  has  returned  and  is  scattering  the

hopes placed in an instrumental and technocratic command of the rhythms of economic life.  Business ana-

lysts are testing the limits of analytical and forecasting tools adapted to the reasonable and contained insta-

bility of the post-war growth.  Not only is instability becoming more dangerous, but it seems to be gaining in

spreading  force  within  an  international  space  which  is  both  globalised  and  heterogeneous.    This  evolution

leads to the search for business analysis methods that could become the common asset of business ana-

lysts, whose exchanges, if only driven by necessity, are more regular and more frequent on the international

scale.

It is in such ground that a revival of the analysis of economic cycles has taken root.  New generations of theo-

retical models and econometric methods have been proposed.  The history of tools and that of theories are

once  again  closely  linked,  as  at  the  beginning  of  the  century.    It  is  a  mobile  situation,  rich  in  unconcluded

debates in which competing visions of business fluctuations and, more generally, different ways of "recoun-

ting" economic history are expressed. It is not easy to distinguish between the stimulating use of new tech-

niques and the flowering of disputable theoretical reflections.  A given technique may be introduced into high-

ly differentiated "experimental protocols" and so may be mobilised by competing theoretical visions.  It is also

possible for methods to embody within them a very specific conception of the dynamic, which makes them

resistant to certain theoretical options.  Neutrality of techniques is not a foregone conclusion.

The theoreticians called "neo-classicists" pitilessly perceived the weaknesses of the large macroeconometric

models produced by the synthesis of the 1960s between neo-classical and neo-Keynesian positions.  The

specification of those models was in most cases static and was adapted after the event to introduce in an ad

hoc way the dynamic and uncertainty naturally incorporated in the temporal series used for their estimation.

This dynamic essentially amounted to a linear determinism sprinkled with transitory and standardised random

contingencies,  and  to  expectations  which  were  largely  a  function  of  previous  changes.    In  contrast  to  this

reductionism, the critics of the standard modelling proposed and tried out techniques focused from the start

on the dynamic of the temporal series studied, its sensitivity to the nature of expectations and its intrinsically

random character.  These techniques aimed to explore the structure of temporal causalities without a priori

restrictions.  They also aimed to respect the stochastic nature of the economic dynamic, which pits the ratio-

nality of the expectations formulated by the agencies against the irreducible uncertainty of the shocks that

affect  the  latter.    In  effect,  they  competed  against  a  renewal  of  the  statistical  approach  to  temporal  series

under the influence of other scientific disciplines confronted by problems of analogous nature, such as physics.

The properties of the methods proposed are frequently of an asymptotic order, i.e. in order to be validated

they require a large number of observations.  They are therefore methods which lend themselves in particu-

lar to the study of a prolonged period with short periodicities (yearly, three-monthly, monthly, etc.).  Their aim

is to specify and assess processes that unite the need for long-term equilibrium relations within a group of

variables  and  flexibility  in  the  short-term  adjustment  modalities  between  those  variables.    Thus,  they  cor-

respond to the lines of theoretical thinking that are concerned to define rigorously a long-term equilibrium path

that can constitute a reference for appreciating the shorter movements of economic history.

37

4.1 Disparate conceptions of the cycle

It is not an incontestable and unified paradigm that has imposed itself during the past twenty years or so, but

rather, a shift in the positioning and description of problems that continue to raise divergent responses.  This

is what applies to the factors and nature of the cycles that affect contemporary economies.

The models of "real business cycles" perceive fluctuations as the result of optimum adaptation of a competi-

tive system comprising rational agencies, to unexpected shocks.  In these models, the inter-temporal rationa-

lity of the agencies, via substitution and income effects, transforms a sequence of independent and unfore-

seeable shocks (or innovations) into fluctuations that show signs of self-correlation, in other words, apparent

cycles.  For example, if an unexpected shock brings about an increase of interest rates, immediate work beco-

mes more advantageous than future work because savings are better remunerated: this results in fluctuations

of the offer of employment.  One can also consider the illustrative example of a win on the lottery, unconnec-

ted with productive effort: even if the player is highly rational, equipped with calculations of the probabilities,

he will still be surprised if he wins the jackpot.  Depending on the nature of his preferences at the time, his

propensity to spend at once or to put his winnings into savings, or perhaps to work less, his rational decisions

will induce rapid or slow inflections of various economic variables.  Applying these ideas, models of real cycles

have to be subjected to a process of calibration, i.e. justified choice of the numerical values of their parame-

ters, some of which are difficult to estimate by classical econometric methods.

However, as pointed out by one of the founders of this approach, Plosser (1989), the word 'cycle' is hardly

appropriate here and it would be better to speak of fluctuations when referring to transitory components of

activity that have no confirmed recurrent character.  The innovations that give rise to these transitory fluctua-

tions have a permanent impact that affects the long-term course of events.  Thus, growth and "cycles" are

fundamentally inseparable since it is the same chronicle of innovations that engenders them.  It is the deg-

ree of persistence of these shocks and the way their impact is propagated that must be represented as well

as possible, by identifying "response functions" of the economy to the shocks, which are necessarily of diver-

se origin, both monetary and real.  The empirical  validation  of  models  of real cycles is based on the ca-

pacity of these response functions to simulate appropriately the effective dynamic of the economy, which can

be summarised by a  few  key indicators (such as the temporal variances and correlations of the variables

observed).

In the course of a polemic debate with Plosser, Mankiw (1989) pointed out that this representation was only

compatible with the stylised empirical facts provided that it exhibited innovations of a nature and intensity such

as to be able significantly to modify the behaviour expected from a competitive system.  For example, in a

recession that depresses employment and so increases the marginal productivity of labour, real wages should

increase compared with a competitive labour market.  If this is not what happens, it is because the recession

is correlated with a negative technological shock that affects the function of production and reduces the mar-

ginal productivity of the factors: real wages then revert to a procyclic evolution which accords better with the

stylised facts.  When technological shocks are measured by the variations of the productivity of the produc-

tion factors in the manner of Solow's residue, their macroeconomic order of magnitude is sufficient to provi-

de  naturally  the  chronicle  of  innovations  needed  for  the  theorisation  of  cycles  for  that  reason  called  real.
However, Mankiw was indicating that he had doubts about interpreting the chronicle of technological shocks

so  measured  as  a  sequence  of  exogenous  and  independent  innovations.    On  the  one  hand,  they  in  fact

appear  to  depend  on  the  course  of  the  activity  itself,  via  the  well  known  phenomena  of  production  factor

adjustment lag, employment in particular; on the other hand, when they are unusually intense this can mani-

38

fest the impact of singular events, such as the oil shocks, which cannot be reduced to routine innovations.  A

large part of the variance of the apparent chronicle of technological innovations can in fact be explained either

by a productivity cycle endogenous to the cycle of the activity, or by singular events.  If, by eliminating these

two components, it were possible to isolate the true innovations of technological order, it is not certain that

they would still have sufficient statistical intensity to bring the model into line with the facts.

These criticisms formulated against the first generation of "real cycles", developed in the 1980s, led to a dual

adaptation: on the one hand, acceptance of the diverse nature of the shocks that can affect the economy; on

the other hand, a reconciliation with the "neo-Keynesian" stream which wished to remain faithful to a more

traditional view of fluctuations and open to a rigorous representation of the market imperfections that give rise

to them  –  such as price viscosity, monopolistic behaviours or even bankruptcies.  Thus, making the most of

the fruits of this reconciliation, Blanchard (2000) discounts a new synthesis centred on models of dynamic

and stochastic general equilibrium, uniting greater freedom in the nature of shocks and expectations with the

rehabilitation of the role of market imperfections in supporting the propagation of fluctuations  –  a customa-

ry theme in post-Keynesian literature.

The models of real cycles, or more generally from now on, the models of dynamic stochastic general equili-

brium, constitute a theoretical experiment that explores in depth the hypothesis that macroeconomic fluctua-

tions are produced by (more or less …) rational microeconomic behaviour, whose methods of empirical vali-

dation obey specific norms.  Whatever judgements may be made in their favour, they remain very far from the
preoccupations of practical and forecasting business analysis and cannot really be used for that purpose15.
In that sense they are certainly no substitute for the macroeconomic models of neo-Keynesian design, the cri-

ticism of which nevertheless constituted one of the reasons for their development.  They are models whose

purpose is a searching analysis of a precise problem, rather than to understand and forecast economic series

of events in which nothing happens "other things being equal".

4.2 The difficulty of methodological transparency

The debate raised by questioning the neo-Keynesian inspired macroeconomy, then by emulation of the "neo-

classical" and "neo-Keynesian" streams, brings up important issues of methodology.  This relates in particu-

lar to the agreement between theoretical model and empirical method, an old methodological problem made

more acute by the greater depth of techniques, which does not always go along with the necessary transpa-

rency.  To describe the temporal processes observed in a suitable way, the methods used must be adapted

to the nature of these processes.  What the processes are, however, is not a matter of absolute ontology but

arises from the choice of a model to represent them.  By choosing a model, the proper method is prejudged.

And behind the recourse to a particular method, there is a reference model.  But how can one be sure about

the indisputable singularity of such a model?  The tests one can envisage enable the reference model to be

accepted or rejected, but it is much more difficult to choose between the population of models that can be

considered.  Deduction and induction compete for the legitimacy of the analytical techniques used16.  And

how  does  one  escape  from  this  epistemological  vicious  circle,  other  than  by  the  discretionary  choice  of  a

"model-method package" that meets the preferences of the economists concerned?

15  For a precise demonstration of this point, see Bonnet and Duchêne (1998).  It is also a point made by Diebold and Rudebusch (1999,
p. 21):  "Still, even if the new structural models are off to a good start, they nevertheless have a long way to go if they are to be truly use-
ful for macroeconomic forecasting".
16 On the need in this context for active methodological reflection, reference may be made to the thoughts expressed by Malinvaud

(1991).

39

It would also be best for these preferences and the coherence of the "package" to be stated clearly.  Thus,

the dynamic of a "real cycle" can formally be written in terms of deviations from the equilibrium path of stea-

dy growth associated with the neo-classical model retained.  To compare the "real cycle" of theory against

suitably described stylised facts, it must be possible to identify that path by an appropriate statistical trend

extraction method.  Things are rather less than clear in this domain, because it is quite difficult to prove that

such an extraction method does the job of revealing the equilibrium path associated with a precise model.

And everybody prefers their own, without too must justification.

Accordingly,  there  is  always  tension  between  a  wish  for  greater  technical  rigour  by  recourse  to  analytical

methods that take better account of real dynamics, and the use of these methods as weapons in the service

of adopted theoretical positions that do not always avoid a speculative drift.  That tension plays a part in the

current  incompleteness  of  this  fourth  period.    The  situation  is  clearly  as  stimulating  as  it  is  unsatisfactory.

Dialogue  between  those  who  adhere  to  different  approaches  is  needed  to  overcome  it,  the  more  so  since

there is still an association between the technique used and the type of job they do: practical business ana-

lysts who use the toolbox of descriptive statistics on one side, and theoreticians of cycles and dynamic eco-

nometrics of temporal series on the other.

The entire course of the past history described brings out the permanence, in successive forms, of the ten-

sion between the deterministic and stochastic approaches to economics.  Thus, the procedure adopted by

Burns and Mitchell represented a relaxation of the hard determinism implicitly present in the Harvard baro-

meter by a study of the statistical frequencies that characterise the various aspects of the cyclic phenome-

non.  Determinism is nevertheless a natural propensity of business analysts.  When one makes a forecast,

the care devoted to identifying the linkages that can be envisaged is a response to the need to be persuaded

of their high degree of probability or their necessity.  It is mentally difficult to argue that a forecast is well foun-

ded without being convinced of the reality of a quasi-necessary sequence of causes and effects.  Ex-post, the

importance attributed to the account by business analysts in their analyses corresponds to the need to pro-

pose  a  rational  and  convincing  reconstitution  of  linkages  which  were  in  fact  very  difficult  to  foresee:  even

taken in reverse, determinism always tends to have the last word.  Although quantitative forecasts are use-

ful, this is inter alia because their errors motivate this work of reconstitution and orientate it.  It is a little like

detective novels: the mystery is solved when scattered clues converge to bring out the evidence of a sequen-

ce of events that is difficult to identify and foresee in real time.

The raw material that business analysts work with consists in effect of perceptions, expectations and revie-

wable intentions which are those of the economic agencies themselves.  The measurable macroeconomic

reality is the product of the conflicting aggregate of the decisions ultimately made by those agencies.  It is a

random and non-linear reality where, for example, adjustments at different times can happen suddenly and

reverse the economic trends rapidly, so taking by surprise even those observers who are best warned of their

probable proximity: economic reversals rarely have the gentle and rounded shape claimed for them by ele-

mentary models of business fluctuations.  The macroeconomic trade situation is not only vulnerable to unpre-

dictable shocks whose origin is external to the economy considered, which upset the plans of the agencies

and their realisation, but rather, uncertainty is fundamentally endogenous in it.  It is a function of the interac-

tions that unite the agencies within an economic system characterised by a monetary and financial organisa-

tion, a regime of competition and accumulation, a group of institutional rules which model the typical regula-

tion of that system.  The practical study of the economy thus moves away from a clear cut opposition bet-

ween macroeconomic holism and methodological individualism, because it compels an effort to understand

the interaction between macroeconomic regulation and the plans of the agencies, and therefore constructs

its own observation tools, such as surveys of business opinion.

40

The notion of a cycle so brought into play is far from a conception of economic life that would reduce it to the

rhythms of a clockwork mechanism, however refined.  This danger exists when, in the press but also in some

professional cases of economic thinking, cycles have sometimes been regarded as a reality completely exo-

genous to the strategies of the agents and economic policy in particular.  On the contrary, recourse to the

notion of a cycle should here be seen as the heuristic way to take account of the interaction between the force

of certain economic determinisms and the influence of stochastic factors, whether they arise within the very

functioning of market economies or stem from the impact of specific shocks, including decisions of economic

policy.

5. Outline of a contemporary view of the cycle problem

Following in the footsteps of Burns and Mitchell, as a first approximation a cycle can be regarded as a suc-

cession of fluctuations of the macroeconomic aggregates that has characteristics of duration, amplitude and

profile sufficiently similar for that succession to be considered as a recurrence.  The property of cyclicity that

characterises  the  course  of  these  aggregates  can  be  understood  as  the  significance  and  regularity  of  the

recurrence.  The cycle is regular when the instability factors that displace the economy from a balanced path

do not exceed a certain threshold, their action being progressively contained by other factors that limit the

deviation  and  reverse  the  dynamics.    If  the  cycle  were  sufficiently  regular,  economic  forecasting  would  be

easier and so would learning about cycles.  Such learning, by both the social agencies and economists, would

decrease business uncertainty to its irreducible fraction summarised by the distribution of probabilities rela-

ting to the various "business conditions that can be envisaged": for economic agencies capable of progressi-

vely building up a subjective estimation of that distribution, the management of cycles would be a particular

dimension of risk management.  And without doubt, in the world of industry, entrepreneurs have long since

acquired experience of the management of cyclic risk, which they know can threaten the balancing of their

books.

Although  economic  history  has  known  periods  in  which  this  cyclic  regularity  seemed  to  impose  itself  and

become an object of familiarity to economic agencies, it also shows that this can rarely be taken for granted.

The cycle is a phenomenon located at the intersection of the factors of stability and instability that compete

within economic life.  That competition renders the fate of cycles much more uncertain than an inescapable

return to the starting point.  The virtual development of a business cycle is by its nature subject to tensions

and shocks that affect its regularity.  Since cyclic development includes in particular the moment of crisis and

the gravity of the crisis can vary, the behaviour adopted by the agencies when faced by it influences subse-

quent events.  The institutions and the rationales for action they embody are then subject to conflict, the more

so since the immediate perception of the crisis complicates the definition of policies simultaneously suited to

the different short and long term horizons.  It is often during the critical moments of a cycle, when financial

crises threaten or a deflationist trend prevails, that, with some difficulty, institutional changes take shape, nota-

bly in the monetary and financial domain, which will then mould subsequent developments.

This duality of the notion of cycles can be defined by locating the use of that concept at the intersection of

approaches  inspired  by  regulationism  and  evolutionism.    These  two  methods  of  approach  seem  in  effect

rather to complement one another in reaching an understanding of how a cycle is the complex form assumed

by the trial and error attempts that govern a society's learning process of its long-term economic course:

(cid:122)

In a regulationist approach, the periodisation of economic history is based on the observation of succes-

sive regimes of accumulation and growth.  When the structural stability of a regime is sufficiently confir-

med, the participation of the cycle in its regulation bears witness to the formation but also the correction

41

of imbalances.  An empirical distinction between trends and cycles is then relatively easy, without signi-

fying any strict independence of these two manifestations of the dynamic.  Over a fairly long period the

dynamic is characterised by recurrences based on typical sequences of behaviours, tensions and cor-

rections, so that the decomposition between trend and cycle has a descriptive and analytical range.  A

trend is like a sequence of states that the modes of regulation and the judgement criteria of the agen-

cies lead one to regard as normal.  Cyclic regularity expresses the capacity of the economic system to

correct its imbalances and revert  to a near-normal condition.  The reproduction of cycles is vigorous

enough to contribute to the characterisation of the accumulation regime and to participate in the main-

tenance of the trend: cycles are both reproducible and reproducers.  When the combination between

trends and cycles that prevailed up to a point becomes obsolete, that may be a symptom of the emer-

gence of structural instability which calls the regulatory mode into question.

(cid:122)

In  an  evolutionist  approach,  the  learning  and  adaptation  processes  of  the  economic  agencies,  which

orientate  the  selection  of  their  behaviour  and  their  strategic  choices,  are  the  source  of  the  economic

dynamic.   Macroeconomic regularities emerge and are then consolidated by interactions between agen-

cies which, frequently, combine within critical situations distanced from equilibrium (for example, when

engulfment in cumulative situations of under-employment and deflation motivates new social compromi-

ses).  The long-term course, marked by its initial conditions and the effects of inertia, is also subject to

bifurcations in the direction of new economic regimes.  Recurrences are part and parcel of that course,

but they do not signify a systematic return to equilibrium.  Cycles can express the reality of reverses and

even failures in the collective effort to found a new structural regime of growth.  These relapses, mani-

fested by recessions and depressions after the precarious trial of new organisation methods during the

expansion phase, mask conflicts between social agencies in defining the necessary mutations.  They

bear witness to the difficulty of reaching stabilising social compromises that relate to the objectives (the

"collective preferences") and the processes that allow them to be achieved.

To be inspired by regulationist and evolutionist references at the same time is to take the ambivalence of the

cyclic phenomenon into account.  At times that phenomenon shows a regularity favourable to the control of

risks  and  to  the  reproduction  of  growth  performances  consistent  with  the  trend  or,  on  the  contrary,  fails  to

ensure the success of changes and manifests a painful and unexpected reversibility contrary to the viability

of long-term plans.  A rather reassuring reality in the first case, in the second case a cycle is worrying becau-

se of its possible destructive effects, when its depressive phase shows up an institutional anomaly that is hard

to overcome.

The structural stability of a growth regime and the regulatory nature of the cycles that drive it are not inde-

pendent of an accord between the expectations of the agencies and the fundamental properties of that regi-

me.  For example, the solvency of debtors is not independent of a consensus with creditors about the growth

perspectives.  Where there is no such accord, the surprises and disappointments induced by the contrast bet-

ween  expectations  and  reality,  the  revisions  to  which  their  formation  is  consequently  subjected  and  the

conjoint adaptation of behaviours give rise to fluctuations specific to these periods of transition.  During them,

the  economic  agencies  learn  new  norms  that  guide  the  implementation  of  their  rationale.    So  long  as  this

maturation is insufficient for new models of expectation coherent with the structurally modified determinants

of the growth regime to impose themselves, the fluctuations remain disordered, more perturbing than regula-

tory.  Return to a normal reproduction of a redefined growth regime is in part connected with a renewal of the

dominant model of inter-temporal rationality.

42

The process described leads to a use of the notion of cycles which is both intensive and prudent.  Cycle ana-

lysis  in  a  powerful  instrument  for  working  on  economic  chronology,  one  which  allows  the  observation  and

identification of characteristic chains of events, the location of an economy's position in the course of a dyna-

mic, and the relocation of the current economic situation in the series of past experiences.  Since the com-

plete course of the cycle involves time delays that exceed the horizon of strict short-term forecasts, it displays

a temporality that lies at the intersection of economic and structural movements.  Thus, mobilisation of the

notion of the cycle is part of a conception of business analysis which makes of it a tool for bringing structural

issues to light.  This conception rejects a pure and hard dualism of business and structure, which would unde-

restimate the structural density of business movements and the fact that historical bifurcations can be deter-

mined within precise economic situations.  It motivates the inclusion of economic reasoning in the historical

approach.

6.

Bibliographical references

ARMATTE, Michel, 1992, « Conjonctions, conjoncture et conjecture. Les baromètres économiques », Histoire

et Mesure, VII, 1-2.

BLANCHARD, Olivier, 2000, « What do we know about macroeconomics that Fisher and Wicksell did not ?»,

Working paper 7550, National Bureau of Economic Research, February. 

BONNET,  Xavier,  et  Sandrine  DUCHÊNE,  1998,  «  Apports  et  limites  de  la  modélisation  "Real  Business

Cycles" », Working Document of the Direction des Etudes et Synthèses economiques (Directorate for Studies

and Economic Syntheses), n° G9803, INSEE, March.

BURNS Arthur F. et Wesley C. MITCHELL , 1946 : Measuring Business Cycles, National Bureau of Economic

Research , USA. 

DIEBOLD,  Francis  X.  et  Glenn  D.  RUDEBUSCH,  1999,  Business  Cycles,  Durations,  Dynamics  and

Forecasting, Princeton University Press.

DOMAR, Evsey D. , 1947, 1974 : "Expansion et emploi", in Problematiques de la croissance, Vol.1, texts cho-

sen, translated and annotated by G.Abraham-Frois, Economica, 1974, French translation of the article publis-

hed in American Economic Review, vol.37, March 1947.

FISHER, Irving, 1933 : « The Debt-Deflation Theory of Great Depressions », Econometrica 1, October.

FRISCH, Ragnar, 1933 : « Propagation and Impulse Problems in Dynamic Theory », in Essays in Honor of

Gustav Cassel, George Allen and Unwin, London.

GLASNER, David (ed.), 1997 , Business cycles and depressions, an encyclopedia, Garland Publishing, Inc.

HABERLER Gottfried, 1937, 1943 : Prospérité et dépression, Society of Nations, Geneva.

HAHN, Frank H., et R.C.O. MATTHEWS, 1972, Théorie de la croissance économique, Economica. 

HARROD, Roy F. , 1939 : « An Essay in Dynamic Theory », Economic Journal, Vol. XLIX, March.

HARROD, Roy F. , 1948, 1974 : "Théorèmes dynamiques fondamentaux", in Problematiques de la croissan-
ce, Vol.1, texts chosen, translated and annotated by G.Abraham-Frois, Economica, 1974, French translation
of the article published in Towards a Dynamic Economics, Macmillan,1948.

HICKS, John, 1939, Value and Capital, Oxford University Press.

JUGLAR, Clément, 1862 (new, enlarged edition in 1889) : Des crises commerciales et de leur retour pério-

dique en France, en Angleterre et aux Etats-Unis, Guillaumin.

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KEYNES, John M. , 1936 : Théorie générale de l'emploi, de l'intérêt et de la monnaie, French translation,

Payot.

KOOPMANS, Tjalling C., 1947 : « Measurement Without Theory », Review of Economic and Statistics, Vol

29, August.  

MALINVAUD, Edmond, 1991 : Voies de la recherche macroéconomique, Odile Jacob.

MANKIW, N. Gregory, (1989), « Real Business Cycles: A New Keynesian Perspective », Journal of Economic

Perspectives, Vol. 3, n° 3, Summer.

MERAUD,  Jacques,  1961  :  "Statistique  et  prévision  économique,  quelques  méthodes  de  prévision  à  court

terme,  analyse  des  tendances  récentes,  indices  précurseurs  et  tests  conjoncturels",  Cahiers  de  l'ISEA,

August.

MITCHELL, Wesley C., 1913 : Business Cycles, University of California Press.

MITCHELL, Wesley C., 1927 : Business Cycles: The problem and its Setting, NBER.

PERSONS, Warren M., 1919, « An index of General Business Conditions », Review of Economic Statistics,

Preliminary Vol. i, April.

PERSONS, Warren M., 1925 : « Statistics and economic Theory », Review of Economic Statistics, 1925, Vol.

vii, July.

PERSONS, Warren M., 1926 : « Theories of Business Fluctuations », Quarterly Journal of Economics, Vol.

xli, November.

PERSONS, Warren M., 1927 : « An index of General Business Conditions, 1875-1913 », Review of Economic

Statistics, Vol ix, January. 

PLOSSER, Charles, I. 1989 : "Understanding Real Business Cycles", Journal of Economic Perspectives, Vol.

3, n° 3, Summer.

SAMUELSON, Paul, 1939, « Interactions between the multiplier analysis and the principle of acceleration »,

Review of Economic Statistics, 21(2), 75-78.

SAUVY,  Alfred, 1938 : Essai sur la conjoncture et la prévision économique, Publication by the Polytechnic

Centre for Economic Studies.

SCHUMPETER Joseph A. 1939 : Business cycles: a theoretical, historical, and statistical analysis of the capi-

talist process, 2 vol., Mac Graw-Hill.

TINBERGEN, Jan, 1937, An Econometric Approach to Business Cycle Problems, Hermann, Paris.

VIDAL, Jean-François, 2000, Dépression et retour de la prospérité, Les économies européennes à la fin du

XIXe siècle, L'Harmattan.

VINCENT, André, 1947 : Initiation à la conjoncture économique, PUF, 1947.

WAGEMANN, Ernst, 1931 : Struktur und Rhythmus der Weltwirtschaft, Verlag Von Reimar Hobbing, Berlin.

WAGEMANN, Ernst, 1932 : Introduction à la théorie du mouvement des affaires, Félix Alcan, Paris.

WICKSELL,  Knut, 1934-35,Lectures on Political Economy, George Routledge, London.

WICKSELL,  Knut, 1936, Interest and Prices, Allen and Unwin, London.

44

EUROSTAT COLLOQUIUM

HISTORY OF BUSINESS CYCLE ANALYSIS

Luxembourg, 12 November 2001

CYCLES AND BAROMETERS:

HISTORICAL INSIGHTS INTO THE RELATIONSHIP 

BETWEEN AN OBJECT AND ITS MEASUREMENT

Michel Armatte
Directeur de l’UFR d’économie appliquée 
de l’Université Paris IX-Dauphine

E-mail: Armatte@dauphine.fr

45

TABLE OF CONTENTS

1. Conditions in which barometers emerged

2. The first barometers

3. Semiology

4. First statistical tools of barometers

5. The promise of correlation theory

6. The price of wheat and the marriage rate

7. The notion of correlation in economics

8. Second-generation barometers

9. Economic crisis, crisis of the barometers, new perspectives

10. Conclusion

11. Bibliographical references

48

49

52

54

57

58

60

63

65

70

70

46

"Examine the causes and indicate  the effects of the business crises that have taken place in Europe and

North  America  during  the  19th  century".    This  question,  proposed  by  the  Academy  of  Moral  and  Political

Sciences as a competition topic in 1862, led to the publication by Clément Juglar of his treatise on business

crises and their periodic recurrence, which was awarded a prize by the Academy.  The work is marked by two

innovations.  The first is the abandonment of the old notion of a crisis and its replacement by that of a cycle.

Instead of describing the succession of events associated with each economic crisis in a specific way, Juglar

and his contemporaries in the second half of the 19th century sought to substitute an appreciation of their

similarities and differences in a spirit of comparison, locating each crisis in a paradigmatic series and redu-

cing the crisis to no more than an element and moment in a more general and more abstract object, namely

the cycle.  Since then, Business cycles (BC) have very much become an object of economic science.  From

the 1880s to the 1940s they even became the topic of predilection for economists.  Juglar's second innova-

tion was to answer the Academy's question not at the usual level of a priori reasoning applied to economic

policy, as had been done by Malthus and Sismondi, but at the level of empirical evidence: from a compilation

of  publications  by  the  American  Congress  or  the  Bank  of  France  he  traced  a  detailed  history  of  business

movements,  country  by  country  and  period  by  period.    In  this  he  was  one  of  the  initiators  of  a  descriptive

approach in terms of what would much later become known as stylised facts.  And besides, to the question

of causes posed by the Academy, he responded with a work "less ambitious but more satisfying"  –  as the

rapporteur commented  –  which identified several factors, the most important of them related to the deregu-

lation of credit, while the others were totally outside the financial  sphere  but played the part of symptoms

perfectly well. The good Dr Juglar put in place the setting for barometers long before they came into existence:

the nosology of crises interested him far less than clinical expertise.

The same will apply to our historical work.  Although the history of economic facts and the history of econo-

mic ideas form the essential back-cloth to what we wish to say, what this paper is about is neither the cycle

nor the concept of cycles, but the relationship of both with the statistical tools of a dual representation of facts

and concepts.  Among these tools and integrating almost all of them, economic barometers were the preferred

and magical instrument used by the first business analysts at the beginning of the 20th century.  Built up from

the  elements  of  economic  statistics available  at the time  –  serialisation of data, graphical representation,

transformations,  decomposition,  correlation,  mathematical  modelling    –    they  were  designed  to  give  an

account  of the  cyclic fluctuations of economic activity and to test the theories put forward to explain such

fluctuations.

"To  give  an  account  of"  is  an  expression  that  can  have  several  meanings.    First,  it  means  to  represent.

Constructing and publishing an economic barometer first entails the objective recognition and depiction of an

oscillatory movement of the economy as a whole in a numerical and graphical line that can be manipulated

in the form of a small number of combined statistical series.  The mere quantitative representation of a cycle

already  poses  serious  problems:  is  there  really  such  a  thing  as  a  "cycle"  which  pre-exists  its  own  measu-

rement, as  might be  hoped in  the context of a realistic  epistemology?  And if so, how is that cycle to be

defined, conceptualised and distinguished from any other form of evolution of economic activity?  How can

one be  sure that  this  indeed is  what  one  is measuring?  Then, is the measurement being made on the

correct assumptions, on the correct scales?  What are its formal properties, its semantic properties?

But to represent is also to give a presence, to bestow a reality.  Would a barometer rather not be a construct
which, by the very choice of what it treats as important, institutes business cycles by giving them a concrete

form which is a working definition?  In this "operationalist" vision in the sense given to it by Bridgman in 1927,

"it is the measurement itself that defines what is to be measured, which does not pre-exist its own measure-

ment",  to quote Jean Ullmo (1969, p. 24)  precisely.  Methodological  questions  about measurement lead

47

fairly rapidly to the epistemological question of the type of theoretical knowledge procured by the empirical

approach: how can one know anything (in economics) about the properties of an unobservable theoretical

object (the cycle) from  the empirical  measurement of  phenomena  selected for all sorts of good and bad

reasons?

It seemed more interesting to us to answer all these questions from a historical point of view, bringing in the

agencies and issues of  the period, than from a purely philosophical point of view or in terms of an episte-

mology  with  no  historical  or  social  context.    This  must  lead  to  a  better  understanding  of  "science  in  the

making".

Another reason in favour of the historical approach is that a barometer is not a thermometer.  It is not limited

to recording a trace.  It reveals phenomena, suggests causes or reasons, heralds a probable future, guides

a possible response, an organised action which may change the course of events.  Beyond its representa-

tional function, a barometer plays a part in the action, which can besides take three fairly similar but distinct

forms: a heuristic role of assisting an understanding of the economic mechanisms involved, a predictive role

of forecasting crises, and a decisional role of help to economic policy makers.  If it is added that economic

barometers were developed in two different contexts, that of advice for private enterprise and that of national

business analysis institutes whose function is to support public decision-making, it is evident that these instru-

ments have played an important part in the birth of business analysis expertise.  By following the history of

the barometer we will be able to determine the scope of its significances and usages, which covers the very

wide  spectrum  of  knowledge  and  action,  and  enables  consideration  of  the  relations  between  an  economic

situation, its trace, the manipulation of that trace, and the action in response to the economic situation.

1. Conditions in which barometers emerged

The golden age of economic barometers was the inter-war years.  The first barometers, however, appeared

towards the end of the 1880s.  Why not earlier?  Certainly, because the recurrence of industrial and business

crises  reached  its  peak  at  the  end  of  the  19th  century  and  that  decade  was  marked  by  a  first  Great

Depression.  The crash of the Banque de Lyon et de la Loire, and then that of Union Générale in France in

1882, was the first of such magnitude and brought about a fall of the currency that was not reversed until

1896, the beginning of the "Belle Epoque".  At that time the crisis also affected Great Britain and marked the

beginning of its decline.  In France the parliamentarian Méline pushed through a law which instituted a dual

customs duty.  But the whole of Europe and the United States soon slid into protectionism after decades of

liberalism.  The Welfare State made its appearance to correct the disastrous effects of the second industria-

lisation, more particularly in France in 1891, with the creation of the Office du Travail (Office of Employment)

which a few years later was to absorb the Statistique Générale de la France (SGF) (General Statistical Office

of France).  The career of French statisticians at the beginning of the new century, such as March, Huber,

Risser, Dugé de Bernonville and Bunle, was marked by this new involvement of the state in matters related

to employment and the economy: participation in the Conseil Supérieur de la Statistique (Supreme Statistics

Council) (1885-1912), the Commission des crises (Crisis Commission) (1908), the Comité d'études relatives

à  la  prevision  des  chômages  industriels (Study  committee  on  the  prevention  of  industrial  unemployment)

(1911), and the organisation of surveys on prices, wages and the cost of living.

It was in effect for this reason of a political agenda as much as for reasons of innovation in statistical tech-

niques,  that  a  period  of  extraordinary  development  of  economic  statistics  began:  in  1885,  at  the  very  time

when Marshall was giving his inaugural lecture in Cambridge and when American economists were founding

the American Economic Association (AEA), the International Statistics Congress of Quetelet which had last

met in 1872 arose from its own ashes in the more academic form of the International Institute of Statistics

48

(IIS).  Francis A. Walker, first President of the AEA in 1885 was also President of the American Statistical

Association (ASA), which had  been  created  in 1839, from  1883 until  1897.  However, the link between

economics and statistics was not fortuitous but only indicates that economists were becoming more open to

a statistical analysis that corresponded to social and governmental demand, an opening to which statisticians

responded  all  the  more  willingly  as  their  long  and  virtually  exclusive  association  with  demographers  was

coming to a close, and because the interest of public agencies in their discipline reinforced its establishment.

The growth in the size of Statistics societies during that period was remarkable, both in the USA – the ASA

grew from 160 members to over 500 between 1889 and 1898 – and in France for example, where the mem-

bership of the Société de Statistique de Paris (Paris Statistical Society) increased from 81 to 412 between

1881 and 1884.  This revival of the learned societies went together with the appearance of new journals such

as the ASA's Publication (1888) or the Review of Political Economy (1887) which saw itself as an alternative

to the omnipresence of liberals in publishing.  It also went together with the development of the first courses

and  chairs  of  mathematical  statistics  (Hotelling  in  the  USA)  or  economics  and  statistics  in  England  (the

London School of Economics)  and in France  (Faure  chair in  Paris in 1892, doctorate and agrégation in

economics created in 1895 and 1896), and  correlatively, with a  surge of  publications of treatises on economic

statistics in the two following decades (Bowley 1901, Liesse 1905, King 1912, Yule 1911, Secrist 1917).

A last factor worth mentioning is the taste of the period for mechanical inventions, for studies of movement

and most particularly for the recording of all kinds of phenomena, as witnessed by the work of Marey (1885)

on kinematics, and for photography.  Here, one could revert to the theme of the "mechanisation of power" so

dear to Giedion to show that the end of the century was marked in the arts and industries as in the sciences

by the fertility of studies of movement.  In movement there is something enigmatic which, while being material,

lies beyond the visible and requires new technologies to record the permanent trace of its effulgence.  From

that trace it will then be possible to work back to the mechanism that leads to the movement.  Marey's photo-

graphs of birds, Muybridge's horses, Marcel Duchamp's nude coming down a stairway, Taylor's observations

on the handling of pig iron, Frank Gilbreth's wire constructions and his invention of "therbligs" as atoms of

movement were aspects of the same search as that of economists who wished to scrutinise the movement

of the economy using a special device which they called a barometer.

2. The first barometers

So  what  were  the  characteristics  of  the  first  barometers?    The  Austrian  statistician  von  Neumann-Spallart

used the quite new framework of the IIS to propose a kind of general picture of symptoms that would enable

the  position  of  a  national  economy  to  be  fixed  and  an  international  comparison  to  be  sketched  out,  which

extended the unrealised project of the international congress of statistics in the 1870s to establish an inter-

national statistical system.  That picture envisaged "a measure of the variations of the economic condition of

nations" by virtue of three batteries of indexes.  A first group of indexes gives an account of the state of the

economy: production of oil, cast iron, zinc, glass, armaments; passenger traffic, goods, navigation and exter-

nal trade.  A second group of indexes reflects the social condition of the system: consumption of tobacco (in

France)  or  beer  (in  Germany)  or  coffee  (in  Austria),  deposits  in  savings  banks,  emigration,  bankruptcies.

Finally, the state of society's morale is appraised by a last series of indexes, which owe a lot to the pioneers

of moral statistics led by Farr, Quetelet and Guerry in the 1830s: frequency of marriages, birth rate, ratio of

illegitimate births, suicides, criminality.  The IIS Bulletin reproduced Neumann-Spallart's report and tables of
figures (1887) "unfortunately without including the graphs he had used to illustrate it", and the author's death

that year precluded any further publication.

Fortunately, that same year the French Statistician de Foville, Head of the office of Statistics at the Ministry

of Finance, put forward at the congress of the French Association for the Advancement of Science and then

49

at the Paris Statistical Society an "Essay on economic and social meteorology" which essentially amounted

to commentary on a strange device with coloured strips, which he presented as follows:

"You  all  know  what  recorders  are.    That  is  what  we  call  mechanisms  of  greater  or  lesser  ingenuity

whose purpose is not solely to follow from day to day the variations of some phenomenon or other, but

in addition, to take note of those variations, commit them to paper, in a word record them, either in the

form  of  curves,  or  by  chemical  coloration,  or  in  some  other  way.    There  are  recording  barometers,

thermometers, hygrometers, photometers, anemometers, etc.  Well, Sirs, I have tried to achieve some-

thing similar in the field of economics.  By constructing this image I have tried to portray in a manner

as real, simple and expressive as possible, the fluctuations of our country's economic activity over a

certain number of years."  (de Foville, 1888, p. 243) [Fig. 1]

The principle of this barometer, which is identical to that of Neumann-Spallart, consists in summarising eco-

nomic and social activity by means of a small number of indexes –  in this case 32  –  which reflect and quan-

tify the various dimensions of economic movement, which "bear witness" to them in their way according to

the author's terminology, within a very heterogeneous not to say heteroclite panoply in which furniture sales

are taken together with sales of postage stamps, pledges at pawnbrokers and the number of suicides.  The

originality of the device, however, lies in the graphical semantics that replace the cold language of figures;

instead of giving a numerical series, each index is translated into a strip coloured "with a red square for a

good year, a pink one when the year is only fairly good, sombre grey when the year is mediocre, more bad

than good, and finally, black to characterise really bad years."  This "childish" colour symbolism, in the author's

own words, which replaces the figures of the indexes by a complex recoding which is evoked but not descri-
bed1,  is the product of a claimed wish for the greatest possible clarity: each of the coloured strips reveals
much better than would the figures, the succession of phases in the business cycles, the "fat kine and the

lean kine" of the biblical parable.  But it also enables a second reading of the diagram, vertically and in syn-

chronism, which shows up the similarities between the coloured cycles: "At every stage of the picture, the

evolution is the same.  In every case there is a little black on the left, red in the middle and a lot of black on

the right.  It is like a ray of sunshine between two unequally dark clouds".  In other words, the same move-

ment  of  business  straddles  all  the  economic  phenomena  and  is  in  some  way  the  common  factor  between

them, latent but shown up by the measurement and the coding, since all the indexes show the red and black

trace nearly simultaneously.

Only nearly, however, because the agreement is not at all perfect.  Some indexes precede the others in the

same  cyclic  evolution.    "Among  the  various  elements  of  our  national  economy  there  are  some  which  are

influenced more quickly and more strongly than others."  This off-set is neither fortuitous nor the result of mea-

surement errors, it is the very principle that makes this instrument of synthesis a forecasting tool: de Foville

was able to end his article with a reassuring look forward to a return of the fat kine.

The main ingredients of the barometer are there: juxtaposition of fairly heteroclite series, but ones chosen as

a representative sample of economic activity transformed by a certain semantic, graphical and/or numerical

rule, to become comparable and to bring out synthetically both a similar movement and useful differences.

The barometers of these two precursors attracted many followers in the first decade of the 20th century.  But

some,  such  as  Clément  Juglar or  Baron Charles Mourre, favoured a  single  index that  would  serve  to

represent BCs: the first chose the portfolio of the Bank of France or even its liquidity, which moves in the inverse

1 Sometimes it is levels, sometimes growth rates that are taken into account; sometimes maxima and sometimes minima are interpre-
ted in red or pink as favourable.

50

Figure 1: de Foville's barometer (1888)

direction [Fig. 2], while the second advocated commercial paper.  Some, more recently, have seen an excel-

lent index of economic activity in the volumes of packaging cardboard used.

Other authors defend the synthetic index that results from an aggregation of several plain series: since 1922

the company ATT has published a single Index of General Business, and Carl Snyder, director of the Federal

Reserve Bank, collected 56 series into 5 synthetic indexes (production, wholesale distribution, retail distribu-

tion, general business, finances).  In 1923 Warren Persons published an Index of Trade for 1903-1925, which

combined 28 series, and its most famous offspring, the Harvard barometer, is still of that type.  The questions

raised by synthetic indexes are similar to those known for price indexes: what justifies the sample of series

chosen?  Should they be homogeneous (because they measure a well defined dimensions of economic acti-

vity) or heterogeneous (the better to cover the diversity of that activity)?  Under what conditions (for example,

of reduction to  comparable  units)  can  the  combination be reduced to a sum or an average?  Does that

average have a probabilistic interpretation which gives a better estimation of the true size of the phenomenon?

Is it the proper way to neutralise accidental variations so as to isolate more effectively the constant cause of

the phenomenon measured?  If there is an average, what are the weightings of the various series?  

51

Figure 2: Juglar's Barometer

The synthetic index reflects the entire series of questions raised by the theory of averages stemming from a

transfer by Quetelet  from the theory of errors in the social sciences and highly criticised at the turn of the

century by the German (Lexis, Bortkiewicz) and English (Venn, Galton, Pearson) schools.  At its 1923 meeting

the  IIS  pronounced against the use of composite indexes: "it is not expedient to group indexes that repre-

sent phenomena of different nature into a composite index".  This opinion was echoed by most authors on

BCs before 1914.

This certainly motivated many statistical economists, such as Lucien March, Director of the SGF in France or

Armand Julin in Belgium, to remain faithful to a system of numerous indexes (43 in the case of Julin, 1911)

grouped into dimensions.  For Julin, for example: production, trade, incomes and consumption, demography

and morale.  No system combining these indexes into a single index or a small number of them is to be found

in their barometers.  Beveridge in London in 1909, Mortara in Rome in 1913 and Sorer in Vienna in 1913 all

developed barometers of the same type as March and Julin in the framework of public statistics, and this right

up to the first world war.

3. Semiology

It is not just a question of the technical difficulty of aggregating heterogeneous series.  It is also that the vision
of those pioneers was that of semiology, a term borrowed from the field of medicine, a group that included a
fair number of economists, Juglar to begin with.  His work on business crises had already stressed "what is
known in medicine as a predisposition", which  determines the  form of the  crisis, or  even the  upset and
blocking of a paralysed social body, the necessary liquidation or purge that follows the crisis, and the affirmation

that "crises, like illnesses, are inevitable".  The first economic barometers resembled temperature and blood-

pressure charts of an economy subjected to periodic attacks of fever.  Beveridge published his barometer with

the title "Pulse of the Nation".  For Schumpeter (1939) cycles, like heartbeats, were part of the essence of the

52

organism in which they appeared.  The term 'semiology' was also adopted in the small book by André Liesse,

professor at the CNAM, on Statistics.  Its difficulties, procedures and results (1905), four chapters of which

were devoted to "the study of statistical symptoms or semiology", and by  the  decision of the  IIS  (1911)

advocated by A. Julin to set up "a special commission entrusted to study the methods relating to statistical

semiology".  Wagemann2 defined semiology or the science of symptoms as "an inductive process leading to

the discovery of the probabilities of events (…) which does not, however, yet amount to a theory of the necessary

relationships (…)  Besides, transition from the theory of symptoms to functional theory [defined later as the

reciprocal determination of economic variations which do not lend themselves to mathematical formulation]

carries a certain risk.  There is nothing less prudent than to assert the existence of functional or causal rela-

tionships before the results obtained from the theory of symptoms have shown them to exist".  In this "medical"

vision barometers are incapable of noting any mechanisms, identifying their causes and factors and their way

of acting upon the system.  The very functions of measuring the wellbeing of peoples and acting as a fore-

casting  tool  are  rejected  by  statisticians  such  as  Julin.    This  brings  us  back  to  the  thermometer,  which  by

objectively detecting a high temperature, offers the clinician no more than a symptom.

Another sign of this semiological approach is the use of demographic variables. In a causal economic process

one would look either for natural causes, as for example Jevons did by referring to sun-spots, or for endo-

genous causes, as economists have preferred to by invoking the phenomena of anticipation (Pigou), inno-

vation (Schumpeter), machine production time (Spiethof, Aftalion), cash flow fluctuation (Hobson, Marx) or

money supply (Hansen, Fisher).  But it could never be said that variations in the marriage or the crime rates

caused economic cycles.  It may be that they are the results of such cycles, but the reasoning that establishes

this is not obvious, as we shall see.  All that observation can do is to record "concomitances", to repeat a term

that John Stuart Mill associated with one of the four canons of inductive method in his Logic.  Recourse to

such extra-economic variables  –  demographic or moral   –  is much more easily justified in the context of a

semiological view in which high or low values of these variables constitute signs that are symptomatic of an

economic condition because they appear in systematic association with that condition, without being either

causes or factors of it.

In  his  work  on  Business  Cycles,  Schumpeter  devoted  a  large  part  of  his  introduction  to  what  he  called
"Common sense Semiology3"  and defined as "the interpretation and co-ordination of such symptoms".  He
even gave a non-limiting list of 41 such symptoms, and above all provided an interesting justification for it: the

"factors" of a business cycle should preferably be sought among those with causal significance, but this is

almost impossible because we do not always have a rational scheme (in the sense of rational mechanics)

and, all too frequently, "in our field causes do not always precede effects (because) anticipation of coming

events sometimes produces the same effect on the behaviour of business communities as do these events

themselves, and symptoms sometimes lag behind the events to which they refer."  (Schumpeter 1939, p. 14 - 15).

The forecasting function, rejected by Julin, is in contrast at the centre of the "private" barometers produced

by small consultancy offices in companies, one of the models of which could be the "Babson chart" accom-

panying the weekly Letter sent out by Roger W. Babson to his subscribers since the early 1910s.  And to

attach importance to forecasting is to favour a single, synthetic index.  Constructed on the basis of 12 statis-

tical series (4 commercial, 4 monetary and 4 financial), Babson's model had the special feature of combining

2 Ernst Wagemann was the Director of the Institute for Business Research in Berlin, the largest in Europe since it included about a hun-
dred  economists  and  statisticians  just  before  the  second  world  war.    See  J.  Adam  Tooze  (1999)  on  the  important  part  played  by  the
Institute in the Weimar Republic.
3 And which can be illustrated by numerous proverbs, the best known of which in France he quotes: "Quand le bâtiment va, tout va" ("If
the building is OK, everything is OK").

53

them by simple addition (after reduction to a common base, the average for 1903 - 1904) into a single index

whose  fluctuations  are  arbitrarily  intersected  by  an  average  line  in  accordance  with  a  principle  which  the

author claimed to have borrowed from Sir Isaac Newton (who is blamed for so much!).  The crossing of this

average line should be a simple indicator for the public  – "manufacturers, traders, heads of trade unions and

professional people"  –  which is the target of the "Barometer Letter" and which warns them, for example, "that

business this week is 32 points below  the line X-Y, compared with last week's 30 points below the line and

the 56 points of a year ago."  (29 August 1922).  For its designer this product fills the need for objective infor-

mation which cannot be  provided by the  actors  themselves, who are  too bound up in   group strategies

[Fig. 3]. In the same market there would shortly appear the indexes of Brookmire's Economic Survey which

combined 6 factors in accordance with an undisclosed alchemy: speculation, physical volumes, imports and

exports, bank deposit movements, discount rate of bills of exchange, and foreign currency rates.

Figure 3: A Babson Chart

4. First statistical tools of barometers

Throughout the period before 1910, the statistical tools used by the creators of barometers were extremely

unrefined and were limited to reducing series to a common base, and to a great deal of graph manipulation.

The first technique assumes a practice of synthetic indexes which was in effect one of the major issues of

the statistics of the 1870s.  The debate first related to the syntax of these indices, i.e. in essence to the way

they were to be weighted: to construct an index for the prices of a group of goods, it seems that in 1738 Dutot,

cashier of the Compagnie des Indes, had inaugurated the ratio of means, while in 1764 Carli, an economist

and professor of   astronomy at  Padua, preferred a mean of ratios.  In the 1870s Laspeyres and Paasche

proposed price averages weighted according to quantity.  The average taken can also be varied: arithmetical

mean, geometrical mean (Jevons), median (Bowley, Mitchell).  Irving Fisher published two works on index

numbers (Fisher 1911 and 1922), the second of which explored 134 different formulas.

In relation to the weighting and choice of the sample of goods, Edgeworth, Bowley and Fisher agreed in consi-

dering that the former was ultimately secondary.  The debate then turned to their semantics, that is to say the

theoretical object they were supposed to be representing, namely in the case of a prices index for example,

54

the general movement of prices, or that of a group of goods, or the value of money, etc.  Since the work of

Jevons and Edgeworth, the probabilistic interpretation of an index has been at the heart of the debate.  If one

believes  the  theory  of  errors  and  its  declension  into  a  theory  of  averages  by  Quetelet,  then  an  index  is  a

weighted mean taken on a sample of goods that represents the "true" movement of prices in an economy,

just as the average person is the centre of gravity of society.  And since this operates to compensate variable

and  accidental    causes,  it  no    longer    reflects    anything  but  the  effect  of  constant  causes,  i.e.  the  general

movement of prices and its counterpart the value of money, regardless of the characteristics of the goods.

But a probabilistic interpretation of an average is itself quite daring, both because the conditions of the theory

of errors (for example independence, homogeneity and normality of errors) are not respected by price varia-

tions, and because there is confusion between price and exchange value.  In a lengthy mathematical study

in 1909 Keynes himself expressed some reservations about this interpretation, for the same reasons, after

having begun to adopt it.  Walsh opposed any probabilistic approach even more violently in a controversy with

Edgeworth in the 1920s.

The second technique that was blossoming in the 1880s after decades of criticism by adherents of adminis-

trative  statistics,  was  the  graphical  approach.    The  subject  was  at  the  forefront  at  the  jubilee  of  the  Royal

Statistical Society, with speeches by Marshall and Levasseur, who introduced the technique very widely in his

teaching at CNAM and at the Collège de France.  The lectures by Karl Pearson at Gresham College in 1891

dealt with the geometry of statistics and listed a veritable menagerie of all the kinds of graphs.  Cheysson

explained the graphical method in lectures at the Société Statistique de Paris, and practised it freely at the

universal exhibitions of 1867 and 1878 at the Directorate of Maps, Plans and Archives of the Ministry of Public

Works, and in a famous article on the associated subject of graphical statistics.  Lucien March had a large-

format graphical album printed for the exhibitions of Liège and Milan (1907), comprising 273 figures.  Graphs

appeared  fairly  quickly  as  a  substitute  for  tables  of  numbers,  which  facilitated  inductive  inferences.    In  an

example published in 1904 Juglar used a device which illustrated how a table could be converted to a graph

and the semantic superiority of the latter [Fig. 4].  

Recent studies of the reviews (Kang on the JSSP, Biddle on a selection of reviews) show that graphs were

at the forefront as tools and as a subject for the discussion of methodology in the 1910s and 1920s.  Works

devoted solely to that subject appeared (Karsten 1924).  In his treatise, Bowley made of the graphical method

an obligatory technique of statistics.  He devoted to it a lengthy chapter of about 50 pages, which deals with

distribution representations (for example of wages) as well as chronological evolutions.  Graphical techniques

emerge as an indispensable means for comparative analysis, and as a way "to discover or illustrate causal
relationships" (Bowley 1920, p. 153)4.   Graphical semantics are discussed in detail and even standards for
graphical presentation were proposed by the IIS5.   The discovery by de Foville that the graphical recording

of series that are heterogeneous (in their measurement units and variation) suddenly rendered them compa-

rable and enabled them to be combined in a barometer, became the main technique of statistical economics

twenty years later.

4 However, Bowley was aware of the difficulties of causal analysis: "Diagrams may often be used to suggest correlation between two
series of figures, and this indeed is one of their chief merits, and they may be used to illustrate arguments on the subject, but at this point
their utility ends, for they cannot be made to prove much.  Causal relations are very difficult to establish, and the original figures must be
critically consulted when theories are to be brought to the test" (Bowley 1920, p. 155).
5 At its 1911 meeting the IIS proposed that "the average of the figures for the years 1901-1910 should be taken as the standard and that
this  average  should  be  represented  by  a  vertical  height  equal  to  the  horizontal  measurement  that  represents  thirty  years"  (cited  by
Bowley 1920, p. 153).

55

Figure 4: From a table to a graph (Juglar, 1904)

To the technique of indexes and that of graphs must be added the technique of decomposition into Fourier

series, which was also fashionable in the 1910s but remained confined to the small group of the few econo-

mists capable of carrying out this type of mathematical modelling.  The principle is that a function of time can

be approached by a limited development which takes the form of a sum of functions of the form Ai sin(ikt + ei),
where  2π/i  represents  the  period  of  the  main  underlying  cycles,  ei  their  phase,  and  Ai  their  amplitude.
Persons, Crum and Beveridge used this method.  H.L. Moor (1914) made rhetorical use of it by showing that

the cycle of rainfall and the cycle of harvests a few months later could be broken down in almost the same

way, with two major periods of 8 and 33 years, corresponding roughly to the cycles of Juglar and Kondratiev

[Fig. 5].

56

Figure 5: Moore's comparison of cycles

5. The promise of correlation theory

The second barometer period corresponds to the incorporation of new statistical tools imported from English

biometrics.  Correlation and regression are the two main tools of mathematical statistics that stemmed from

the  work  of  Francis  Galton  and  Karl  Pearson  on  the  phenomenological  laws  of  heredity,  in  the  context  of

research marked by Darwinism and eugenics which was very remote or even antagonistic to the preoccupa-

tions of  economists more reactive to the paradigm of environmentalism.  It was G.U. Yule who presented

economists  –  in his fundamental article of 1897 on pauperism, at a key meeting of the IIS in Paris in 1909,

and in his manual whose first edition dates from 1911  –  with a totally revised version of the theory of regres-

sion in which Pearson's idealistic philosophical assumptions are abandoned along with all the apparatus of

contingency and  the normal distribution, in favour  of a  working version which ties up again with the lest-

squares line of the astronomers and geodesists of the beginning of the 19th century:

"To anyone familiar with the theory of errors it will be evident that the method is no more than the appli-

cation of the well known least-squares method to the objects of statistical research. It is consequently

impossible to separate the literature specific to the theory of correlation entirely  from  literature that

touches upon the theory of errors and the least-squares method (…) Since the shape of the frequency

distribution given by the law of errors is not common in statistical economics, it is important to obtain

the  correlation  formula  and  its  properties  without  recourse  to  the  frequency  distribution".  (Text  in

English in BIIS, Vol. XXVIII, p. 537.)

In 1897 Yule demonstrated that regression lines defined as the locus of connected means can be deduced

directly from the principle of least squares since the least-squares line coincides with the regression line if the
latter is linear (which includes the normal case), and approaches it as closely as possible if it is not.  This new

approach received the support of Edgeworth in 1902 and 1908 and of Bowley (in his treatise), and it remained

only to show its relevance and efficacy in economics.  That is what Yule did in his 1909 presentation at the

57

IIS meeting in Paris, using the now classical examples of his own study on pauperism, the studies of Hooker,

Yule and  March on the marriage rate and the price of wheat, and Norton's study on the New York money

market.  That was how most French economists and statisticians discovered the potential of the methods of

correlation and regression.

Since then, following the path traced out by these first examples of economics applications, numerous eco-

nomists began studying correlations between economic series, whether in the context of a partial study or in

that of constructing an economic barometer.  However, although the promise offered by the tool led to some-

times rather uncontrolled enthusiasm, the difficulties were found to be considerable.  To grasp this better, it is

quite useful  to go  into details of the succession of controversies that marked, for example, the numerous

studies on the links between economic cycles and demographic cycles.

6. The price of wheat and the marriage rate

The  history of the links between demographic and economic variables plays a paradigmatic part in the deve-

lopment of a way of thinking about the links between economic phenomena in terms of new statistical tools,

as has been shown by several recent studies6. The problem has its distant origin in the theses of Malthus,

whose  population  principle asserts  that  "the  available  quantity  of  subsistence  goods  determines  the  real

population level by constraint".  From there he derived a kind of retroactive mechanism in which population

and wealth determined one another, a mechanism which he was still trying to make more specific long after

the first edition of his Essay on the principle of population (1798).  Population growth increases the price of

subsistence goods and reduces effective income; but that reduction itself affects the mortality, which it increa-

ses, so reducing the population (positive braking effect); the lowering of income also affects the marriage rate

and fertility, and therefore the population, which it compresses (preventive brake) by compelling couples to

cancel or defer their plans to marry and start families.  These two retroactive loops tend to stabilise the popu-

lation at the level of the subsistence goods available, or more exactly those that incomes can afford: "Real

salaries and wages are the main regulators of the population and its most exact limiting factor".  After Malthus

himself, numerous demographers or economists sought to provide statistical validations of the hypothetical
causal relationships of this mechanism7. 

In effect, the first studies carried out at the General Registrar Office by its superintendent William Farr (1846)

concentrated  more  on  the  positive  braking  effect  of  mortality,  and  others  took  up  (without  verification)  the
Malthusian hypothesis of a negative link between the price of wheat and the marriage rate8. But William Ogle,
Farr's successor at the GRO, published in 1890 a study which took the contrary view based on statistical data

from the previous 20 years: "Indeed the relation between the two is the very opposite.  The marriage-rate

varies not inversely but directly with the price of wheat".  (Ogle 1890, p. 258).  Ogle explained this in terms

of a kind of ratchet effect in which a fall in the price of food at first has a favourable effect on marriages, which

is soon cancelled by an increase in the "standard of life".  The author then went on to show that the series of

exports is even more closely sychronous with that of marriage rates.  

6 This subject has been studied in more detail by Baumol (1985), Armatte (1992, 2001) and Morgan (1990, 1997).
7 It should be noted, as was done by Wrigley (1984), that this verification is very dependent on the country and time when it is made,
and  considering  that  Malthus  was  writing  precisely  at  the  time  when  the  relation  between  population  and  wages  seemed  inverse  in
England, it is understandable that he was right at the time but wrong later.  That is what was demonstrated by data on the period collec-
ted by the English historical school in Cambridge and by the work of its Social Science Research Council from which Wrigley took his
data.
8 For example, Mr.Fawcet wrote in his Manual of Political Economy: "There are few statistical facts better substantiated than that mar-
riages among the labouring class increase with the fall in the price of bread" (quoted by Ogle 1890 and Baumol 1985).

58

Figure 6: Ogle's comparison of Exports and Marriage rates

Ogle's test is based solely on a graphical comparison, not of the raw series, which gives a graph that is not

very convincing, but one that becomes so when the marriage rates are corrected for a tendency estimated

roughly as a decline in the marriage rate of 0.47% over 30 years, explained by a shift in the marrying age, a

hypothesis considered in detail by Hooker (1898) and Yule (1906) [Fig. 6].  The explanation provided for this

paradoxical9 direct relation, involving transport costs, is of little importance here.  What is interesting is the

use of the graphical test and its sophistication by manipulating the scales, transforming levels into differen-

ces or growth rates, and the already apparent separation between tendency and fluctuations.

9 "Men marry, as we have seen, in greater numbers when trade is brisk and when the value of exports increases; but when the exports
increase, so also do freights, and this rise in freights causes a corresponding rise in wheat, the largest part of our wheat being imported
from abroad" (Ogle 1890, p. 262).

59

In the first editions of his textbook, Bowley (1901) returns to the example of marriage rate to illustrate the gra-

phical method.  Using data covering the period 1860-1900 he makes the series comparable by plotting on the

same graph values centred on the mean and reduced to the same unit of variation.  From this he concludes

that there is an agreement between "marriage rate and trade" but no such agreement between "marriage rate

and wheat price", after 1880.  His  interpretation is  directly causal: "our conclusion is, that since 1870 the

causes which affect foreign trade have also affected the marriage rate at the same dates and in the same

sense, and that the more marked the effects on the one, the more marked are the effects on the other also,

but  that  there is no law of simple  proportion  between  them" (Bowley 1901, p. 177).  The introduction of

correlation tools into the problem of links between economic cycles and marriage rate is also present in the

very last part of his textbook10 and in an article by Hooker published the same year.  Bowley computed the

correlation between "marriage rate" and "price of wheat" and then between "marriage rate" and "imports and

exports", whose values were r = - 0.30 and r = 0.007 for the period 1845 - 1864, and r = 0.47 and r = 0.14 for

the period 1875-1894, which  illustrates the  inversion of  the first  relation from about 1870 and the non-exis-

tence of the second relation11. The text read by Hooker to the Statistical Section of the British Association

in September 1901 and published in the JRSS proposes a different way of handling the same data: instead

of  decomposing  the  period  into  sub-periods  in  which  the  connection  is  almost  in  the  same  direction,  Hooker

reverts to Ogle's idea of decomposing the overall movement of each series into two movements, which he

called "trends" on the one hand, and which he calculated with a moving average over 9 years, and what fluc-

tuates around the trend on the other hand.  Over the period 1861-1895 the coefficient r = 0.18 found for the

relation between marriage rate and exports per capita was devoid of significance.  If the deviations from tend

are considered, the correlation becomes r = 0.80 and even r = 0.86 if exports delayed by 6 months are taken

into  account.    The  same  method  applied  to  the  price-marriage  rate  relationship  confirms  Bowley's  results,

being negative before 1875 (r = - 0.47) and positive after 1875 (r = 0.32).

Hooker's text established a methodology for the studies of time series which become widespread after 1900,

until the 1930s.  For example, the French statistician Henri Bunle took note of the work of the English school

and applied the same methodology to French data (Bunle 1911), and like Bowley and Hooker, found a corre-

lation between marriage rate and the price of wheat which was negative before 1870 but almost zero after

that date.  Marriage rate, however, seemed positively correlated with prices and trade if the deviations from

the moving averages were considered, with a lag of one year for the demographic variable.

7. The notion of correlation in economics

This brief  excursion into a case study is instructive.  The transfer of biometric tools to the new material of

business and the economy is strewn with pitfalls, not to say blocked by an impasse, since measurements of

the  correlation  between  two  chronological  series  cannot  be  interpreted  directly.    The  results  clearly  differ

according to country and period. But they also differ depending on whether the correlation measurement is

applied to raw series, to series corrected relative to the trend, or to the trends themselves, not to mention the

manipulation of time shifts.  What is the sense of each of these measurements?  Which of them corresponds

to what one might call an explanation?  Is it short-term fluctuations or long-term growths which provide us with

the key to a mechanism of cycles?

10 In the 11 pages of Chapter 6 devoted to correlation.  This part was considerably enlarged in later editions, since in the 1920 edition
there are 3 chapters and 60 pages devoted to correlation theory.
11 The test of this value being zero concludes: "the odds against the correspondence between the observed figures, since 1875, arising
without causal connection are only about 4 to 1, if we assume that the figures for each year are independent of the next" (Bowley 1902,
p. 322). It is true, however, that Bowley adopts a very strict rule for rejecting a causal relation (probable error < r/6).  In the 1920 edition,
example 6 presents a calculation of r = 0.09 for the entire period 1845-1898 (Bowley 1920, p. 508-510).

60

The Director of the  Statistique Générale de la France, Lucien March,  who  was very well  aware of  these

difficulties, defended the notion that there is a certain inaccuracy in speaking of a correlation between chro-

nological series.  In a text which is often quoted (March 1905) he proposed several measures of dependence

the simplest among which is Fechner's coefficient i = (c - d)/(c + d) in which  c  and  d  are concordances and

discordances of the variation direction of the series.  When these are weighted by the product of the standar-

dised variations of the two variables, this produces what is called a dependence coefficient which is formally

analogous to that of Bravais Pearson.  But two differences should be noted.  The first is that his coefficient,

renamed coefficient of differential co-variation in March (1928), does not relate to the series in terms of level

but to their primary differences.  It is of course easy to show series whose level correlation, which he rebap-

tised tendential co-variation, is positive while the differential co-variation is negative.  We then revert to the

separation asserted by Hooker between trend and fluctuation, but with a filtration method which is no longer

that  of  the  deviation  from  tend  (obtained  by  the  moving  average)  but  that  of  the  primary  differences.    The

second discrepancy claimed by Lucien March between the notion of correlation in biometrics and that which

should be built up in the economy of cycles relates to the term co-variation itself, which Armand Julin took up

on his own account and explained perfectly clearly in his treatise:

"With  Mr Lucien  March, we regret that this  term [correlation] has become part of the vocabulary of

statistics by virtue of its meaning in logic and in ordinary language, a meaning that it does not have in

statistics.  When one says that one fact is correlated with another, one usually wants to express that

one of the said facts stands in such a relation to the other that one assumes the other (Littré).  In logic

the correlative nature of two phenomena implies the existence between them of a causal link (…) The

name of co-variation, which implies  only that there is a concomitance between the variations of the

phenomena, is proposed and used by Mr March and we adopt this terminology."  (Julin 1921, p. 479-80).

The difference from the English usage of correlation is dual.  On the one hand it denies a causal interpreta-

tion of correlation, according to which the correlation stems from the existence of common causes or would

even be the expression of a balance between common and distinct causes, as Bravais had shown and as

Bowley reasserted in his treatise.  It is not surprising that March, who translated and published in 1912 the

Grammaire de la Science (Grammar of Science) which disseminated in France its author's idealistic philoso-

phical thinking at the same time as his eugenic theses, should become like him the defender of a science in

which any mechanical notion, beginning with that of cause, had to be discarded in favour of the broader and

less compromising concept of contingency.   Thus, the coefficient of co-variation is a simple measure of a

contingent relation located somewhere between simple concomitance and correlation interpreted in a causal

way. This return to Pearson is also a defence of the specificity of the field of economics, and more particularly

its place in history.  The correlation of biometricians expressed a synchronous relation between characteris-

tics of two organs measured at the same time in the same individual, or in two related individuals. For Pearson

chronological series are never observed, only instantaneous distributions.  Everything changes in the economic

study of Business cycles for which time, in contrast, is one of the most important factors.  As Mary Morgan

(1997) says clearly, the notion of correlation in economics very often assumes a search for an explanation in

which the concept of cause signifies both precedence in time and location in a historical context that renders

it sometimes operative, sometimes not, and always interwoven with other causes.

The notion of correlation in Business cycles is therefore completely located in a historical vision which com-
prises both the term "co-variation" and the chronological graph of indexes and barometers from which it is

inseparable.  The graphical recording of concomitances must be made explicit and objective by a correlation

calculation, but that correlation calculation needs the graph for its interpretation.  As Morgan also notes, and

as a result of the interpretation difficulties which have been stressed, the measurement of correlation has not

61

at all supplanted graphical representation, has not at all gone beyond it, and has not been established as an

autonomous tool.  This is because the coefficient of correlation still indicates nothing more than a co-variation.

It should be noted that the same does not apply in a different branch of economic theory in which correlation

has played a major part, namely the theory of demand.  In that case the relation between prices and quantities

has adopted a connotation closer to  that of  biometrics because, even for data in series, clouds of points

(scatter diagrams) supporting the search for a functional relationship were quite soon substituted for chrono-

logical graphs, though not without difficulty since it was necessary in that context to link on the one hand the

two interpretations of co-variation and the course of the data, and on the other hand a structural connection

which was non-historical and could be interpreted in terms of a law of demand  ceteris paribus.  While the

empirical law of demand played the part of a bridge between these two universes, allowing an appreciation

of the difficulty of articulating them (the problem of identification, for example), the barometer is an object enti-

rely immersed in the universe of co-variation alone.  Thus, the causal interpretation of simultaneities is based

solely on the temporal order and direction of variation, but cannot be expressed by a stable, non-temporal

functional relationship that could be called a law of economics.  This, no doubt, is one of the reasons why

many economists continue, as opposed to this bashful and maltreated causality, to prefer the semiological,

quasi-medical interpretation of co-variations discussed to begin with.

Nevertheless,  other  economists  radically  committed  to  a  usage  of  correlation  which  seems  promising,  but

sometimes goes beyond its inferential possibilities.  On the basis of these techniques of decomposition, linear

adjustment and correlation, the methodology of the treatment of chronological series seems to deviate very

significantly and even to depart entirely from the central concept in which barometers are regarded as simple

aggregates of symptoms, reduced only to a semiological function.  An author such as Henry Ludwell Moore,

an American economist trained in statistics by Karl Pearson, undertook a series of studies which no longer

spoke of barometers, heuristics and forecasting.  They sought to find true mechanical models of an economy

which would explain both its growth and its cyclic fluctuation, because they identified its workings in the form

of strong links between variables, attested by high correlations, and operating as conveyor belts.  These links

may correspond to laws of economic theory established in unrealistic, ceteris paribus conditions, or they may

deviate from them to foreshadow a different kind of dynamic theory, but one whose essence is grasped by

correlation.  Without going into details of what is no longer in the field of barometers, an overall view of such

a  mechanism  can  be  obtained  by  putting  together  the  few  studies  published  by  Moore  between  1911  and

1923 in the form of a summary graph of the relations he found between price movements, agricultural production,

climate variations and the motion of the stars [Fig. 7].

This usage of correlation bears witness to a slide from contingency towards causality which Mary Morgan has

also noted: "The correlation coefficient, as a loose associative notion depending on common cause arguments

in the temporal domain, can easily be reinterpreted to serve as a measure of a direct cause-effect relationship

which dispenses with both the notion of common causes and history contingency.  We can see both these

types of usage of correlation in Persons's own work." (Morgan 1997, p. 72).

62

Figure 7: Moore's causal explanation of Economic Cycles.

8. Second-generation barometers

Warren Persons is in effect another American economist who chose to develop the notion of a barometer with

the aid of correlation tools.  The promoter of a Committee for Economic Research at Harvard in 1917, he was

above all the inventor of the famous Harvard Barometer which can be regarded as the prototype of a new

generation of barometers. Persons's main  idea was that there  must be a division of labour in the work of

business analysts, between the ones who publish data and those who analyse the data.  Criticising in barely

veiled  fashion  the  semi-charlatans  who  proliferate  in  the  field  by  publishing  raw  or  poorly  treated  data,  he

clearly  located  himself  among  those  capable  of  mobilising  the  new  statistical  tools.    In  the  structure  of  his

barometer, however, the dual influence of "chartists" and mathematicians can be perceived.

His  barometer  was  published  in  the  first  issue  of  the  Review  of  Economic  Statistics,  which  he  founded

(Persons 1919).  In its first version it was constructed from 20 series chosen from among 50 series found in

government publications.  For each of them, the trend is determined by a linear adjustment of annual data.

Seasonal indexes are then calculated by the method of linking trend relatives, by taking the median of these

relatives and then linking them.  The original monthly data are then corrected for trend and seasonality, and

63

then reduced to the same dispersion unit.  The twenty cyclic series so obtained are then systematically studied

in pairs  to determine their  displacement and correlation. The method is first graphical: three independent

observers observe the optimum coincidence of the series reproduced on transparencies with the aid of an

illuminated table, and note both its optimum displacement and the quality of correspondence, using a sum-

mary scale (excellent, good, acceptable, poor).  This first evaluation is supplemented by calculating the linear

correlation between the cycles and the displacement that maximises this correlation, a calculation necessary

when the said displacement varies throughout the period.  The correlation is deemed "absolutely certain" if

its absolute value is higher than six times its probable error, and "striking" if it exceeds 0.5.  The series are

then sorted and first divided into five groups, then into three, as a function not of their nature, which could

have been done a priori, but as a function of a similarity of their cycle, i.e. of the correlations and especially

the  "lags"  calculated,  leading  to  the  famous  system  of  three  curves  by  which  the  Harvard  barometer  was

popularised.  The nature of these three classes was in some way discovered a posteriori: group A (4 series)

is an index of speculation, group B (5 series) a combined index of physical productivity and prices, and group

C (4 series) an index of the financial situation in New York.  Thus, each of the curves describes the movement

of  one of the three markets: financial market, goods market and money market.  The three series seem to

follow  the same  movement, supposedly that of  BCs, with series A anticipating this movement and being

therefore regarded as an advance index and support for forecasts [Fig. 8].

The composition of the Harvard barometer was to undergo many modifications in the years to come.  In 1928

curve A was finally reduced to two series of indexes: the prices of industrial shares (Dow Jones) and the prices

of railway shares; the Bureau of Labor prices replaced Bradstreet prices in curve B, and curve C no longer

contained anything but the long-term discount rates and railway bonds.  The correlations between series and

the essential relation between the three curves, estimated over the period 1903-1914, was at first satisfactory

and even very successful.  For example, the 1920 crisis was clearly predicted by Harvard, although its amplitude

was underestimated.

The success of this barometer was so great that numerous imitations of the device appeared in Europe, by

Beveridge in Cambridge, March in Paris, Dupriez in Louvain, Wagemann in Berlin, and Kondratiev in Moscow.

The idea that these tools could also allow public authorities to act well-advisedly upon the levers of economic

policy also emerged.  For example, in a BIT report of 1924 one reads:

"If businessmen can almost unconsciously influence the future situation or small groups of speculators

can deliberately provoke the appearance of conditions favourable to them, one imagines it should also

be possible to influence the future in the interests of the community as a whole."

The methods of economic analysis and forecasting were institutionalised at business Institutes which enabled

them to survive the crisis.  In France, for example, it was on the day after the crisis of 1907 that a Commission

was set up, entrusted "to study the measures to be adopted in order to reduce the unemployment resulting

from periodic economic crisis", followed by a permanent committee whose lines of credit were only opened

in 1914.  The Service d'Observation des prix (Prices monitoring service) was not officially created until 1917

and attached to the SGF in 1919.  Numerous indexes have been published since 1911 by the SGF in its bulletin,

on the occasion of certain exhibitions (Ghent 1913), and in the Revue politique et parlementaire since 1919.

The monthly publication of a collection of "Indexes of the general movement of business" fell in 1922, at the

same time as the foundation of the ISUP, to Lucien March who was no longer directing the SGF.  It took the

form of about ten large-format plates, the first describing the evolutions of three indexes (the Harvard types

A, B and C) for France, the United Kingdom and the United States, while the other plates represented about

fifty French indexes (finance, domestic and foreign trade), the whole accompanied by a note on methodolo-

gy and a business commentary.

64

Figure 8: Harvard Barometer

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65

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technically, the indexes are worked out much more simply than in the Harvard case: they are expressed as

"values  relative  to  a  monthly  average  calculated  over  the  period  1904-1913",  which  eliminates  neither  the

trend nor the seasonality.  On the other hand they are not the result of groupings mechanically operated on

the  basis  of  the  correlations  observed;  in  most  cases  they  are  only  simple  ratios,  averages  or  budgetary

indexes.  These indexes (Indices in French) would according to A. Sauvy (1954) not be very useful except

for "an unexpected application: the use of price and cost of living indexes for the execution of index-linked

contracts.  A mechanical use applied without discrimination, which led to countless court cases".  

He prefers private initiatives such as the single index known as the "industrial barometer" published daily from

1923 onwards by the Société d'Etude et d'Informations Economiques, or the analyses of Jean Dessirier who

left the SGF to create a monthly publication, the Conjoncture économique et financière, which favours less

fully equipped, less automatic and more critical methods.  Charles Rist's Institut scientifique de recherches

économiques  et  sociales (Scientific  institute  of  economic  and  social  research)  also  publishes  a  quarterly

review  –  l'Activité économique –  to which the business analysis studies refer.

9. Economic crisis, crisis of the barometers, new perspectives

After 1924, however, the curves of the Harvard barometer diverged: shares took off and prices stagnated.  In
his course of 1928, published a few months before the stock-market crash, Professor Aftalion nevertheless

remained confident: "In 1925-26 we witnessed this new phenomenon: a fall in prices together with a rise in

production.  Thus, curve A has not positively failed in its predictive role.  Although it has not foretold a crisis,

to tell the truth no crisis has taken place although there was something of a slowdown in 1927-1928" (Aftalion

1928, p. 276).

Besides, almost everywhere in Europe it was the crash of 1929 and the crisis of the 1930s which dealt a fatal

blow to barometers while at the same time encouraging thoughts about State regulation and intervention, the

publications of X-Crise and especially the Bulletin du Centre Polytechnicien d'Etudes Economiques bearing

witness to this in France between 1932 and 1939 (Armatte 2001).  In effect, these bear the marks of a lecture

on "indexes of statistical movement" by Dugé de Bernonville (13 December 1935) and another by Wagemann

(CPEE, November 1937), and a regular business column written first by Dessirier and then by A. Sauvy, who

made it both a summary of the state of the economy and a mixed platform for the criticism of economic policy
(the 40 hours, for example) and for the promotion of his own ideas12. 

The barometers amassed a great deal of empirical knowledge about economic cycles.  But they are symbols

of the failure of an attempt to establish a reliable forecasting method.  An economic crisis is therefore also a

crisis of methodology.  The die had been cast: there was no talk of barometers after 1930 except to criticise

them, but as Sauvy said (1954, p. 92): "One is therefore inclined to reject definitively, as museum pieces, the

old business barometers used between the two wars.  One should be wary, however, of selling one's horse

before the machine called upon to replace it has been properly developed".  So what was to replace barometers?

Four different tendencies can be perceived in the answers offered to that question in the 1930s and 1940s.

12 A. Sauvy, "A monthly index of the cost of living in France", Bull. 37; "Artificial economic revivals", Bull. 39; "Financial crisis and popu-
lation  crisis",  7  February  1939,  Bull.  55.    See  also  the  contribution  by  Sauvy  published  in  On  the  recurrence  of  economic  crises,
Economica, 1982, his Essay on business analysis and economic forecasting published in 1938 as document No 8 of the CPEE, and
What do I know which he subtitled on economic forecasting (first edition, 1943).  However, it was not until 1938 that a true Institute of
business analysis, directed by A. Sauvy, was created in an administration.  Attached in 1941 to the National Statistics Service which for-
med  the  transition  between  the  SGF  and  INSEE,  it  disappeared  in  1946  and  its  functions  were  shared  out  between  INSEE,  the
Commissariat for Planning and the Department of Economic and Financial Studies (the future Directorate of Forecasting).

66

The  first  comes  from  business  analysts  themselves,  who  see  these  statistical  treatments  as  a  misleading

manipulation of economic data, a cloud of smoke and dust in the eyes, cleverly disguised as mathematical

science, which hides the reality of phenomena more than revealing it.  They want quite simply to return to the

art of business analysis, an art close to that of practitioners which is not cluttered with sophisticated tools.

Partisans of kind of chartism, they criticise the mechanical use of barometers and claim a return to the semio-

logical concept.  This point of view is well represented by Jean Dessirier in Paris and Wagemann in Berlin: 

"These curves cannot ultimately shed light on the mechanism of economic cycles, nor constitute a kind

of barometer as is sometimes believed: (…) the apparent automatism is purely illusory …   More gene-

rally,  would  it  not  be  appropriate  to  react  against  a  certain  tendency  that  consists  in  systematically

squeezing economic phenomena into definitions and mathematical formulas that are rigid and much too

narrow? (...)  The whole art of the statistician, the whole difficulty of economic forecasting reside in this

"feel",  this  flexibility,  this  updating  and  infinitely  sensitive  analysis  of  the  most  useful  elements,  much

more than in the search for  ideal  mathematical   formulas  capable  of apparently replacing a part of

judgement and experience." (Dessirier 1928).  

"One of the greatest mistakes of the American business analysis service is to have worked mechani-

cally in accordance with general formulas.  This led to a complete fiasco when it was claimed that the

American  economy  had  been  correctly  assessed  during  the  upswing  period  of  1927-1929  (…)    The

purely mechanical application of this method cannot be enough; it is only an aid to the solving of problems,

just  as  medical  diagnosis  only  provides  a  basis  for  assessing  the  patient's  condition."  (Wagemann

1938).

"The system of functional relations is subject to the organic-biological principle of economic dynamics.

By this, I mean the fundamental conception of the economy as a living organism, analogous to those

of animal and plant life from two points of view: 1.  Close association of all the parts that make up a

closed system governed by its own laws.  2.  Effect of external influences manifested only in the form

of stimuli which trigger movements, these being subject to the autonomous laws of the economic organism."

(Wagemann 1932, p. 36).

Jean Lescure, professor in the faculty of law, in a controversy with the statistician Bunle over the question of

whether economic studies should be made autonomous in relation to faculties of law, is in the same, much

more reactionary vein in the primary sense of the term; he advocated a return "to the diagnostic methods used

by doctors" on the basis of the actual figures "without correcting or manipulating the figures", without cons-

tructing any index and without eliminating either the trend or the seasonality.  So to speak, a return to the

stone age:

"The tendency here is all too often to misuse indexes.  The figures themselves are in many respects

more instructive than an index (…)  Similarly, it is common nowadays to "weight" or "adjust" indexes.

We now express the most explicit reservations about this way of manipulating the figures."

"Rather complicated methods have been thought up which enable statistics to be corrected, expurgated
in some way, so as to eliminate the influence of long-term and seasonal variations.  These would only
seem to us to be worth recommending if it were possible to apply the spirit of geometry to the obser-
vation of economic phenomena, if it were possible to compare one cycle with another as one compares

triangles or angles.  But a detailed historical study of these phenomena shows that every cycle has

67

its own particular features, that although cycles may be analogous they are never identical (…)  To

eliminate by calculation what it has been agreed to call the trend, is to mask one of the essential cha-

racteristics of economic evolution.  It is to commit an error analogous to that of a doctor who would

care for his patient without regard to the patient's general condition."

One could also quote Baron Mourre, who considered that his "forecasting system [published in 1913] was

along general lines the same as that of the University of Harvard's committee and only differed from it in some

accessory points", among which he included "the elimination of the secular trend [which] is only of very little

use in the forecasting of crises (…)" and "the elimination of seasonal variations" (Mourre 1928, p. 281-282).

The reluctance of the NBER's institutionalists about statistical manipulation and the mechanisation of baro-

meters was not so great, but led its main inspirer, W. C. Mitchell, to return in the second edition of his work

on Business cycles (Mitchell 1930) to the credo of the first edition of 1913: Every cycle is unique and, what

is  more,  irregular,  which  calls  for  detailed  analyses,  and  which  led  him  to  reject  over-simplistic  periodic

models.  He was not even quite sure that the Business cycles, as such, had any conceptual reality.  He listed

most of the statistical works on barometers with a good knowledge of their institutional roots but with poor

technical understanding (which caused him to confuse R and R2).  More interesting is his comparison of five

American  indexes,  which  enabled  him  to  set  up  a  kind  of  typical  picture  of  the  cycle  and  to  introduce  the

NBER's own method, that which he was to develop after 1935, which was published in 1946 by Vining and

which triggered the anger of Koopmans.  This approach aims at a classification and description of cycles from

a simple, morphological point of view.  It starts  from observed  series, looks for their type in the form of a

reference cycle described in detail in 8 symmetrical phases and broken down in various shapes  –  rounded

for prices, triangular for production, dotted for speculation –  and allowing identification, by comparison with

this reference cycle, of advance or lagging indicators that may be pertinent for business analysis.  Although

not statistical, this  is  indeed a totally  empirical  approach but one that distances itself from the techniques

of statistical reduction and from the automatic forecasting aimed at by the barometers, of which Mitchell is fair-

ly moderately critical.

The statistical techniques employed by the barometers are undermined much more by the work of mathema-

ticians and statisticians who decry the erroneous use of correlation measurement and the artefacts that this

measurement can produce.  The most incisive criticism comes from the famous presidential address by Yule

at the RSS meeting in November 1925 (Yule 1926), which dealt with nonsense correlations between time-

series.    Yule  put  forward  the  famous  example  of  the  correlation  between  the  time  series  of  mortality  in

England and the proportion of marriages celebrated by the Anglican church.  Now, that very close correlation

(0.952), although validated by the usual  r significance tests, is clearly meaningless in the sense that one

cannot  imagine  any  direct  connection  between  those  variables.    A  series  of  papers  by  Yule  (1921,  1926,

1927) and by Slutzky (1927) shows that the main decomposition methods used  –  moving averages, diffe-

rentiation, harmonic decomposition  –  have an annoying tendency to create artificial correlations or cycles.

Yule had already pointed to the role of the self-correlations of each series in the final result of the measure-

ment of a connection between two series (Armatte 2000).  Finally, a campaign carried out in 1934-1936 at the

International Institute of Statistics by the mathematician Maurice Fréchet violently attacked the mistaken use

of the correlation coefficient wrongly enlisted in mixed operations to measure the dependence level and the

linearity of that dependence, pointing out that the value zero is in no case synonymous with the absence of
a connection, while the value  1  only means that there is marked linearity.  Via a broad survey among statis-

ticians all over the world and motions passed at two IIS meetings, but also via the mathematical work of the

Italian school (Gini, Pietra) and his own work on the notion of distance, Fréchet sought to make more relati-

ve the excessive significances yielded by the correlation coefficient.  Its maximisation, widely used to deter-

68

mine  the  lag  between  cycles  of  the  series  in  barometer  construction,  was  the  direct  aim  of  that  campaign

(Armatte 2002).

A fourth and last reaction also started from the failure of the statistical method used by barometers, and com-

plained  that  its  result  was  a  methodology  founded  solely  on  inductive  inference  and  the  consideration  of

repeated  regularities,  a  method  which  has  shown  its  limits  in  economics  as  in  the  natural  sciences  (see

Bode's law in astronomy).  But this criticism, poles apart from that of the business analysts, tried to be positive

and called for yet more theory and yet more mathematics.  It was supported by the econometrists who met

in the Econometric Society founded just after the crash (30 December 1930), and even more among the small

group of the Cowles Commission founded two years later.  They called for an articulation of the deductive

method (mathematical economics) and the inductive method (statistical economics), and sought several alter-

natives to the construction of barometers.  The first was that of the small oscillator models proposed by Frisch,

Tinbergen  and  Kalecki  between  1933  and  1936,  which  sought  an  explanation  of  cycles  in  terms  of  a  dual

mechanism  combining  impulses  and  propagation  in  a  device  with  its  own  dynamic  characteristics.  The

second form of modelling is that of stochastic structural modelling that would constitute the paradigm of eco-

nometrics for over thirty years.  At  the core of tthis  methodology,  which  was made quite explicit by the

"manifesto" of Haavelmo (1944), the notion of a stochastic structural  model  replaces  inductive statistical

inference based on co-variations, a hypothetical-deductive approach based on "autonomous" relations made

explicit by equations that are both functional and stochastic, and a new statistical tool: the hypothesis test.

Curiously,  however,  it  was  the  work  of  Tinbergen  and  his  macro-econometric  models  of  the  Netherlands

(1936)  and  then  the  USA  (1939)  which  imparted  a  certain  visibility  to  the  econometric  approach.    Now

Tinbergen, who was fairly distanced from the small Cowles Commission circles, was trained in business ana-

lysis at the Central Bureau of Statistics which he entered in 1928, via the practice of barometers  –  of which,

it is true, he was rather critical –  as initiated by M. J. de Bosch Kemper, who adapted the Harvard example
to the conditions of an open economy13. According to van den Bogaard (1999, p. 301) since 1935 he had
expressed the need to replace the barometric approach by the use of "quantitative schemes" expressing a

theoretical economic structure in the form of dynamic relationships between certain aggregates and prede-

termined variables: "In order to know the eigen-movements we have to construct a model which consists only

of regular relations".  It was, besides, to test the theories of BC that he was recruited by the Society of Nations,

an unexpected context for the publication of his model of the economy of the United States. After he too had

tried out highly theoretical models inspired by theoretical physics and then engineering science, he reverted

to statistical tools, which play a dominant part both in the specification of the model and in its appraisal, to the

point that he gave the name "method of multiple correlations" to his methodology set out in the first volume

of the report of 1939 (Boumans 1992, Armatte 1995).  Thus, in Tinbergen's macro-economic model there are

many elements of continuity with the barometer method: the same objective of forecasting and action upon

an object of simulation with a view to effective economic policy, the same obsession with cycles, the same

idea of temporal co-variation, a central utilisation of correlation and graphs.  These elements are besides the

ones that the Cowles Commission would want to eliminate by appealing more for the introduction of an a prio-

ri structural model based on relations assumed to be autonomous, and on the range of probabilistic hypothe-

ses that enable confusion between the validation of that probabilistic model by statistical tests and a valida-

tion of economic theory.

13 This Dutch barometer comprised 4 series (instead of 3 for Harvard) - the markets for goods, securities, money and labour - represen-
ted separately (like the indexes of Lucien March) but superimposed on foreign series (American, English and German).

69

Nothing, however, is further from the philosophy of barometers than this emphasis on a theory, a separation

between exogenous and endogenous factors, the expression of organic connections by functional relations,

hypotheses that could be specified a priori and tested a posteriori by bringing in the calculus of probabilities.

There, we are in another world.

10. Conclusion

For about twenty years barometers were the favoured framework of comparison between the various economic

methodologies of the years between the wars  –  morphology, semiology, harmonic analysis, correlation analysis

–  and they have continued to be a reference – positive or negative  –  for modelling in terms of oscillators or

in terms of structure.  They constituted the favoured territory for the importation of the main tools of mathe-

matical statistics into economics.  For that reason they compelled economists to reconstruct the significance

and efficacy of those tools.  They provided a good empirical knowledge of cyclic phenomena, but did not allow

the testing of competing economic theories on cycles.  They failed to provide sufficiently reliable forecasts,

and even more to allow control and regulation of national economies.  Discredited by the major crisis of 1929,

they served as a  stimulus to the design of a new econometric approach which also integrated the a priori

knowledge of economic mechanisms more effectively.  It is not without malice that, to end with, we recall the

reappearance at the end of the 1970s of their philosophy of a non a priori treatment of chronological series

(for example, in the form of VAR models), when structural modelling began to lose its allure under the impact

of the oil shock and the overlapping criticisms of Lucas and Sims.

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71

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74

EUROSTAT COLLOQUIUM

HISTORY OF BUSINESS CYCLE ANALYSIS

Luxembourg, 12 November 2001

KONDRATIEFF 

OR HOW TO CONVINCE PEOPLE THAT 

LONG-TERM ECONOMIC EXIST

Alain Carry

Senior Researcher, CNRS
Centre de Recherche en Histoire de l'Innovation 
UMR 8596 CNRS- Université Paris Sorbonne

E-mail: Alain.carry@paris4.sorbonne.fr

75

TABLE OF CONTENTS

1. The intellectual journey of Nicolai Kondratrieff and

the problems of his writings

2. Kondratrieff’s methodological framework

2.1  Dynamic analysis of the business cycle and the hypothesis

of large cycles

2.2 Statistical materials and methods of observation

3. 

Interpretation of the large cycles

3.1 Essential capitals goods and degree of development of the

productive forces

3.2 Free capital and the rythm of development

78

83

85
88

92

92
98

3.3 An internal contradiction in Kondratieff’s explanation

106

76

The Kondratieff cycle has been the unit for measuring economic time ever since Joseph Schumpeter1 gave

the name of the Russian economist to the long cycles of economic development.

Schumpeter thereby brought to a close a dispute on the existence of possible economic movements of lon-

ger  durations  than  those  postulated  up  to  then,  which  had  been  identified  by  Juglar  in  1860.  Meeting
Marjolin's  doubts2 on  the  issue  head  on,  he  recognised  the  reality  of  them  in  response  to  the  significant
amounts of statistical material gathered and the agreement among numerous publications.

From the end of the 19th and the beginning of the 20th centuries, research into the conditions of economic
expansion  have  revealed  "undulations"  of  long  duration.  In  his  study  of  the  industrial  crises  of  England3,
Tugan-Baranovsky detected a succession of periods during which industry develops faster, the process of

which could not be captured by traditional crisis theory4 and Van Gelderen sought an explanation for the cau-

ses of the changes in the "purchasing power of money"5 to determine different periods in the evolution of

capitalism6.  After the First World War, the number of studies grew, and gradually the vocabulary in use evol-

ved:  the  writers  made  fewer  and  fewer  references  to  metaphors  related  to  movements  of  the  sea  (as  Van

Gelderen  had  done7)  and  turned  to  using  phrases  expressed  in  terms  of  cycles  (Cassel8,    Dupriez9,

Spiethoff10,  Wageman11,  De Wolff12,  Woytinski13) starting out from ideas expressed on the theories of over-

capitalisation or quantity theory of money. 

While, by choosing the name of Kondratieff over that of any other authority to describe this type of "cycles14,"
Schumpeter did cause the name to go down in history, at the same time he eliminated Kondratieff from memo-

ry as an economist of originality and independence of thought. 

Soon, nothing was left of him but "his" famous statistical method of trend-deviation. His analysis of "move-

ments  in  the  form  of  sing and falling  waves" in  economic  activity  was rapidly reduced to a semantic

1 Schumpeter J.A., Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process, 1939, 1st edition, 2 volu-
mes, MacGraw-Hill Book Company, New York, Toronto, London.
2 Marjolin R., 'Mouvements de longue durée de prix et extraction des métaux précieux,' in: L'activité économique, January 1937 and
'Rationalité et irrationalités des mouvements économiques de longue durée,' in: Annales Sociologiques, series D, book 3, 1938, pp. 1-38.
3 Tugan-Baranovsky M., Les crises industrielles en Angleterre, 1913 (translated from the 2nd, revised and amplified, Russian edition),
Giard & Brière, Paris, 476 pages.
4 'The periodic return of epochs of prosperity and of crisis is a characteristic feature of the capitalist mode of production. But these fluc-
tuations must not be confused with the changes in the situation of industry which extend over extremely long periods,' ibid., pp. 32-33.
5 Gelderen J. (Van), 'Springvloed. Beschouvingen over industrielle ontwikkeling en prijsbeweging,' in: De Nieuwe Tijd, vol. 18/1913, no.
4 (April), pp. 253-277, no, 5 (May), pp. 369-384 and no. 6 (June), pp. 445-464.
6 'If we consider the stages of the movement of prices (…) as manifestations of the different phases of the capitalist development, the
knowledge of the expensiveness will also mean the knowledge of the essence of capitalism,' ibid., p. 253.
7 The title of his article referred to above does indeed translate as '"Spring Tide. Considerations on industrial development and the move-
ment of prices.'
8 Cassel G., Theoretische Sozialökonomie, 4th edition, Leipzig, 1927, XIII-649 p..
9 Dupriez L.H., 'Einwirkungen der langen Wellen auf die Entwicklung der Wirtschaft seit 1800,' in: Weltwirtschaftliches Archiv, Vol 42, no.
1 (July), 1935, pp. 1-12.
10 Spiethoff A., 'Krisen, in: Handwörterbuch der Staatswissenschaften, Vol 6: Kriminalstatik- Reklamesteuer, Jena, p. 8-94, 1925 (1st
edition: 1923).
11 Wagemann  E.,  Struktur  und  Rythmus  der  Weltwirtschaft.  Grundlagen  einer  weltwirtschaftlichen  Konjunkturlehre,  Hanseatische
Verlagsanstalt, Hamburg, 1931.
12 Wolff S. (De), 'Prosperitäts- und Depressionsperioden,' in: Jenssen O. (ed.) Der Lebendige Marxismus, Festgabe zum 70. Geburstag
von Karl Kautsky, Jena, 1924, pp. 13-43.
13 Woytinski  W.,  'Das  Rätsel  der  langen  Wellen,'  in:  Schmollers  Jahrbuch  für  Gesetzgebung,  Verwaltung  und  Volkswirtschaft  im
Deutschen Reiche, Munich and Leipzig, 55th year, 1931, no. II, pp. 577 and ff. 
14 He explains in Business Cycles that 'it was N.D. Kondratieff however, who brought the phe-nomenon fully before the scientific com-
munity and who systematically analyzed all the mate-rial available to him on the assumption of the presence of a Long Wave, characte-
ristic of the capitalist process,' op. cit., volume 1, p. 164.

77

argument on the terms to be used (cycles, not cycles?) or an existential argument about empirical verifica-

tion of them, and became more or less identified with what was, in fact, only Schumpeter's interpretation of

the long term.

Kondratieff's original goal was that of a rural economist: to stipulate the conditions under which the price ratios

between agricultural products and industrial products evolve, in order to determine the framework of agrarian

policy in Russia. It was in this context that he concentrated on analysing the different types of economic busi-

ness cycles and undertook his research into the "large cycles within business." 

In this paper we shall primarily be concerned with Kondratieff the economist. His working life as an econo-

mist was short: from 1920 to 1928, the year in which he was dismissed from office before being interned from

1930 to 1938. For all the brevity of that period, he left behind him an important and closely-argued body of

work, ignored or barely known for too many years and consequently largely misunderstood. Today, a signifi-
cant portion of his writing is finally accessible15,  making it possible to reevaluate it and begin to present his
vision of the large economic cycles in a more coherent manner. 

This paper sets out to synthesise Kondratieff's work, in order to offer an interpretation of the way in which he

described the internal workings of the large cycles. It will be seen in the course of the paper that the approach

here is far from mechanistic and that from many points of view, Kondratieff appears modern.

In the first part, we shall present his intellectual and professional journey and describe how his writings rea-

ched the West. 

The second part describes the methodology established in order to verify the hypothesis of the existence of

"large cycles within business." 

And the final part will be devoted to reconstructing and critiquing the theory developed by Kondratieff on the

basis of relations between agriculture and industry to explain the regular alternation of long periods of expan-

sion and recession. 

1. The intellectual journey of Nikolai Kondratieff and the problems of 

distribution of his writings

Studying the evolution of long-term trends in the business cycles of the economy was in fact a methodologi-

cal detour from the primary object of Kondratieff's research, namely the conditions under which the agricultu-

ral production of Russia, and then of the Soviet State, could be profitably utilised. 

1.1 Nikolai Dimitrievich Kondratieff was born in 1892 into a peasant family living in a village about 300 kilo-

metres north of Moscow. Following brilliant secondary studies, in 1911 he was admitted to the Faculty of Law

of  Saint  Petersburg  where  he  studied  under  M.  I.  Tugan-Baranovsky  and  the  economic  historian  V.  V.

Sviatlovskii.  In  1915,  he  submitted  his  dissertation,  which  aroused  considerable  notice,  devoted  to  the

'Economic development of the Zemstvo of Kinechma in the province of Kostroma.' This in turn allowed him

to seek election to the professorial chair of political economics. Passionately involved in mathematics and for-

mal  logic,  he  became  head  of  the  Department  of  Economic  Statistics  of  the  Union  of  Zemstvos  of  Saint

Petersburg at the age of 24, in 1916, while the country was deep in war with Germany.  His primary concerns

15 In particuliar with the publication of the principal texts of Kondratieff in their entirety. translated into French from the Russian originals
by Louis Fontvieille, Les grands cycles de la conjoncture, Economica, Paris, 1992, LIII-556 and index. 

78

in this post were provisioning and the agrarian question. This was his position when the Russian Revolution

broke out in 1917. 

He  then  worked  on  the  various  undertakings  of  the  Commission  on  Agrarian  Reform  under  the  Central

Agrarian Committee and published a work on 'The Agrarian Question' in which he set out his views. A mem-

ber of the Socialist Revolutionary party, he was in favour of an orderly agrarian reform, based on the one hand

on assignment of the land to those who worked it, by elimination of private ownership of land, and on the other

on  the  development  of  co-operatives  made  up  of  volunteers.  While  a  member  of  the  Committee  on

Provisioning of the Soviet of Worker Deputies and the Provisional Committee of the State Duma, he became

vice-president  of  the  State  Committee  on  Provisioning before  being  appointed  Vice-Minister  of  Supply  on

5 October 1917, just a few days before the October Revolution. Because of his opinions on the agrarian ques-

tion, Kondratieff did not immediately join the October Revolution, fearing as he did a policy which would lead
Russia "down the path of famine16."  

Moving to Moscow in 1918, he specialised in the study of agricultural markets, in particular the market for flax

at  the  behest  of  the  Central  Union  of  Flax  Producers.  Rapidly  becoming  a  member  of  the  Agricultural

Academy of Peter the Great (which was to become the Timiriazev Agricultural Academy), he then published

numerous works on the subject, some of which concentrated on analysing the mechanisms for adjustment of
the ratio between agricultural prices and the quantities of agricultural goods produced17. It is thus not surpri-
sing that Kondratieff should develop research on the analysis of business cycles. He did so in two different

posts: 

(cid:122) The first was the Institute for Business Cycles of the Ministry of Finance which he headed from the time

it was established in 1920. This was to offer him the possibility of developing theoretical works on busi-

ness cycles and on forecasting. He then surrounded himself with young specialists in varying domains

(mathematics, statistics, economics, history of science) who – for example the young mathematician

E. E. Slutsky – would subsequently become famous. He created two journals under this Institute18,  in

which his preliminary researches on long-term movements19 were to appear. 

(cid:122) The second was the Department of Statistics and Agricultural Economics at the Ministry of Land which,

starting in 1923, was directly associated with the preparation of the forecast and plan for agricultural

and forest development20.  In this connection, in 1924 he travelled to various Western countries, inclu-

ding the United States, Canada, Britain and Germany to study the organisation of their agricultural pro-

duction, development trends in their production, the intervention mechanisms and more generally the

situation on the world market for agricultural products. For him, the purpose was to prepare the tools
for planning and controlling agriculture21. 

16 He published a first critical document on the policy of the Bolsheviks under this title, then a second one under the title The Bolsheviks
in Power: Socio-political Outcome of the October Coup d'Etat.
17 Including: The Production and Marketing of Oilseeds in the Interest of the Peasant Economy (1921), The Market for Cereals and the
Regulation of it during the War and the Revolution (1922), The World Cereal Market and the Prospects for Our Cereal Exports (1923).
18 The Economitcheski Buleten Konjunkturnovo Instituta (Economic Bulletin of the Institute for Business Cycles) which published statis-
tical information on the Soviet State and on the world economy and a theoretical journal Voprosy Conjunktury (Problems of Business
Cycles) for theoretical research. 
19 'The World Economy and its Business Cycles Before and After the War' (1922), 'Discussion of Questions On the World Economy
and Crisis' (1923) and 'On the Concepts of the Static, the Dynamic and the Business Cycle in Economics' (1924). 
20 The  Bases  of  the  Forecast  and  Plan  for  Development  of  the  Agricultural  Economy (1924)  and  Prospects  for  the  Development  of
Agriculture (1924).
21 This was to result in two publications: On the Problems of Forecasting and Plan and Forecast.

79

The synthesis of all of these different undertakings would subsequently feed into his thoughts on long-term

economic dynamics. 

In 1925, at a seminar at the Economics Institute of the Association of Social Sciences Research Institutes he

presented an initial version of his thinking under the title 'The Large Cycles Within Business.' The confronta-

tion  between  himself  and  his  opponents,  in  the  forefront  of  whom  we  find  Oparin,  Bogdanov  and  Falkner,

would cause him to become more stringent with his methods of observation and his general approach to the

issues. 

In  1928,  he  published  two  important  works.    One,  picking  up  the  title  of  his  first  paper  ('The  Large  Cycles

Within  Business')  set  out  to  demonstrate  the  existence  of  long-term  movements,  and  the  other  ('The

Dynamics of Agricultural and Industrial Prices') sought to interpret them. 

In terms of economic policy, this research led Kondratieff to adopt the idea that agriculture should be used as

a basis from which to develop light industry, with the first step being to make the producers have an interest

in the results of their work, through the action of the market. The co-operative form of development of agri-

culture then seemed to him the best way, socially and economically, of obtaining this result. The maintenan-

ce of a domestic market, by keeping a link with the world market, would promote the spread of technical or

organisational innovations from which industry would benefit. It is evident that these views, compatible with

the New Economic Policy, were incompatible with the priority which was to be given, starting at the end of

1927, to heavy industry and to the collectivisation of agriculture. 

It was because of his involvement in the conduct of agricultural policy between 1920 and 1928 that Kondratieff

would be dismissed from his various directorial posi-tions, and then arrested in July 1930, not because of his

theories on large cycles. Sen-tenced to 8 years in prison, he was interned from February 1932 in the Suzdal

"political isolation facility." At the end of a second trial in 1938, he was sentenced once more and shot at the

age of 46.

1.2  Through  all  of  this  time,  Kondratieff  had  built  up  a  dense  and  closely-argues  body  of  work.    Until  very

recently, it has been difficult to know anything about it, from the few work of his that had reached us. But, even

when  they  were  translated,  several  problems,  some  of  them  cumulative,  distorted  the  knowledge  of

Kondratieff's thinking.

The  first  problem is  the  language  of  the  translation.  For  example,  his  approach  to  the  long  movements  is
generally considered as being very mechanistic. However, in his 1926 work 'Problems of Forecasting22,'  he

develops a probabilistic approach to business cycles on the basis of a consideration of the relations of cau-

sality and determinism in economics. While it was soon translated into German (although only partially), this

article  was  to  remain  completely  unknown  and  would  almost  never  be  cited  by  the  long  cycle  specialists,

doubtless because it was never translated into English. Only a few authors with an interest in the problem of

planning would sometimes make reference to it23. 

The second problem is the quality of the translation. Kondratieff uses the term "wave-like movements" when
he refers to the actual phenomenon itself and "cycles" when he is seeking the correct concept. The transla-
tions into German (Wellen or wellen-förmige Bewegungen) and French (vagues ou mouvements en forme de
vagues) are correct. 

22 In: Voprosy konjunktury, volume II, pp. 1-42. French translation in extenso from the Russian: 'Problèmes de prévision,' in: Les grands
cycles de la conjoncture, Fontvieille L. ed., Economica, Paris, 1992, pp. 47-104
23  For example,  Carr and Davies, Foundations of a Planned Economy, 1926-1929, Penguin, 1969.

80

What is less correct is the descriptor associated with these waves or cycles. It has become customary since

the translation into German24 of his works on the "long cycles," and has unfortunately remained so until the

1984 translation25,  to talk of long [lang] cycles (or waves), no doubt in order to stress the contrast with the

short cycles, or by reference to the long term as the horizon of economic analysis, as Alfred Marshall was to

develop this. 

But, the term deliberately used by Kondratieff was "large cycles." For him the important thing was to indicate

that the process repeats over time (hence his choice of the word "cycle"), but also that it leads to an overtur-

ning of all the economic conditions (hence the adjective "large"). 

We rarely find any trace of this intention of Kondratieff's in the Western literature, although this term was to

be used by the German translator of the 1928 article on the 'Dynamics of Agricultural and Industrial Prices'26
to  characterise  the  fluctuations  of  price  movements  ("die  großen  zyklischen  Schwankungen  des

Preisniveaus"). We also find a trace of this term in the title of a German article critical27 of Kondratieff's posi-

tions.  In  the  French  sphere,  Verley28 also  used  this  term  in  a  new  translation  of  some  extracts  from

Kondratieff's works.

The third problem is that of the choice of the texts for translation. There are several versions of the article
devoted to the analysis of the "large cycles within business." The most complete dates from 1928, because

Kondratieff integrated new data to refute the monetarist positions of his opponents, which allowed him to bulk

up the theoretical framework of his concept of the large cycles. However, this document, the most interest-

ing of all, has never been translated, although a participant in the various discussions did make a summary

of it in a German journal29.  

The only text which has been available for a long time corresponds in fact to a preliminary version which res-

tricts itself to studying the form of the wave-like movement and to recording the regular characteristics of each

period. In this part devoted simply to a record of the research, Kondratieff also does not speak of phases, as

Simiand was to do later, but of "long periods of increase or decrease of the business cycles" or alternatively

of "periods of rising wave and of falling wave." These interim considerations cannot be taken as theoretical

explanations of the phenomenon revealed, which he was not to develop until the final version. 

This "interim proposal" was to be published in German in Schumpeter's and Lederer's journal30 and it was
on the basis of this version that it would be retranslated into English for publication in 1935 by the Review of

Economic  Statistics31,    but  in  an  abbreviated  version32 which  no  longer  contained  the  presentation  of  the

24 Kondratieff N.D., 'Die langen Wellen der Konjunktur,' in: Archiv für Sozialwissenschaft und Sozialpolitik, Tübingen, no. 56/3, 1926,
pp. 573-609
25 Kondratieff N.D., The Long Wave Cycles, translation from the Russian by Guy Daniels of the 1926 version, Richardson and Snyder,
distributed by E.P. Dutton, 1984, New York.
26 Kondratieff  N.D.,  'Die  Preisdynamik  der  industriellen  and  landwirtschaftlichen  Waren  (Zum  Problem  der  relativen  Dynamik  und
Konjunktur),' in: Archiv für Sozialwissenschaft und Sozialpolitik, Tübingen, no. 60/1 (August), 1928, pp. 1-85.
27 Herzeinstein, 'Gibt es grosse Konjunkturzyklen?' in: Unter dem Banner des Marxismus, no. 1 and 2, 1929.
28 Verley P. [1987], 'Commentaire d'extraits d'articles de Kondratieff,' in: Revue française d'économie, no. II/4, Autumn, 1987, p. 186
and ff.
29 Pervouchine S.A. [1930], 'Account of the Arguments on the Large Cycles within Business at the Moscow Institute of Economics,' in:
Weltwirtschaftliches Archiv, Gustav Fischer, Jena, 1930.
30 Kondratieff N.D., 'Die langen Wellen der Konjunktur,' in: Archiv für Sozialwissenschaft und Sozialpolitik, Tübingen, no. 56/3, 1926, pp.
573-609.
31 Kondratieff N.D. [1935], 'The Long Waves in Economic Life' (translated from the German by W.F. Stolper), in: The Review of Economic
Statistics, no. 17/7, November, 1935, pp. 105-115.
32 The complete text appeared in Review in 1979 (volume II, no. 2, 1979, Spring, pp. 519-562).

81

method, the economic significance of the "secular trend" (points II-III), or the studies on changes in wages

and in international trade (points VI-VII). In this text, Kondratieff presents some graphs corresponding to the

9-year moving averages only of the deviations of the gross data relative to the "theoretical series," which cau-

sed many authors to interpret these curves as the smoothing of the actual movement of the economic com-

ponents studied33.  

The fourth problem is that certain parts of the texts chosen for translation were cut out. By hiding a part of the
demonstrations, this results in a deformation of the the-ses defended by Kondratieff, or even in a reversal of

them. This is particularly the case with his study 'On the Concepts of the Static, the Dynamic and the Business

Cycle in Economics34'  dating from 1924, the English translation35 of which is much shorter.  The object of this

text was to put forward the concept of the business cycle, as a working idea which would make it possible to

observe and explain the conditions under which the process of change of the components of economic life

takes place.  This formal research led the author to redefine the notions of static and dynamic analyses, to

break down the economic evolutions into their reversible and their irreversible aspects, and to differenti-ate

the general business cycle from any particular simple business cycle, and from the differential business cycle.

From that point, he deduced general principles for the use of concrete methods of observation, and in parti-

cular statistical methods. In parallel with his demonstration, he systematically sought to relate his own posi-

tion to that of the great theoretical schools (from the physiocrats to the Marxians, via the classical theo-rists

and  the  marginalists),  or  to  the  methods  used  by  certain  authors  to  analyse  the  business  cycle  (Sombart,

Wagner, Schumpeter, Marshall, and so on). He even introduced a very modern discussion on exchanges of

concepts between sciences, with regard to the use of the concepts of reversibility and irreversibility. 

From all that, very little remains in the article published in the American journal: all of the references to busi-

ness cycles and to the discussions have been systematically erased, with even the phrase "business cycle"
being dropped from the title36.  Thereby, all of the analysis of the irreversibility of the dynamic movement has
disappeared, and as a result P. Norel, for example, can maintain nowadays that Kondratieff "considered the

time of the long cycle to be reversible," while Norel holds the opposite view, namely "the non-repetitive cha-

racter of the long cycle, never returning to the identical37."  A further effect can be noted with Gattei: mista-

kenly, he thought that Kondratieff was not to develop his thoughts on the "relative dynamic business cycle"

until 'The Dynamics of Agricultural and Industrial Prices' in 1928, when the criticisms of his paper on the large

cycles struck home, forcing him to respond to them by introducing some supplementary ideas38.  The reality

is different. 

1.3 From the point of view of the history of economic thought and of the relationship between Kondratieff and

Schumpeter, this problem of translation is important. In the paper 'On the Concepts of the Static, the Dynamic

and the Business Cycle in Economics,' he justified his preference for the concept of the business cycle, which

33 We may quote H. Guitton (Les fluctuations économiques, Sirey, Paris 1951, p 160) and more recently N.H. Mager (The Kondratieff
Waves, Praeger Publishers, New York, 1987, p 29).
34 Kondratieff  N.D.,  «  'On  the  Concepts  of  the  Static,  the  Dynamic    and  the  Business  Cycle  in  Economics,'  in:  Sotsialistitcheskoie
Khoziaistvo, volume 2, no. 4, 1924, pp. 349-372.
35 Kondratieff N.D., 'The Static and the Dynamic View of Economics,' in: Quarterly Journal of Economics, no. 39/2, 1925, pp. 575-583.
36 A persuasive example can be supplied with the following phrase from the 1925 article "having defined the static and dynamic points
of view, we have to characterise the various forms of dynamic processes,"  whereas in the original, it was "having defined the static and
dynamic points of view, and explained how we differ with respect to other attempts of this type, we have to, for the following defi-
nition, that of the business cycle, characterise the various forms of dynamic processes" (words in bold are deleted from the American
version).
37 Norel P. [1991], 'Cycles longs Kondratieff et crises: une approche épistémologique,' in: Économies et Sociétés, Histoire quantitative
de l'économie française, AF no. 16, February, 1991, p 174.
38 Gattei G., 'Introduction to N. D. Kondratieff,' in: I cicli economici maggiori, Cappelli, Bologna, 1981, p 13.

82

led him to criticise the wrong trail which Schumpeter was following in analysing the stationary economy in

order to understand economic development39.  

The perception of the unity and continuity in time of the theoretical concerns of Kondratieff was thus comple-

tely distorted by the conditions under which his works were distributed outside the Soviet Union, with the lat-

ter doing nothing to improve the situation by hiding his works under a bushel for almost 60 years. 

Kondratieff's theoretical project was a mature one from the point of view of its object and its methodology. The

theory of the large cycles is far from being just a commentary on statistical curves. On the contrary, produc-

tion of them is one component among others. Their function was to corroborate or refute pre-existing hypo-

theses. This work of investigation was not incomplete, because it was only provisional, nothing more than one

stage in a wider project. Unfortunately, Kondratieff was not able to continue his research, and what we have

is a body of work which, while promising, is uncompleted. 

In order to have a picture of Kondratieff's difficult intellectual position at the end of the Twenties, when he was

trying  to  defend  his  hypotheses  concerning  the  "probable  existence"  of  large  cycles  in  the  long  business

cycles of the economy, we could use the same words as those of Keynes at the end of the preface of the first

edition of his General Theory: "The difficulty lies, not in the new ideas, but in escaping from the old ones,

which ramify into every corner of our minds." 

Indeed, the nature of the criticisms directed at his general method of approaching the long movement reveals

clearly the lack of understanding of the theoretical concept underlying the theory of the large cycles and the

difficulty of conceiving of development in a new way. This idea, apparently extremely simple, that the rhythm

of the irreversible movement of development is rendered by the reversible movement of its structural compo-

nents calls into question all the benchmarks of the  existing theories, and  construes everything quite diffe-

rently. Indeed, this idea which combines differential analysis and dynamic analysis of the business cycle veers

off towards a systemic approach to the long movement, the regulator of which might be the changes in the

relative prices as between industry and agriculture. However, it would be erroneous, in seeking to renew the

meth-odology for approaching the large cycles, to assign unalloyed virtue to Kondratieff's analysis of them,

or to present it as a precursor of the theory of regulation. The explanation supplied suffers, in fact, from an

internal flaw of logic relating to the role attributed to agriculture and from a complete lack of any theory of dis-

tribution, which in turn makes the mechanism of distribution of the transfers of values totally obscure. 

2. Kondratieff’s methodological framework

Kondratieff has never been truly recognised as a fully-fledged economist, as can be seen from the absence

in economic literature, starting right from Schumpeter in his Business Cycles, of any attempt to make a gene-

ral presentation of the goals of his research or the issues related to it. 

On the other hand, the opinions expressed on his body of work are numerous, although they are as divergent
as they are emotional: Marjolin dismissed Kondratieff as a "vulgar materialist," the better to be able to ignore
him subsequently, whereas Imbert incensed him by "parking" him among the Marxian theoreticians. While the
former certainly had not read him, the latter did not attempt to justify his classification by showing how a link
is created, for example, between the large cycles and the law of the tendential decrease in the average rate
of profit.

In fact, the implicit criterion by which Kondratieff is judged always lies, including in the multiple intermediate
variants  between  those  two  extreme  positions,  in  the  assessment  of  the  validity  of  the  method  he  used  in

order to demonstrate the existence of the "large cycles."

39 This had to do with the following works of Schumpeter: Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie, Duncker
und Humbolt, Leipzig, 1908 and Theorie der wirt-schaftlichen Entwicklung, Duncker und Humbolt, Leipzig, 1912.

83

As a consequence of this focus of the criticism on the mode in which the statistical data were processed, the

judgment by the different authors on Kondratieff's approach almost always starts out from the result, namely

the statistico-empirical demonstration of the existence of the large cycles, irrespective of any examination of

the prior theoretical path followed to reach that point. From this point of view it is astonishing to note that bet-

ween the article by Garvy in 194340 and the work of Grangeas41 in 1991, the order in which Kondratieff's

work is presented remains the same: first "the method" (reduced to the statistical processing), then "the reach

of the results," and finally "the criticism42." 

The poor way in which Kondratieff's body of work has been distributed may largely explain this difficulty in

reconstituting the genesis of his thought in order then to give the proper weight to the importance in it of his

instruments of statistical verification. But that cannot explain the whole situation. 

This approach to the work of Kondratieff is also symptomatic of the methods generally used by the theoreti-

cians described as "long cycle." For a very long time, right up to today, the latter, setting out from statistical

series  representative  of  the  result  of  economic  activity  (price,  production  and  consumption  levels,  etc.)

thought a priori to reflect the overall movement of the economy, have sought a visual – and thus supposedly
objective – trace of the wave-shaped movement43.  A chaining together of the explanatory causes was then
deduced from that. 

Kondratieff's  investigative  method  is  thus  reduced  to  no  more  than  the  statistical  tool  selected  (the  "trend

deviation") plus the choice of the mode of pre-processing of the series selected (conversion to constant pri-

ces from gold prices, normalisation). This definition is of course much too restrictive. It does not answer one

question which is, however, essential: why and how did Kondratieff come to be using these tools of empirical

verification? 

Of  course,  it  could  be  considered  that  he  was  no  more  than  a  skilful  manipulator44.    Some  people  in  the
Twenties, in the arguments caused by his work, were not far away from thinking that. But this hypothesis has

to be rejected: it matches neither the quality of exposition and synthesis of his articles (including in their trans-

lated versions), nor the responsibilities which were entrusted to him after the Revolution of October 1917.

Rather, it was the whole prior theoretical path which he followed to understand the causes of price movements

relating to agricultural production that was to cause Kondratieff to define the "large cycles" as a relevant and

scientifically-based subject for analysis of the conditions of development of the market economy. 

It can consequently be maintained that the theory of the large cycles, initially understood as a theory of a
rhythmical economic development, is pre-existent in Kondratieff to the statistical demonstration of it45. 

40 Garvy G.,  'Kondratieff's Theory of Long Cycles,' in: The Review of Economic Statistics, vol. 25, no. 4, November, 1943, pp. 203-220
41 Grangeas G., Croissance, cycles longs et répartition, Economica, Paris, 1991, 326 pages.
42 Note must nevertheless be taken of a major difference between the two authors, even if this does not have an impact on the argu-
ment put forward: the first author refutes the existence of the large cycles, the second does not.
43 Imbert, for example starts his work with a very long first part devoted to "the statistical analysis of the long-term movement," before
going on to "the statement of the theories" and "the nature and the causes" of this long-term movement (Des mouvements de longue
durée Kondratieff, Bibliothèque de la Faculté de Droit et des Sciences Économiques d'Aix-en-Provence, La Pensée Universitaire, 1959).
44 Or even a usurper of a "discovery"  made by others, if one accepts the arguments of Baran and Sweezy, when they write on the sub-
ject of long cycles "called by Schumpeter 'Kondratieff cycle(s)' to honour the Russian economist who first claimed to have discovered a
cycle about fifty years long and relating to the history of capitalism in the 19th century and the beginning of the 20th," Le capitalisme
monopoliste, François Maspéro, Paris, 1970, p. 209, note 12.
45 Kondratieff is also explicit in his theses on large cycles: "In order to establish whether these large cycles really did exist, we studied
the statistical data..." ('Les grands cycles de la conjoncture,' in: Les grands cycles de la conjoncture, Fontvieille L. ed., Economica, Paris,
1992, pp. 165 [noted below in Kondratieff 1992d]).

84

By contrast to what is generally held by his critics, he did not develop an induc-tive method. On the contrary,

he differentiated himself radically from the historical German school, and, on this specific point, from Tugan-

Baranovsky. It was his conception of capitalist economic development that led him to seek the tools which

would be the most suited to empirical investigation. The extreme virulence of the arguments caused by the

publication of his works in the Twenties can be explained in part, leaving aside the particular socio-political

context of the Soviet Union, by the innovative way in which he raised and resolved the problem of long-term

movements.

In consequence, the analysis cannot be limited merely to the technical aspects of the methods, but has to

cover also Kondratieff's general methodology within which the latter are produced and incorporated.

2.1 Dynamic analysis of the business cycle and the hypothesis of large cycles 

Kondratieff sought throughout his work to make his scientific approach explicit by laying down a number of

methodological principles and by defining stages in his researches. We find these concerns reflected in all his

writings. During the arguments caused by his various publications (on business cycles in 1922, on the defini-

tion of the static relative to the dynamic and of course on the large cycles) he always states the methodolo-

gical  framework  which  he  has  set  for  himself.  Very  often,  he  admonishes  his  opponents  on  questions  of

method and a lack of rigour in their demonstrations. He also always sought to locate his position relative to

the major theories and with respect to the work of other international institutes working on the same subject

(for example, he placed the concerns of the Institute of Business Cycles, of which he was the director, at the
same level as those of the Harvard Committee)46.  

2.1.1 Kondratieff's theoretical objective was to understand the socio-economic reality in its long movement of

transformation.  This  is  by  definition  "fluctuating,  varied  and  complex,"  making  it  "mobile  and  impossible  to

grasp." The whole challenge of a scientific method is to break it down into simpler and more homogeneous

components, allowing each of its relevant aspects to be studied separately and in depth. Kondratieff stressed

that doing so results in a tendency to shift the question towards that of delimiting particular fields of research

and creating tools suitable for investigation into the real. 

As a result, the point of view that one chooses to simplify the real is not a matter of indifference and forms
part of the scientific concept. Indeed, since the theoretical construct is no more than a reconstitution of reali-

ty, it becomes dependent upon the point or points of view that one has favoured in order to bring about the

simplification of the objet of the study. These points of view become determining because the concepts used

will flow from them, while the essential criterion of their relevance has to be their capacity, on the one hand,

to simplify the empirical investigation into objects and into elementary and concrete relations favourable to

particular studies, but also on the other to represent the complexity of the whole of which they are only one

of the manifestations. 

The quality of the point of view chosen will determine directly the quality of our capacity to understand the real

movement, an understanding that has to be expressed in the form of a statement of laws. This approach led

him to place as the horizon of scientific work, and thus as the horizon of his own work, the production of laws
of behaviour or alternatively of empirical regularities. The latter can only be obtained at the end of a neces-

sary process of comparison and contrast between hypotheses (arising out of the particular point of view for

approaching  the  problem  to  be  studied)  and  empirical  investigations  on  elementary  phenomena  correctly

46 Kondratieff N.D., 'Sur les concepts de statique, de dynamique et de conjoncture en économie,' in: Les grands cycles de la conjonc-
ture, Fontvieille L., ed., Economica, Paris, 1992, p. 6 [noted below in Kondratieff 1992b].

85

selected. This comparison and contrast converges into the current practice of the experimentation whose pur-

pose is to reproduce the behaviour that is imagined to exist between different elements at a given moment

and under defined conditions. 

Consequently, a law results primarily from our capacity to reproduce a given phenomenon in a simplified man-

ner. But it must never be confused with the phenomenon itself which, in its concrete manifestation, remains

dependent on other elements. In order to illustrate this caveat, Kondratieff gave the following example: it is

pointless to "refer to the law of gravity (to) explain why yesterday a stone fell off the roof of the house which
you were just passing47" . 

This presentation is very much marked by the practice of the exact sciences as is shown by its large number

of references. He is thus then brought to envisage the particular application of these principles in the "scien-

ces of culture."  In Problems of Forecasting, he examined in detail the reasons for the difficulties which they

encounter in bringing this scientific procedure to its conclusion, namely to the performance of the experiment.

The reason lies in the irreversible character of the socio-economic phenomena. This situation means that all

concrete phenomena are unique and the result of a very large number of causes. Kondratieff notes that the

situation is the same for the natural sciences, but to a lesser degree: "The unique character of the phenome-

na of nature is less striking than in the case of culture. This offers to science the possibility of bringing closer,

and  rendering  more  exact,  the  determination  of  the  causal  relationship  between  the  phenomena  of  nature

than" between those of culture. 

However, with regard to the typical features as compared between the phenomena of nature and culture, the

difference is only quantitative, not qualitative. Given that it is impossible to master the totality of the causal
interlinkages48,  this difference has simply to impact the mode of experimentation, not the actual principle of
the experiment. 

Experimentation in the natural sciences finds it feasible to reproduce the inter-linking of the causes because

they are very few in number and because the physical components are stable over time. From that pheno-

menon arises the regularity of the behaviours. Consequently, experimentation in the sciences of culture will

have to set out from "the regularity of the progression of events" which he describes further with: "By the term

'regularity, we understand the uniformity with which events occur." Generalisation will consist then in revea-
ling the essence of a regular phenomenon. 

But how is one to proceed in order to extract from the concrete movement the constant and regular compo-

nents that allow independent generalisations concerning their historical context? The answer is that a causal

relationship supplies only the conditions necessary for the actual performance of the event. Those are what

must be sought. Consequently, experimentation entails the study of "the notion of regularity (which) is groun-

ded positively in the real existence of uniformity and the repetitivity in the world that surrounds us." Kondratieff

stated that one can rely on the notion of uniformity because "relative to the events observed in their totality"

the effects of the actions of this or that component, even if they are determined and necessary, will be "rela-

tively random." One could therefore rely on the regularity observed as an approximate expression of the real

movement. 

47 Kondratieff N.D., 'Questions controversées d'économie mondiale et de crise,' in: Les grands cycles de la conjoncture, Fontvieille L.,
ed., Economica, Paris, 1992, p. 510 [noted below in Kondratieff 1992f].
48 Kondratieff states "unless one were the almighty reason," which is a barely veiled allusion to the methods of the Gosplan ('Problèmes
de  prévision,'  in:  Les  grands  cycles  de  la  conjoncture,  Fontvieille  L.  ed.,  Economica,  Paris,  1992,  pp.  59  [noted  below  in  Kondratieff
1992c]).

86

2.1.2 Kondratieff had also studied under Tugan-Baranovsky. He was familiar with the analysis of crises and

of  development,  and  was  well  acquainted  with  Tugan-Baranovsky's  analysis  of  industrial  crises  (sectoral

disproportionalities and available savings). But he also knew well the latter's dissatisfaction with the explana-

tion of the nature of the evolutions which occurred during the 19th century: "Contemporary observers are not,

normally,  capable  of  distinguishing  periodic  fluctuations  from  the  more  profound  changes  in  the  sphere  of

industry49."  

Kondratieff took up this subject. He did so firstly because if was to specialise in the problems of development

of agriculture, he had to determine the constraints on its development and, to some extent, the nature of the

links binding agriculture to industry. In such a context, the theory of industrial cycles is of course far from ade-

quate. What was demanded was to determine, taking into account the regularities in the relations between

industry and agriculture, the form that development of agriculture in the Soviet Union should take, and the

supporting policies (price policies, integration into the world market, types of crops, types of investments) that

would be required. 

These concerns (evolution of agriculture and of its relations with industry) decided him to define the object of

his  research  as  being  the  search  for  the  economic  dynamics  expressing  the  combination  of  two  different

movements found in all economic variables: an irreversible evolution and a reversible behaviour, these being

found whatever time horizon is selected. 

Starting from the finding that certain variables mainly experience a movement with a given orientation but with

changes in their rate, and that others initially manifest themselves in the form of cyclical oscillations with a

change of level, Kondratieff deduced that irreversible and reversible processes are present in all variables.

Methodologically, he deduced that the study of the reversible movements could be separated from that of the

irreversible movements, even if they are linked in the course of the general process of development. He indi-

cated that he was taking "reversible processes as the object of study." Consequently, "the study of the dyna-
mics of these reversible processes is the study of the shift from one cycle to another50." 

The analysis of the business cycle will be that of the evolution of this reversible movement, taking into account

the evolution of the relations between sectors or branches (the differential business cycle). The hypothesis

put forward is therefore that the reversibility observed translates an internal movement which leads periodi-

cally to the return of a given particular business cycle. For Kondratieff, in consequence, a cyclical movement

simply translates the regularity of an economic process which causes certain particular business cycles to

succeed one another periodically in a given order, each of them reproducing the causes for the appearance

of the next one. 

On the basis of this hypothesis and of remarks by Tugan-Baranovsky and other authors, or of his own fin-
dings, "we find an empirical regularity in the changes, not only of the small cycles, but also of the large busi-
ness cycles of the capitalist economy." From there, Kondratieff reached the conclusion that there exist regu-
lar and repeated movements in the process of development. 

Starting in 1922, he described them and defined them as the specific object of his study: "The only pheno-

mena that concern us here as the direct object of our research are the reversible processes of the dynamics

of the business cycles. We make a distinction between small cycles of 7-10 years and large cycles of 40-50

years, those which we have been trying to track, starting from the end of the 18th century." At the end of his

empirical experimentation, he would be able to state the average length of those large cycles. 

49 Tugan-Baranovsky, 1913, op. cit, p. 33.
50 Kondratieff, 1992f, p. 497.

87

2.2 Statistical materials and methods of observation

Kondratieff adopted as his own the principle of Tugan-Baranovsky that "no economic theory can be conside-

red as being absolutely demonstrated until it has been verified by the facts51."  Consequently, he sought to

set up statistical series which would allow an empirical approach to the economic elements that his prior ana-

lysis of the principles of the dynamic business cycle had revealed as being relevant. The purpose of the empi-

rical verification which he undertook was not to establish laws on the overall movement of capitalist society.

Quite the contrary, "at the current stage" of his work, he was interested only in analysing the principal ele-

ments of the capitalist economy in the evolution of their relative business cycle, and more specifically, a veri-

fication of his hypotheses52. 

In order to do that, he used the techniques of mathematical statistics in order to be able to separate secular

trend and large cycles. This method brought him both the hostility of the other economists and notoriety, with

the convergence of those two attitudes having the effect of that he reduced his methodology to making use

only of a few specific techniques. 

2.2.1 Initially, he sought to set up a sufficiently large range of all the variables useful for verifying that there

really are long waves in the business cycle, without however attempting to be exhaustive. Many elements

supplied by Kondratieff in the course of the arguments reveal this approach conclusively. Thus, when Oparin

complained about his making use of English lead production although it was small, he replied that the ques-

tion was not to determine "the relative importance of England in the world production of lead, but to find out

whether there are fluctuations in the production of lead, and if so, what they are." Thus the purpose of the

series  was  not  to  reconstruct  the  real  movement.  On  the  other  hand  when  Kondratieff's  objective  was  to

understand the real movement of evolution in the relative prices between industry and agriculture, he would

collect  all of the data which would allow him to construct his price indices. 

The structure of the sampling of the series is defined by reference to the different types of behaviour which

economic variables may present in their development, as he had described them in On the Concepts of the

Static, the Dynamic and the Business Cycle in Economics. He identified two main groups on the basis of their

being somewhat more reversible (elements expressed in value such as prices of goods) or somewhat more

irreversible (elements expressed in volume: production and consumption) as well as mixed groups correspon-

ding to the various intermediate situations (interest rates, wages, bank deposits, balances of external trade).

Under  the  constraint  of  covering  the  whole  of  the  period  of  development  of  capitalism  for  each  of  these

groups, the selection of the countries had to be limited (to France, to England and also to the United States)

as did that of the series. Only the most significant were presented in his texts in support of his demonstrations. 

In  order  to  make  possible  a  comparison  over  time,  Kondratieff  normalised  the  data  on  the  one  hand  by
converting the values into gold prices (always going through the dollar equivalent) and on the other hand by
establishing ratios on the basis of the population. The "empirical series" to which reference is made in the
texts correspond to data which have undergone this sequence of operations. The principle of normalisation
did not raise any problems in Kondratieff's opponents: they simply objected to the methods used for it. Oparin,
for example, considered it useless to divide by the population, in the case of the volume series. More funda-
mentally, the monetarists considered it necessary to divide the value series by the price index and to amplify
the list of the series by adding the data on the evolution of the quantity of gold in circulation. Kondratieff natu-

51 Tugan-Baranovsky, 1913, op. cit., p 222.
52 "In my work, by taking empirical series, I was asking myself if it was possible and relevant to process them in such a way as to learn
their structure and to obtain such or such a response, affirmative or negative, on the existence of the long fluctuations in these series. I
recognised the necessity of such processing." [Kondratieff 1992d, p 265].

88

rally refused this procedure which in the final analysis equated to interpreting a priori the results of the inves-

tigation being undertaken. 

2.2.2  It is not enough to have set up a sample of statistical series representative of the different types of beha-

viour of the economic variables over the long period, because the latter remain "complex entities." Kondratieff

was confronted with the problem of breaking down each of them into reversible movements and irreversible

movements. This then raised the question of statistical method. In order to obtain this result, he put forward

the suggestion that he should separate the general trend (also called the "secu-lar trend") from "the accele-

ration of this basic trend." 

In his first works, Kondratieff used the traditional method of smoothing, which entailed using a moving avera-

ge to get rid of short fluctuations. But this method was not suitable for his objective, not giving him the break-

down  between  general  trend  and  cyclical  movements  that  he  had  anticipated.  He  thus  sought  a  different

method which would allow him to determine the secular trend on the basis of the processing of all of the data

in a series, and by subtraction to reveal the reversible aspect of the movement. The objective was subse-

quently to study the form of the curve obtained from the annual deviations from the general trend of the series.

The whole question, of course, was to find the technique for extracting the trend. The visit which Kondratieff

made to the United States in 1924 was an opportunity for him to obtain a deeper knowledge of the work which

Harvard University had been pursuing since the 1910s on the same subject under the direction of Warren M.

Persons, involving the creation of "economic barometers" able to predict the evolution of the business cycle. 

In order to calculate the trend of a series, Persons used the method known as "least squares," which means

that the series is adjusted by a linear function the type and equation of which are determined in the light of
its graphic representation53.  Next, the data are recalculated over the whole of the reference period in order
to obtain a "theoretical series." By calculating the deviations between the two series, one obtains the expec-

ted residual movement. The new series will be smoothed to eliminate random variations. The whole set of

curves (4 in total) can then be transferred to a graph. 

Kondratieff adopted the whole of this procedure known today as "trend-deviation" to process his own series54.
A smoothed moving 9-year average calculated on the deviations – the nine years corresponding to the ave-

rage length of the short cycles (7-11 years) – "then reveals large cycles in the raw state," but the work of cal-

culating adjustments to all of the series was complicated, long and tiresome, and would take several years to

complete. Thus, when Oparin in a carping criticism of his calculations was to reproach him with not updating

his  series  with  the  most  recent  data,  Kondratieff  was  to  reply  in  exasperation  "that  updating  an  empirical

series always requires you to revise the theoretical series, and (that) that is a colossal task." 

The trend deviation method was thus developed primarily in a search for accuracy. It consists of comparing

on the same graph the evolution of a certain number of variables, in such a way that observation of the regu-

lar repetition of shifts in the changes of direction of the different series make it possible to predict the chan-
ges  in  the  business  cycle55.    The  variables  are  represented  not  by  the  raw  or  theoretical  data,  but  by  the
smoothed deviations. Kondratieff in his first reports on the large cycles adopted exactly the same presenta-
tion, consisting of superimposing several different series56,  with the aim of showing the existence of synchro-

53 Persons W. M., 'Construction of a Business Barometer Based upon Annual Data,' in: American Economic Review, vol. VI, no. 4, 1916,
pp. 739-769.
54 Imbert therefore maintains, wrongly, that "the method of the 'trend-deviation' had been discovered and applied with all the rigour desi-
rable by N.D. Kondratieff," op. cit., p. 90.
55 Kondratieff gave a detailed presentation on these techniques in 'Problems of Forecasting' [Kondratieff  1992b].  

89

nous movements for series of the same nature. This procedure was roundly criticised by Oparin, and rightly

so. In the subse-quent versions, Kondratieff took care to present his diagrams in three distinct parts and to

individualise them in order to avoid any confusion between the real movement and anything which was only

the result of processing of the data. 

2.2.3 But the fact that the origin of the method was related to the problem of forecasting led numerous authors

to seek to extrapolate the curves of the "large cycles." Kondratieff always refused to concede any value what-

soever to any interpretation of the continuation of the trends, because those particular curves were not and

could not be those of the real, concrete and historical movement of the long business cycle. The evolution of

the business cycle could only be probable, without any certainty as to when and how fast the trend would

change direction. In another part of his response to Oparin, he stated clearly that "for anyone who knows a

little about the least squares method, it has to be evident that, without sufficient bases, it is impossible sim-

ply to prolong a theoretical curve beyond the limits of the empirical series." 

In fact, the question raised by this temptation to prolong the trends revealed by the processing is that of their

nature and their economic meaning. When Oparin heaped up the "technical criticisms" on the method itself

and on the particular use which Kondratieff made of it, it was primarily in order to deny that there was any

economic  meaning  in  the  theoretical  curve,  as  an  expression  of  the  secular  trend,  and  consequently  to

demonstrate that any deduction from it as to revelation of the existence of "large cycles" was on very shaky

ground. Indeed, the heart of the verification of the actual presence of large cycles in the different types of cur-

ves is based upon the necessity of eliminating the secular trend. Is it possible for the result of adjustment by

the least squares method to achieve this result? 

At all times, Kondratieff's reply was precise: "Firstly, it is true that we do not yet have a method for determi-

ning perfectly precisely the real trend of the secular movement. (...) Secondly, with a degree of approxima-

tion, we can nevertheless grasp the trend of a given empirical curve." The theoretical series is not the repre-

sentation of the trend, but it is assumed that it "reflects fairly exactly the trend of the given empirical series."

The various criticisms are then interpreted as an expression of the limitations specific to the method, of which

Kondratieff is perfectly aware through his regular reading of the publications of the Harvard Committee, and

not as the refutation of the procedure itself for revealing the large cycles. Nevertheless the problem was a

real one, which caused him in his role as director of the Institute for Business Cycles to start a programme of

specific research on it. It is in this context that Slutsky developed his thesis work, the results of which would
appear in a famous article in the American journal Econometrica, in 193757.  

The most important limitation of this method stems from the fact that by definition the "movement is not inde-
pendent of the period envisaged58"  as noted by Lacombe with whose work Kondratieff was familiar. Virtually
all of the criticisms formulated by Oparin do not do anything more than give expression to this limitation from
its differing points of view. Kondratieff would attach only a little importance to the actual thrust of these com-
ments on his general approach, because their practical consequences are so minor "that they have absolu-
tely no impact on the conclusions concerning the existence of large cycles." The first criticism refers to the
orientation of the curves at their two ends. It is true, in fact, that depending on the degree selected for the
adjustment function, the form alters at the ends. A first element of response by Kondratieff was to estimate

56 His 1926 article ('Die langen Wellen der Konjunktur,' op. cit.) repeats this presentation.
57 Slutsky E., 'The Summation of Random Causes as the Source of Cyclic Processes,' in: Econometrica, Vol 5, no. 2, April, 1937, pp.
105-146. A first version was published by the Institute for Business Cycles in 1927 in the journal The Problems of Economic Conditions,
Vol 3, no. 1. In the same issue, we find an article by D. I. Oparin, 'The Method of Schematic Deviations Applied to the Dynamics of the
Cotton Market.'
58 Lacombe E., La prévision en matières de crises économiques, Paris, Marcel Rivière, 1925, p. 58.

90

the  real  consequence  of  this  inaccuracy  on  the  economic  analysis:  the  start  corresponds  to  the  period  of

development of the capitalist economy (end of the 18th and beginning of the 19th centuries) and is therefore

in any event difficult to define; while the end of it represents an exceptionally unstable period (the World War

and its consequences). In fact, and this is the second element of response, the alterations of the ends reflect

the greater or less accuracy of the adjustment on the whole of the empirical data.  What was important, the-

refore, was the general representation of the curve obtained. However, there is no objective rule for determi-

ning the best adjustment function. The question becomes a question as to the choice of the function. Oparin

maintained  that  this  choice  would  make  it  possible  to  create  cycles  "artificially."  Kondratieff  was  cut  to  the

quick by this criticism which called into question the rigour of his scientific approach. He recalled first of all

that this statistical processing was only one stage of his project intended to verify on empirical data whether

certain hypotheses were correct. He then stated that the risk was not so much that of making cycles appear

as of making them disappear, depending on the nature of the function selected to adjust the series. The pre-

cise choice of the characteristics of the function depended solely on the goals in view. Since he was looking

for large cycles, he had to reject particular functions (for example, those giving sinusoids) or high-degree func-

tions which would absorb the phenomenon. What he had done that was arbitrary, therefore, became no more

than the choice of the most suitable tool to resolve the scientific problem raised59.  

This first series of criticisms was then joined by a second concerning the consequences that extending the

empirical series would have on the determination of the adjustment functions. In fact, for any one function of

a given type, this takes the form of a marginal modification in the parameters, and thus partially in the form

of the curve. Major modifications, if any, should occur only over the long term, raising not the problem of the

calculation method but that of the empirical movement causing them. Finally, Oparin did not understand why

Kondratieff used very different functions to adjust empirical series of the same nature (the French pension

fund and the English Consol). This criticism is based on the hypothesis that for a given phenomenon there

has to be a corresponding secular trend, and thus a type of adjustment also. In consequence, if we have two

types of adjustment that means that the least squares method is not appropriate to the object of the problem.

We come back to the starting point on the meaning of the adjustment. Kondratieff rejects this syllogism and

asks the question the other way round: why, "despite the unity of the capital market and the links between

England and France, was the empirical curve of the French pension fund of a different shape from that of the

Consol?" 

Finally, the last series of criticisms refers to the number of complete cycles which Kondratieff had been able

to demonstrate. The argument was that the number of cycles obtained (2 to 2½) was insufficient to confirm

the certain existence of a clear wave-like movement. Kondratieff had no difficulty in conceding that its exis-

tence was no more than probable. He was nevertheless satisfied with the result because he had succeeded

in finding cycles throughout his sample for all the principal series of the same nature and with virtually the

same timing. He felt himself empowered to continue his research, the more so as he detected a degree

of ambiguity in his opponents. Some of them (including Oparin), despite the technical arguments put forward,

were nevertheless ready to recognise the large cycles where their theoretical thinking could admit them, and

to  reject  them  for  the  volume  series  where  the  explanation  originating  in  monetarist  theory  encountered  a

greater number of difficulties.

59 It can be remarked on this aspect of the question that the work of  Persons  covers only the period 1879-1915 and that only first-
degree adjustment functions are used to reveal the medium-sized cycles. Lacombe (op. cit., p. 52) indicates that if he had used a lon-
ger reference period (1810-1920), he would have had to use a more complex function of the fourth or the fifth degree, and therefore a
curve more clearly  following the  empirical data. However, Kondratieff for  the same period  took some functions of signficantly lower
degree, and was right to do so, because he was not working on medium-sized cycles.

91

3.

Interpretation of the large cycles

In Kondratieff's view, the object of using the trend deviation method was not to measure fluctuations, and thus

to compare different real situations. 

The point was to verify that the oscillations observed in the rates of growth of certain variables or in the abso-

lute levels of others could be revealed in the form of a movement with a discontinuous orientation. That made

it possible to determine the probable profile of the large cycles. By comparing and contrasting the profiles

obtained  with  the  empirical  regularities  defined  elsewhere  on  qualitative  variables  of  economic  life  (known

under the term "empirical laws"), Kondratieff sought to make explicit the conditions of the cyclical process, by

detecting the conditions necessary for a shift from one short business cycle to the other within the framework

of a single cycle. 

By hypothesis, he sought to take account of the endogenous conditions, in other words those internal to the

economic activity. Synthesising those different concerns allowed him to define the draft of a theory of the large

cycles. 

The formulation of this theory drew vigorous criticism. We have referred to the dispute only where this was
necessary to allow for the most complete presentation of Kondratieff's position. 

3.1  Essential capital goods and degree of development of the productive forces

The "large cycles" characterised the conditions in which capitalist economic activity unfolds over time. The

explanation for them, that Kondratieff was careful to present more as a hypothesis than as a completed theo-

ry60,  could be looked for in the internal laws of development of capitalist economic activity: "The large cycles

which we discover cannot be explained by random exogenous causes. The explanation for them must evi-

dently be looked for in the particular features of the capitalist economic system61."  

Kondratieff then indicated that the basis in material terms of these "large cycles" would probably reside in the

conditions of wearing-out and renewal of the "essential capital goods" and that the rhythm of the large cycles

would reflect the rhythm of their process of growth. But the definition of them remains imprecise and ambi-

guous. We find in fact two different approaches to them. This vagueness attests to the difficulty encountered

by Kondratieff in defining not so much the nature of the productive forces themselves from the material point

of view as their degree of development from the social point of view. 

3.1.1 The first approach consisted in dividing goods up into three categories, using this double criterion of the

wearing-out time and the scale of the investment to be undertaken ("the scale of the grouped investment" as

it is technically called). The essential capital goods fell into the third category, characterised as goods which

"function for several decades, and which require a great deal of time and enormous investments to produce."

Kondratieff drew up a list of them to clarify the idea (large buildings, the construction of major railway lines,

canals, major civil engineering work, etc.) although he did indicate that the boundaries between categories

were imprecise. 

60  He stipulates, indeed, several times over: "it seems to us, in conclusion, that the hypothesis put forward, as a first attempt, gives an
explanation..." and later "as an initial explanatory hypothesis, one may propose the following conception.." Kondratieff [1992c], p. 164
and 167
61 Unless indicated otherwise, the reference of the quotations in this part is Kondratieff, 1992d. 

92

This approach is the exact counterpart of the theory of Alfred Marshall concerning the different types of equi-

librium, and Kondratieff drew attention explicitly to the closeness of their theories. It is also consistent with his

criticism of the crisis theories which he charges with analysing the concrete development of economic activi-

ty on the basis of an abstract scheme of sectoral distribution of production62,  which would be possible only

if one "possessed at a given moment a complete knowledge of the impact of all the causes and the disposi-

tion of the elements of reality" as he indicated in 'Problems of Forecasting63.'  Kondratieff finished off this argu-

ment on the scientific method to be used for investigation into reality by adding a reference to the specific pro-

cedure of Marx himself who "affirmed that the basis in material terms of the periodic crises which repeat every

decade (...) is the wearing-out, replacement and extension of the mass of the tools of production." We may

observe that Kondratieff is here applying a significant shift to Marx's thinking, in deducing from it that the star-

ting point of the analysis is the study of the time-related conditions of wearing-out and renewal of the capital

goods. From the theoretical point of view, the challenge of this discrepancy between Marx's hypothesis and

Kondratieff's interpretation is to analyse the conditions under which the social reproduction of the material and

financial conditions of accumulation take place over a long period of time. The reference to the wearing-out

time of the means of production is in itself insufficient to establish that he is methodologically a descendant

of Marx. 

We grasp very quickly the consequences of this point of view once we examine the statistical materials gathe-

red and the way they were processed. We find virtually no statistical series having to do with the evolution of

the annual productions of these essential capital goods (with the exception of railways), nor, obviously, any

on the stock available and in use (in physical and/or value terms). This last question is of course an awkward

one from the point of view of the sources. He had worked on the question a few years earlier of evaluating

the capital in terms of stocks and shares invested: he stressed that "recalculating the capital held in shares
is not a simple operation64,"  recreating it over a century was doubtless even less simple. He was subsequent-
ly never to bring this indicator up again.

It may be thought nevertheless that the problem is certainly not simply one of sources. For example, we may

note that the calculations of productivity which Kondratieff undertakes in The Dynamics of Agricultural and

Industrial Prices to demonstrate that changes in the price of gold should not be linked to the evolution of the

quantity  of  gold  in  circulation  but  to  that  of  productivity,  are  never  referenced  to  the  quantity  of  the  capital

goods available, nor to the amount of capital employed, nor to its structure. It is clear that he was seeking to
bring in the apparent productivity of labour65 only as an indicator of the evolution of the purchasing power of
money and not, by way of this admittedly very imperfect result indicator, the evolution of the fluctuating condi-

tions of the profitability and performance of economic activity. 

Ultimately, this approach comes down to an additive approach to the essential capital goods viewed indivi-
dually, although when grouped together they are considered as being motors of the mechanism of the large
cycles. This, of course, stirred up a large number of objections. 

62 In this connection, it may be remarked that while Kondratieff refers to all of the Marxian economists of the period (Hilferding, De Wolff,
Parvus, Kautski, etc.), he never cites Rosa Luxemburg.
63 Kondratieff, 1992c, p. 59.
64  He proposed to calculate two series expressed at constant prices: the total volume of the capital actually invested (equal to the value

of the stock of capital at the beginning of the year plus any increases of capital over the year) and the total market value of the capital

in the form of shares (equal to the total value of the shares at the beginning of the year corrected by the average rate of the shares of

that year, and increased by the total of the shares relating to the increases in capital for the year), Kondratieff, 1992f, p. 536 and ff.

65  Division  of  the  physical  volume  of  the  production  by  the  manpower  employed,  in  indices  to  obtain  the  evolution  of  productivity,

Kondratieff, 1992e, p. 407 and ff.

93

The list which one obtains by applying the two criteria of time and mass causes the essential capital goods

to be defined as items of equipment which cannot be limited to traditional means of production, or in other

words items of equipment which take part in the actual act of transformation of materials. It might be found

surprising that the criticisms did not mention this aspect. In fact, as the majority of them, following Oparin and

Falkner, denied the very existence of movements of long duration for the physical series, this question was

not of any particular interest. It may be that they followed the line of Bogdanov who pointed out that that what

was involved were goods produced by branches of the particular activity and that their primary feature was

the temporary, ephemeral and fleeting aspect of their outlets. 

It  is  evident  that  once  Kondratieff  chose  particular  goods  in  order  to  verify  the  existence  of  wave-shaped

movements in the essential capital goods, he inevitably opened himself up to the criticism that he was disco-

vering life cycles (of a product or of a sector) where what he was claiming to find were activity cycles. By

extension, Oparin thought that what was true for the railways was equally true for the series dealing with coal

mining or iron production, because "all the progress of technology consists precisely in using the least possi-

ble energy and materials, and obtaining a maximum effect." The effect on the curve in this case would thus

not be a downward trend in production in absolute terms, but a clear slowdown of growth, which might erro-

neously be interpreted as indicating a period of stagnation. Making an argument which combined the abso-

lute effects (saturation of markets) and relative effects (relative saving in materials) of eco-nomic development

on the essential capital goods and on the conditions of energy consumption equated to denying their capaci-

ty to generate long movements of the "large cycle" type, and thus to denying any basis in material terms for

such hypothetical movements. 

Thus, the angle of attack chosen by the critics to challenge the notion of essential capital goods does not per-

mit of any questioning of the functions of the latter in the mode of development of economic activity because

it  observes  the  additive  method  of  Kondratieff.  The  complex  links  which  obtain  between  the  technical  and

social division of labour on the one hand and, the extension of the means of circulation and transportation as

well as the increased mastery of production and distribution of energy on the other are not considered or dis-

cussed with a view to proposing a series which would be more significant than one comprising only the rail-

ways, roads or coal. Kondratieff, in his reply to Bogdanov, while reaffirming his initial positions, does howe-

ver introduce two interesting clarifications which lean in that direction. The first involved emphasising that the

50-year rhythm was created by a coming together of a "radical renovation" and an "extension" of the capital

goods, thus explaining the periodic return of the need to assemble a significant mass of capital, which also

had the effect of refuting the argument of the saturation of markets over time. The second pointed out that

the list was not final, "the essential productive forces (not being able) to be always and solely restricted to the

rail-ways and the installation of factories." However, these clarifications did not cause him to draw up other

variables, nor to take his analysis to any greater depth.

The introduction of the technological innovations (implied in the expression "radical renovation") as a comple-
ment to the criteria of wearing-out time and mass of financing offered Kondratieff's opponents a new angle of
attack  for  their  criticism,  relating  to  the  logical  relationship  between  cyclical  movements  and  technological
revolutions.  They  all  thought  that  the  relationship  established  was  false,  but  with  varying  arguments.  One
group  (Bogdanov  and  others)  thought  that  "the  technical  revolutions  are  chance  interactions  between  the
development of scientific thought and economic dynamics." By contrast, while the second group, within which
Oparin developed the most complete arguments, did not question the hypothesis of the type of relationship

established by Kondratieff, it did contest the idea that it can take place in the context of the "large cycles"

which he claimed to have found.  The first argument involved affirming that the ten-year cycles constituted

the natural framework of diffusion of technological innovations, with upgrades of equipment in the rising pha-

94

ses incorporating the innovations accumulated in the depressed phases. This was a general rule verified for

each one of the cycles and well established by theory. Consequently Kondratieff's hypothesis on the accumu-

lation of the inventions during the descending wave of the large cycle could not be correct, because it assu-

med a contrario that the medium-sized cycles of the large cycle's rising wave would not see any innovations,

a situation which had never happened. As a complement to this, the second argument involved saying that it

was not conceivable that inventions could remain unapplied for several decades if they offered the possibili-

ty of lowering production costs. 

The  critics  saw  here  a  major  contradiction  in  reasoning,  one  which  Kondratieff  refuted  vigorously.  In  his

responses, he refined his analysis by indicating that the greater or lesser degree to which the innovations

were radical differentiated them from one another, although unfortunately without providing much more infor-

mation on the descriptor used. He deduced from this that the movement of diffusion of the radical innovations

could not be linear because it was constrained by the conditions of profitability of the major amount of capi-

tal needed, not by a simple maintenance or refurbishing of the essential capital goods ("renewal part by part"),

but by their complete recasting. The impact of this constraint of profitability varied with the types of replace-

ment entailed in the investment expended. Consequently, the process of diffusion of the innovations was typi-
cally heterogeneous over time, with at the same time an improvement in processes of an existing technolo-
gy and introduction of processes from a radically new one. But only the radical new technological innovations

were concentrated in the period of time corresponding to the upturn of the long cycle, the others being depen-

dent on the conditions specific to the ten-year cycles. The logic of  the demonstration  was interesting with

respect to its approach to innovation and provided an effective counter to the preceding criticisms. But from

the point of view of the method of analysing the large cycles which concerns us here, this response leads one

to  think  that  the  radical  re-equipping  cannot  be  limited  to  the  essential  capital  goods  only,  but  that  it  also

impacts all of the means of production, whatever their degree of wear or financing. This approach to the ques-

tion assumes that the essential capital goods would be the precondition for the generalisation of his famous

radical new technological innovations over all of the means of production. Here too we return to the earlier

question on the understanding as to the process of extension of the social and technical division of labour.   

Following our examination of the nature of the essential capital goods and then of their renewal time, we have

to express our doubts about the definition given by Kondratieff to the notion of wear, because of the vague-

ness  surrounding  it.  The  first  definition  ("material  productive  forces  with  a  long  working  life")  refers  to  the

length of time that the equipment is operational, its amortisation period (50 years) then corresponding to its

physical  lifetime.  Nothing  in  Kondratieff's  presentation  gives  any  indication  that  would  allow  a  different

approach to the problem of the wearing-out of the essential capital goods. The expression ("the basis in mate-

rial terms of the large cycles is the wear") therefore has to be taken in its primary sense: the basis in mate-

rial  terms  is  physical  wear.  Bogdanov  accepted  this  interpretation  but  disagreed  with  how  far-reaching

Kondratieff made it, above all because he combined it with the idea of a concentration in time of the invest-

ments. That would actually equate to saying that once the essential capital goods had been produced and

installed, they remained in the same state for the entire time that they were operated without any "new enlar-

gement"  to  respond  to  the  increases  in  production  generated  by  "the  medium-sized  cycles  in  their  rising

curve" and without "repair or renewal part by part." The different fragmentary responses which Kondratieff
gave66 could give rise to the impression that this criticism caused him significantly to modify the concept of
wear, by substituting the concept of technological wear for that of physical wear, which might possibly lead to

that of obsolescence. What is the real situation? 

66 "This objection would be correct if I had stated that there exist material productive forces which are partially renewed only at the end
of 50 years, and that in the interim they must remain absolutely unchanged;" see also the argument on "the radical renewal" considered
above, Kondratieff 1992d, p. 285.

95

In fact, the clarifications contributed by Kondratieff tend rather to be sources of additional confusion. He conti-

nued to maintain two different explanations of technological wear for the rhythm of renewal of the essential

capital goods. In one of them, this is determined by the time for which they have been physically wearing out,

while in the second it depends on the rate at which the capital necessary to finance them is collected. One or

the  other:  either  the  similar  duration  of  the  two  "large  cycles"  revealed  (approximately  50  years)  is  due  to

chance, and in that case the endogenous explanation sought will not be found, or else the two are linked, and

if so, allowance must be made for it. The responses given to Bogdanov do not reveal to us how Kondratieff

resolved  that question, which was all  the  more important in that he had to explain why, at the end of the

process, there is also a radical change in the nature of the essential capital goods. 

3.1.2 The second approach tends to correct the gaps and inadequacies of this first definition, by stressing,

correctly, the nature of the technology being implemented and the forms of organisation of economic activity

on which they depended. He then introduced a new dimension into the analysis: the succession of the large

cycles represented a "radical technical re-equipping" at more or less regular intervals and corresponded to

"organic changes in the economic system itself" and to "a new regrouping of the principal productive forces

of society," each cycle starting at a level of productive forces higher than the one before. This juxtaposing in

the same explanation of a "radical technical re-equipping" with the "organic changes in the economic system

itself" was the beginning of the contemporary theories of regulation, which one does not find in such an ela-
borate form in Kondratieff's contemporaries67.  

This approach explicitly raises the principle of qualitative and quantitative leaps of which the "wave-like move-

ment" of economic activity are no more than a manifestation. Which also equates to saying that all of the per-

iod  corresponding  to  the  total  duration  of  one  cycle  (about  fifty  years)  has  to  be  characterised  as  a  trend

towards establishment of a certain homogeneity and a certain stability in the technology used, and thus in

consequence manifesting itself by a particular mode of use of the labour force, by the relative importance of

the sectors (in terms of price ratios or weight in the total production, etc.) and by the nature and scale of the

essential capital goods. Kondratieff then concluded the list of the latter by including structural elements such

as, for example "the training of management and of qualified manpower," the "reorganisation of the relations

of production" or "a better organisation of companies." 

He did not seek to produce series which would make it possible to determine the movement, such as, for

example, series dealing with manpower employed (numbers, proportion of the wage-earners, qualifications,
etc.), as Potyagin68 very correctly noted during the arguments. Kondratieff accepted the criticism, remarking
that his "work was still far from being concluded." He would limit himself, therefore, to basing this supplement

to the definition of the essential capital goods on the empirical regularities which he had deduced simply from

observation of the movements of the past. 

This second aspect of the definition of the essential capital goods also drew heavy critical fire, for several

clusters of reasons. 

67  The following long quotation gives an indication of this originality: "sooner or later a moment occurs in which a major investment in
large items of equipment entailing radical changes in the conditions of production becomes sufficiently profitable. For any given histori-
cal period, then begins a phase of new and relatively spectacular construction in which the accumulated technical inventions are widely
applied and in which new productive forces are created. (...) At the same time, the tumultuous growth of new productive forces, stirring
up the activity of the classes and groups taking part in it within the country, creates favourable conditions for the fight against outdated
socio-economic relationships which retard development, conditions favorable to large internal upheavals. This is why, as we have seen,
a period of prolonged rise of the business cycle is linked, in reality, to radical changes in the production sector."
68 Ibid. p. 238.

96

3.1.2.1 The first controversy concerns the method of determining the dates when the large cycles changed

direction. He naturally rejected the method consisting of determining them in relation to the upturn or down-

turn the corresponding short cycles because there was no theoretical reason for that to be the case (although

that is a method which we find in Tugan-Baranovsky and in Spiethoff). Nor was he able to base himself on

the curve of the smoothed deviations from the theoretical series to the empirical series since the latter, having

no other function than to reveal the existence of "wave-shaped movements," do not express the real move-

ment. 

Nor do the explanatory details added by Kondratieff to the definition of the essential capital goods make it any

more possible for him to establish accurately the dates when the large cycles change direction, because fun-
damentally the nature of the process which he suggests forbids him to do so69.   This is an extremely impor-
tant position which is virtually never mentioned by the authorities referring to Kondratieff's work. He therefo-

re proposed an interval of a few years around a date read directly from the empirical data. Oparin admonis-

hes him for this way of proceeding: the consequence of making the dates so approximate, which in his view

made them almost arbitrary, would be that shifting, reducing or increasing the periods of reversal by a few

years  would  be  enough  for  the  empirical  regularities  revealed  by  Kondratieff  to  be  modified  and  rendered

meaningless70.  It is true that Kondratieff's method for determining the dates of reversal is weak and results

in a certain circularity in the reasoning: the dates are defined only from empirical laws which, themselves, can-

not be established unless those dates are determined. 

3.1.2.2 The second dispute related to the meaning of the upturns and downturns of the long-period business

cycles. It was not so much the idea of slicing up economic history into periods which was surprising. At first

glance, this appeared perfectly compatible with Lenin's scheme on a succession of "stages." In fact, his idea

had nothing to do with that, and that was the cause for complaint. Instead of describing a continuous and

linear movement of capitalism, with its rhythm given only by the periodic industrial crises, each of the succes-

sive stages of which  corresponded to a further degree in the concentration and centralisation of capital, a

movement at the end of which the system would necessarily be bound to collapse, Kondratieff presented a

capitalist system capable, "all other things remaining equal," of overcoming its periods of depression and en-

gaging in a new long period of expansion under renewed social and technological conditions. Consequently,

in the eyes of certain Russian Marxist economists, Kondratieff's argument amounted in effect to a negation

of "the law of the growth of the productive forces" (as Bogdanov said) and even more seriously to an apolo-
gia for an everlasting capitalism71. 

This polemic did not make him try to increase the degree of detail in his analysis of the pair consisting of the

level of the productive forces and the forms of the accumulation which he considered, however, to be at the
heart of the issues related to the large cycles72.  Instead he recalled his methodological premisses because

69  See his reply to his opponents: "These are extremely complex events, and an extremely com-plex problem, and they would all wish
that one could show them a virtually mathematical co-incidence of the phenomena, a coincidence as transparent as crystal, of all the
fluctuations of reality with the general pattern" and to Oparin in particular: "I noted in my presentation that it was extremely difficult, at
the present stage of the research, to determine exactly the beginning and the end of the periods of rise and fall in the large waves,"
(ibid., p 274)
70 Oparin was thinking more particularly of the first law (on technical progress) and the second (on socio-political upheavals).
71 This criticism of making an apologia for capitalism was aimed at him very early following the publication of his work on the post-war
economic situation (cf. Discussion of Questions on the World Economy and of Crisis, Kondratieff N.D. 1992f), i.e. well before his work
of 1925 and 1926. The ciriticism was never truly supported by arguments dealing with the fundamentals of Kondratieff's conception, as
is shown by this dogmatic expression of position by Spectator at the time of the discussion at the Institute for Business Cycles: "I think
that this reference to Marx and Engels is sufficient on its own to excuse us from having to discuss this question (of the large cycles) with
Professor Kondratieff, as it is highly unlikely that there will be any among us who would be prepared to defend the point of view of N.D.
Kondratieff against Marx and Engels!"  (ibid., p. 244).
72 See his response to Bogdanov: "But if he knows Marx, he cannot be unaware that, in his view, the growth of the productive forces
under capitalism, which expresses itself by their increased reproduction, assumes accumulation. In other words, accumulation is one of
the key moments of the process of development of the productive forces, whereas comrade Bogdanov is quite simply contrasting, without
any critical approach, the one and the other process, in other words to some extent contrasting a part with the whole. Obviously, it is not
sufficient to speak of the growth of the productive forces, it is also necessary to analyse this process," Kondratieff 1992d, p 285.

97

he was convinced, as he said in his response to Ossinsky in 1924, that his position and those of his critics

"are located to a large degree on different planes of thought73."  The theory of the large cycles within busi-

ness is situated on an intermediate level between the analysis of the concrete historical development of the

capitalist economy (where he places the positions expressed by Trotsky, Bogdanov, Ossinsky, and so on) and

the formal theoretical analysis of the crises (like those of Marx with his schemes of reproduction). This inter-

mediate level is called by Kondratieff the dynamic analysis of the business cycle. Its function is to determine

the general laws governing development of economic activity which are repeated over time "all other things

remaining equal," or, to express it as he would, caeteris paribus. These laws describe the reversible mecha-

nism of the large cycles understood as being subject to repetition irrespective of the historical context of the

concrete process of development which, for its part, is irreversible. He states therefore that "it must not be

forgotten that each cycle takes place in specific new historical conditions, at a new level of development of

the productive forces, and for that reason is not at all simply a repetition of the preceding cycle." In conse-

quence,  he  thought  that  a  major  part  of  the  criticisms  reflected  a  lack  of  understanding  of  that  necessary

methodological breakdown of the analysis of the process of development into those three levels, a lack of

understanding which was responsible for the numerous misinterpretations of his theoretical project and his

proposed explanations. 

This approach of Kondratieff's, however, did raise a number of questions two of which are particularly inter-

esting:  1-  How  does  the  idea  of  a  "harmonisation"  between  forms  of  social  organisation  and  the  technical
constraints of production74 fit together with the concepts developed elsewhere of contradiction in the rela-
tionships between private capital and sectoral disproportionalities? 2- Why and how are the shocks received

from the outside (wars, social unrest, discoveries, etc.) made endogenous? It is then astonishing to note that

this aspect, formalised more or less explicitly in Kondratieff's presentations, evolves, at best, into a discus-

sion on the fortuitous, random or exogenous nature of concrete events and on the logical antecedence of the

social upheavals relative to the major turning-points of the business cycle. While it may be noted that Trotsky

tried to place himself alongside Kondratieff when he stated that it was possible to detect "interrelations bet-

ween the clearly drawn epochs of social life and the clearly marked segments of the curve of capitalist deve-

lopment," by reducing "social life" to the "super-structures" (understood as ideology, currents of intellectual

thought, the nature of the political parties, etc.) he completely voided the theoretical aspect of the analysis of

the  long  business  cycle75 described  earlier.  Kondratieff  can  then  allow  himself  to  admonish  Bogdanov,

Trotsky and the other opponents that they were taking up "an idealistic point of view" rather than a materia-

listic one76.

3.2  Free capital and the rhythm of development

The basis in material terms of the large cycles was thus considered to reside in the conditions of renewal of
the essential capital goods. Initially, Kondratieff defined these from the physical point of view. Subsequently,
he  sought  to  explain  why  their  accumulation  took  the  form  of  a  discontinuous  movement  by  studying  the
conditions under which they were financed.  At the same time he sought to explain their effects on the remain-
der of economic activity. At the conclusion of the study, he ought to have been able to reconstitute the rever-
sible mechanism ("reversible" in the sense of reproducible) of the large cycles. He based his demonstration
on the interrelationship between essential capital goods and free capital. This latter concept was introduced

73 Kondratieff, 1992f, p 524.
74 In  'The  Dynamics  of  Agricultural  and  Industrial  Prices,'  he  even  talks  of  the  establishment  of  "norms  of  consumption,"  Kondratieff
1992e, p 417.
75 Trotsky L.D. [1923], "The Curve of Capitalist Development" (translated into French), in: Critique de l'Economie Politique, Maspéro,
Paris, no. 20, April-July, 1975, p. 8.
76 Kondratieff 1992d, p 286.

98

into the analysis at a late stage, but in fact it constituted the heart of it: it tended to explain both the existen-

ce of a major and long-lasting accumulation fund to finance the essential capital goods and at the same time

the profile of the long cycle which resulted from it. From the methodological point of view, that means that the

presentation of the explanatory scheme could not be understood as simply a comparison between statistical

results and the observation of empirical regularities, since Kondratieff, at the end of his presentation, was to

introduce a new graph (balances of deposits in savings banks) and undertake a succinct analysis of the evo-

lution of the forms of concentration and mobilisation of capital. Oparin rightly pointed out that "to give a basis

to his theory of large cycles," Kondratieff had implicitly to introduce "a fifth law," a remark, moreover, which

Kon-dratieff did not contest. 

3.2.1 Renewal of the essential capital goods is costly and takes a long time. 

It cannot take place unless the context is favourable to an ongoing mobilisation of major quantities of capital.

The triggering of this process of renewal operates only when pre-existing capital chooses productive invest-

ment  as  the  principal  way  that  it  should  be  utilised.  This  capital  constitutes  what  Tugan-Baranovsky  calls

"available savings" and Kondratieff calls "free capital." 

The hypothesis marshalled into the reasoning here is thus a strong one: the conditions of economic develop-
ment are such that not all the incomes generated and distributed by it are necessarily re-invested producti-

vely or transformed into individual consumption. We are back at the traditional criticism of the law of outlets

developed by Tugan-Baranovsky. 

Right from the start, on this particular point some took exception to the explanation, given that "free capital

can never exist in society" (Kreynin). The reply to that argument involved demonstrating that the assumption

that all branches of the economy were in a state of adequacy, which is a consequence of this  absence of

free capital, postulated that the economy was in a situation of equilibrium on a perpetual basis, but then it

would  not  be  possible,  for  example,  to  understand  the  long  and  regular  movements  of  prices  and  interest

rates. We are faced once again with the traditional conception of Kondratieff on the dynamic business cycle. 

Almost all of Kondratieff's opponents noted this closeness to the theories of Tugan-Baranovsky, and would
reproach77 him for it all the more violently in the context of the year 1926 since the latter was a minister in
the last government of Kerensky.  Concerned to defend the memory of the man whose pupil he had been, he

claimed this family tie without ever expanding, in this debate, on the fundamental differences which he had

with him78.  Indeed, it may be noted that Kondratieff in his explanation of the large cycles was not interested

in the problem of the equilibrium between quantities produced and quantities consumed under the habitual

twin constraint of the structure of the supply and the structure of the disposable income, which is precisely

what Tugan-Baranovsky was seeking to do in the context of a "genuine" theory of outlets. 

Kondratieff's argument led to the conclusion that the origin of the large cycles was to be found in the relation

between the total mass of the free capital and the portion of it invested productively. 

77 For example, Spectator  explains that "the point of view of Kondratieff on the crises is that of Tugan-Baranovsky. But he has not even
been able to link the large cycles to that theory."  (ibid. p 244). Bogdanov develops the same point of view: "when the author  developed
(this) argument, I thought, and many of our comrades also, of Tugan-Baranovsky" (ibid. p 247) as did Falkner: "his [Kondratieff's] thin-
king, his theory, exactly formulated is no more than a transposition of the theory of the usual capitalist cycles of Tugan-Baranovsky to
the phenomena of the large waves in the world-wide movement of prices," (ibid. p 254).
78 "It is true that there exists a certain link between the conception of Tugan-Baranovsky and mine. But it is also true that it is not a ques-
tion of a simple transposition of Tugan-Baranovsky's theory. I consider his idea on the accumulation of "free capital," and on the role of
this accumulation, to be very fruitful. For the rest, my conception is profoundly different." (ibid. p 291). He wrote an article on Tugan-
Baranovsky shortly after his death, which unfortunately has not been published in the West (Kondratieff N.D., "Michail Ivanovich Tugan-
Baranovsky," in Izdatel'stvo "Kolos," Petrograd, 1923).

99

The expansion phases corresponded to the periods during which the portion of the free capital which it was

intended to invest productively remained for a long time higher than the demand for investment, or in other

words "the curve of the rhythm of accumulation is higher than that of investment." It should be noted that the

reasoning is always expressed in relative terms, and that Kondratieff did not give any information on abso-

lute volumes. He noted this problem in his presentation of 192679 and deduced from it that it was necessa-

ry to construct a series "concerning the issue of new amounts of capital (but) unfortunately, these data do not

exist for a sufficiently long period." He therefore proposed a series showing the evolution of the deposits in

the  Caisse  d'épargne  savings  banks  in  France.  This  series  was  supposed  to  illustrate  the  evolution  of  the

amounts of monetary capital not re-invested productively, even if this type of deposit represented no more

than a fraction of those amounts. He assumed that its movement was the reverse of the movement of the

other portion which was invested productively80.   His analysis demonstrated that there was indeed a rever-

se movement relative to those of prices and of interest on capital thought to be in phase with the amount of

the  productive  investment.  He  deduces  therefrom  that  "it  is  really  at  the  moment  at  which  the  descending

wave of the large cycles reaches its lowest point, that the accumulation of the free capital reaches its maxi-

mum pressure, and vice versa." He thus interprets the high level of the balance of the deposits as being cor-

related with the low level of interest rates and thus in consequence with the low level of productive invest-

ments. 

Obviously, Oparin contested these conclusions. He stressed that the series proposed was insufficient, that at

least equivalent English and American series should be blended into and that in any event the proposed ana-

lysis of his graph (no. 12) was fallacious because no cycle could be detected. 

79 Kondratieff tackled this question for the first time in his presentation of 1926, but it does not appear in the German version of that pre-
sentation. 
80 To those who complained of this approach, he countered with the following argument: "I have studied the essential features of the
data available to us, for example on the issue of stocks, changes in joint stock companies' capital in certain branches of industry, etc.
These data relate to an insufficiently long period, and that is why I have not considered it necessary to quote them"  (ibid. p 279).

100

Figure 1 Private Savings Banks in France

Balances of deposits at 31 December each year

(millions of francs)

see figure:

Serie brute

Serie théorique

Ecarts …..

Ecarts lissés

=

=

=

=

Raw series

Theoretical series

Deviations from the theoretical series

Smoothed deviations

More fundamentally, he put forward a much more traditional monetarist argument, namely that the increase

in the means of financing available to productive investments does not mean the prior existence of amounts

of free capital, but rather a more extensive system of credit and a more pronounced monetary circulation or

"in other words, the extension of the means (of payment) corresponds to the increase of the needs of busi-

ness."

Complementing this argument, Falkner had doubts about the origin of the remuneration of the free capital not

invested productively, given that it is precisely the productive capital which make it possible to finance the inte-

rest paid out. It was therefore inconceivable that such sums of capital might remain idle for some decades

rather  than  being  rapidly  invested  in  industry.  He  deduced  from  this  that  Kondratieff's  hypothesis  was

"absurd." However, immediately after this and in a total contradiction with this argument, he conceded the

"incontrovertible" existence of a contracyclical movement in the deposits at savings banks, the explanation

for which could be found in the fact "that in a period of depression the ratio of the amounts of capital inves-

ted  in  industry  is  markedly  lower  and  more  problematical,  and  it  is  for  this  reason  that  a  certain  portion  of

resources is invested in the savings banks to bring in an income." 

101

3.2.2 The nature of the criticisms formulated by Oparin and Falkner directly confronted Kondratieff with the

question of the forms in which the free capital existed and was reproduced. 

His first definitions remain vague and ambiguous ("this accumulation may take place partly in kind, partly in

money in the widest sense of the term"). Initially, we may indeed think that he is reducing the free capital to

an  accumulation  fund  with  finite  limits  conserved  in  the  form  of  investments  in  traditional  securities  (liquid

savings,  Treasury  bonds,  pension  fund,  etc.)  or  speculative  holdings  (gold,  etc.)  while  waiting  for  the  right

moment to make more remunerative investments. This approach was all the more plausible for Falkner and

Oparin in that it was Tugan-Baranovsky's. From that point, the criticisms veer off towards a search for the

social strata whose type of fixed incomes would put them in a position to release the savings which would

then feed into the stock of free capital (persons on fixed incomes, property-owners, and so on). This view see-

med all the more convincing to them in that Kondratieff refers explicitly to such strata. They were then concer-

ned to demonstrate that the final cumulative volume would be insufficient to finance the major investments

which Kondratieff described as the causes of the rising wave. This volume in their view would be all the more

insufficient, Oparin explained, in that the persons on fixed incomes could not be the originators of this fund,

because since the interest rate was dropping at the same time as prices, their purchasing power would not

improve. 

In fact, Kondratieff's idea is more complex. 

He readily recognised that the amount of free capital available at the end of the descending wave was insuf-

ficient to take care for more than a decade of the renewal and extension of the essential capital goods in their
entirety81,  but he continued to consider it logically necessary that the capital should grow before that process
of investment started. What justified the upturn of the long business cycle was thus not, in itself, the prior exis-

tence of a significant level in the fund of free capital, but the engagement of a process of rapid and continuous

reconstitution of the fund. Kondratieff was explicit on this point: it was necessary "that the process of accu-

mulation should persist, and persist at a rate such that its curve is higher than the curve of the current invest-

ments." The approach was thus much more consistent with his analysis of the dynamic business cycle. 

The whole question now came down to ascertaining what was the motor of this process. On this point, at the

time of his presentation in 1926, he proved to be particularly evasive in putting his explanations off "until later."

His replies to Falkner, whom he accused of having an interpretation that was too literal and too mechanical,

did allow a number of important points to be clarified: 

(cid:122) Firstly, he understood by free capital, "an amount of capital offered in such large quantities that it beco-

mes less expensive," in other words that the rate of interest becomes lower than the profitability of pro-

ductive investment. That situation cannot last unless the increase in the investments generated by the

low rate of interest does not result in a reduction of the mass of capital on offer, because in that case,

the interest rate, becoming once again higher than the profitability of the productive investment, would

halt the movement. It was therefore necessary that the causes of the reproduction of the free capital

should be structural and not only fleeting. 

(cid:122) The second clarification concerned the form that this free capital takes. He said that trying to compare

the cumulative amount of savings released at the time that investments are made, and to deduce the-

refrom  that  the  deviation  observed  invalidates  de  facto his  proposition  that  there  is  a  link  between
essential capital goods and free capital, in fact reveals a gross lack of understanding of the nature of

81 "However large the accumulation which has already taken place, there will never be a fund of capital so large that one may go on
spending it for a decade or more," Kondratieff 1992d, p. 159.

102

the banking system. One of the particular features of the banking system and of the stock exchange is

that  they  are  able,  by  centralisation  of  savings,  to  make  available  an  amount  of  credit  that  in  fact

exceeds demand, thus pushing down interest rates. 

This centralisation was all the more necessary "in that the sources which provide the loanable funds are very

diverse."  They  were  not  limited  to  the  list  drawn  up  by  Oparin.  The  industrial  undertakings  and  the  banks

belonged on the list also. This means that Kondratieff was shifting the question to the more general level of

the  distribution  and  formation  of  all  the  incomes  and  not  only  those  of  the  people  on  fixed  incomes,  thus

making it clear how he differed from Tugan-Baranovsky.  In this connection, and contrary to the opinion of

Oparin,  he  maintained  that  "this  group  can  also  be  the  source  of  an  increased  supply  of  loanable  funds"

because the interest rate curve and the price curve are not perfectly synchronous. According to his observa-

tions, they are slightly offset in time and in amplitude. There was the same type of reasoning for companies.

Thus, at the beginning of the upward period of the long business cycle, the participation of the industrial com-

panies  in  constituting  the  free  capital  resulted  from  an  improve-ment  in  their  relative  prices  owing  to  the
depression rampant in agriculture82. 

It then becomes difficult to go with Kondratieff when he places all of the sources for constituting free capital

on the same level. In fact, the situation of those on fixed incomes does depend on variables (prices and inte-

rest rates) over which they have no control, which is not the case for industrial companies. In consequence,

if one accepts the reasoning of Kondratieff, only the relationship between industry and agriculture is essen-
tial to the explanation for the mechanism of the large cycles83,  because by determining in the final analysis
the capacities for productive investment, it has an influence on the evolution of their respective nominal price

levels, and thus triggers the process of reversal of the movement of the relative prices, which is synonymous

with the upturn or downturn of the long business cycle depending on the sector profiting from the reversal.

But at the same time, this analysis no longer makes it necessary to draw up a theory of distribution. 

His approach to the industry / agriculture pair is based on three very important postulates: 

(cid:122) The first is that the principal effect of the investments made in radically new technological processes,

in particular in the essential capital goods, is to cause a lowering of the costs of production. This is the

essential factor for an improvement in the profitability of companies, which is a primary condition for the

engagement of a continuous process of upturn in the long business cycle since it is the ratio between

the rate of interest and the rate of industrial profit which determines the decision to undertake the costly

investments  in  essential  capital  goods.  Evidently,  this  principle  of  increase  in  productivity  holds  true

whatever the sector of activity, but it is less pronounced in agriculture, since the latter is subject to the

law of diminishing returns84. 

(cid:122) The second postulate explains that one of the effects of the essential capital goods is to prolong the
period of expansion at a time when the process of renewal and extension of it has already reversed.
Kondratieff did not supply any part of an explanation on this phenomenon, contenting himself with tal-

82 "The industrial and commercial groups themselves are also centres of accumulation, to the extent that the agricultural business cycle
remains less favourable, during the descending wave," Kondratieff 1992d, p 282.
83  "Under these conditions and in the absence of external circumstances, the large cycles within business are accompanied precisely
by this organic regularity in the fluctuation over time of the purchasing power of agricultural and industrial products, that we have disco-
vered," Kondratieff 1992e, p 461.
84 If one accepts Kondratieff's reasoning in 'The Dynamics of Agricultural and Industrial Prices,' "agriculture is subject to the law of dimi-
nishing returns. (...) The influence of technical  progress on lowering the costs of production is inevitably weakened by the consequen-
ces of that law," Kondratieff 1992e, p. 417.

103

king of inertia85,  whereas what was needed was to define the conditions in which the reproduction of

share capital takes place, by stating in particular the link which exists between physical wearing-out

and economic obsolescence of the essential capital goods. In fact, the remark acts to confirm the idea

that  it  is  not  possible  to  date  with  precision  the  turning-point  of  the  long  business  cycle:  the  precise

details of the forms and conditions of that turn (in this case, downwards, but he thinks the same of the

upturn) are constrained by the actual socio-historical context and not by an automatic link with econo-

mic variables. 

(cid:122) The third postulate puts forward the principle that industry has a greater capacity for adaptation to the

turning-points  of  the  business  cycle  than  agri-culture,  both  in  terms  of  adjustments  of  the  quantities

offered to the de-mand ("agricultural production is less flexible than industrial production and is not able

to  increase  or  reduce  its  volume  as  rapidly")  and  in  terms  of  adaptation  of  structures.  The  shocks

impacting agricultural prices, tending upwards in a period of expansion or downwards in a period of

recession,  re-sult  in  major  deviations  in  evolution,  with  respect  to  industrial  prices,  thus  generating

transfers of income from the one sector to the other. But these transfers are not on a comparable scale;

they are to the benefit of industry at the end of a descending wave and in particular during the ascen-

ding wave, when activity reaches its highest point, whereas agriculture manages to reverse the move-

ment a little before the downturn and during the period of depression, when activity is more reduced86. 

The notion of free capital takes on, under these conditions, a very different interpretation from that of Tugan-

Baranovsky and from that which is found in the traditional presentations of Kondratieff's theory of large cycles.

Indeed, it is very clear that in no case can it simply be reduced to the availability of savings. Kondratieff is

clearly describing a process of reconstitution of an accumulation fund linked to a general upward movement

of the productivity of labour due to a recasting of the productive capacities and to a recomposition of the forms

in which society and economic activity are organised. 

One of the ways in which this fund appears is of course the savings of households, but the dominant form is

constituted  by  the  increase  in  the  financial  margins  of  the  commercial  and  industrial  companies  and  the

banks. Taking into account his analysis of the relationships between industry and agriculture, this amounts to

saying that the origin of the reconstitution or of the drying up of the accumulation fund is external to the inter-

nal mechanisms of the accumulation of capital. As an example, it is evident for Kondratieff that the general

upwards movement of prices, synchronised with that of the business cycle, does not express difficulties in

obtaining value for the capital, difficulties which one might link, for example, to an excess of capital or to a

settling-down of the gains in productivity, but is the induced effect of the increase in agricultural prices. The

effects may be direct (increase in the cost of supplies) or indirect (reduction in the quantity of capital availa-

ble, resulting in its becoming more expensive). The analysis can thus be developed without encountering any

need for recourse to a theory of distribution, since all that is needed is to know at what moment industry finds

itself in a position to profit from transfers of value arising out of a situation unfavourable, in cyclical terms, to

agriculture. 

3.2.3 Kondratieff was now in a position to produce a general law on the rhythm of secular development of the
capitalist economy, a law which is richer than the way it is traditionally presented. He sought to determine all
of the elements which logically go to make up a cyclical movement of long duration, all other things remai-
ning equal. The law could be stated as follows. 

85 "As the ascending wave appears following major accumulation activity, and long-term invest-ments in expensive basic equipment, a
relatively long period goes by before the inertia of the movement is absorbed and the descending wave starts," Kondratieff 1992d, p.

161.
86 See the analysis developed in Kondratieff 1992e, pp. 458 and ff.

104

3.2.3.1 The favourable evolution, starting from the middle of the phase of depression, of relative industrial pri-

ces, permits the release of a growing flow of free capital but the low level of the rate of profit, explained by a

slow  deterioration  in  the  conditions  of  production,  makes  productive  investment  not  very  attractive.  These

dispersed amounts of capital essentially are in monetary form but their regular growth will bear down on the

rate of interest which is moving downwards, and will at the same time cause initiatives of concentration. As

soon as the rate of interest becomes lower than the rate of profit, the conditions obtain for a reorientation of

the free capital towards productive investment or in other words "the development of the descending wave

gradually creates the preconditions for a new durable rise." Certainly, these are preconditions and not suffi-

cient conditions, because as Kondratieff says, "this increase, of course, is not inevitable," since "the organic

changes in the economic system itself may distort the character of the economic dynamics. But if that does

not happen, the descending wave will be followed by a recovery." 

This point is essential: the upturn is not automatic, since it is dependent on ancillary conditions which are par-
tially related to expectations concerning the maintenance of a favourable business cycle  (level of profit and

significant mass of not-too-expensive capital). By hypothesis, taking into account the structural aspect of the

transfer of value between agriculture and industry, Kondratieff thought that those conditions should obtain.

Then  "sooner  or  later"  taking  into  account  the  medium-term  prospects  for  maintenance  of  a  rate  of  profit

higher than the rate of interest, there is created in society a climate favourable to a major and continuing rene-

wal of the essential capital goods "resulting in radical and profitable changes in the conditions of production"

by application of the technical inventions accumulated and not implemented during the preceding period of

depression. 

The necessary and ancillary condition thus resides in the expectation brought about by the "powerful deci-

sion-making centres" on maintenance of favourable conditions. This way of raising the problem of the upturn

may make one think of the Keynesian under-employment equilibrium, to which, moreover he refers in The

Dynamics of Agricultural and Industrial Prices when he considers, although without developing the idea, whe-
ther it might be possible for the economy to develop without fluctuations in the business cycle87. 

3.2.3.2 If  these  different  conditions  are  brought  together,  then  an  ascending  wave  of  the  business  cycle

begins. 

The massive utilisation of the free capital for the extension and the radical renewal of the essential capital

goods stimulates economic activity as a whole. The reproduction of the free capital is then provided by the

movement of accumulation itself, because of the drop in the costs of production which it generates. But, "in

the internal conditions of its development will also be found the reasons which prevent it from being prolon-

ged  indefinitely."  Agricultural  prices  increase,  keeping  pace  with  the  extension  of  industrial  production  and

with the growth in the working population and its income, but to a higher degree than industrial prices. The

increase in purchasing power of the agricultural products which results, by reversing the flow of the transfer

of  value,  leads  to  "an  influx  of  relatively  greater  resources  into  the  hands  of  the  rural  population,  which  to

some extent limits the possibility of the upward wave in industry continuing for a long time."

The moment of the reversal is not predefined, but Kondratieff tells us that it occurs, in fact, following the begin-

nings of a rise in the price of the free capital following on from the major drain from it brought about by the

massive investments in essential capital goods. These investments stop, retarding expansion to a compara-

87 The reference is to chapters I and IV of his 'A Tract on Monetary Reform' of 1923 (Kondratieff 1992e, p 383] in which we read: "under
current conditions, the intensity of production is largely determined by the real profit for which the entrepreneur is hoping" (incorporated
in: Keynes,  Essais sur la monnaie et l'économie, Paris, Payot, 1971, p. 32). Kondratieff corresponded with him, but to date the cor-
respondence has not been published.

105

ble extent. The ascending wave had initially combined with an extension of the world market by the inclusion

of new countries. But the accumulation of the factors tending towards a reversal of the business cycle would

subsequently manifest themselves in an exacerbation of competition and various conflicts of interest, increa-

sing social, political and economic instability. "Inevitably," the upward movement would reverse, as soon as

there were confirmed and steady prospects of a level of profit lower than the rate of interest. The reduction

in industrial activity would then bring about a drop in demand for agricultural products, but this drop would be

much faster than the reduction in supply. The result would be a downward trend in agricultural prices which

would be faster and more severe than the drop in industrial prices, and thus in the fullness of time a new

reversal of relative prices to the advantage of industry would occur. The process of reconstitution of free capi-

tal for productive investments would then be able to restart. 

From a formal point of view, this explanatory scheme of Kondratieff's is based fundamentally on the existen-

ce of expectations concerning the evolution of the rate of profit by the "decision-making centres" and of diffe-

rences between sectors from the point of view of their reaction time to the changes in the business cycle and

their capacity to improve their conditions of production. Only the combination of these elements makes it pos-

sible for Kondratieff to produce a reversible law of large cycles without recourse to a theory of distribution

associated with his theory of accumulation. At the beginning of his article 'The Dynamics of Agricultural and

Industrial Prices,' he recognised this clearly: "indeed, if (leaving aside purely accidental deviations) the chan-

ges of state of the various sectors occurred in perfect harmony" the large cycles would not exist. It may be

said in consequence that if the essential capital goods are the basis in material terms of the large cycles, they

are not the explanation for them. 

3.3 An internal contracdiction in Kondratieff’s explanation

Kondratieff claimed to be providing an endogenous explanation of the process and the rhythm of develop-

ment of the capitalist economy. Regardless of any theoretical bias88,  can one consider that he succeeded?

We do not think so. Indeed, despite the rigour with which he makes his demonstration, he has to introduce

explanatory elements from outside the economic sphere and has to assume that relations between agricul-

ture and industry are stable. 

The heart of his analysis comprises the explanation of the pendulum-like movement of the transfers of value

between agriculture and industry, sometimes to the advantage of the first (at that point, prolonged periods of

depression start), sometimes to the advantage of the second (entailing at that moment long periods of expan-

sion). These transfers of value occur by means of the evolution in opposite directions of the purchasing power

of their respective products. While they express a deterioration in the purchasing power of the products of a

given sector, or in other words a deterioration in their relative prices, they are not explained in Kondratieff by

the evolution of the respective conditions of utilisation of the capital which had made their creation possible.

He refers neither to the internal processes of accumulation of share capital, nor – and this is obvious – to the

conditions under which the capital is utilised in industry. We thus find ourselves faced with a real problem of

closing the loop of the system of determination of the internal mechanism of the "large cycles," because the

determination that there are alternate reversals of the direction of evolution of the relative prices of agricultu-

re and industry is not enough to act as an explanation. 

In order to remain consistent with his project of elucidating the question of the large cycles, Kondratieff would

have to produce an explanation combining the internal mechanisms of operation of the two sectors with those

88 As for example that of invoking the simple absence of any reference "to the fluctuation of the rates of profit"  to void the analysis pro-
duced by Kondratieff, as E. Mandel does in The Third Age of Capitalism, 3rd edition of Der Spätkapitalismus, Union générale d'éditions,
10/18, Paris (3 volumes),  1976, p. 277.

106

of  the  linkage  between  them.  However,  he  invokes  only  the  natural  and  social  conditions  weighing  on  the

mode of operation of agriculture. As we have seen, that is what ultimately determines, by limiting the capaci-

ties for adaptation and reaction of agricultural production, the foundation of the pendulum-like movement of

the evolutions in purchasing power of the agricultural and industrial products, and thus of the large cycles, as

Kondratieff says explicitly: "it is indispensable to give consideration to certain particular features specific to

agriculture, by contrast with industry." 

These particular conditions controlling production in agriculture are of two orders: relationships of ownership

entailing the use of the land and thus the diversion, via the rent, of a portion of the agricultural income (and

thus of the income of society) and the conditions of the process of agricultural labour itself, arising out of the
fact that this production is "organic" in character89.  Even if what is involved are not fleeting or random events
as postulated by his opponents (such as war, technical discoveries, new veins of gold, and so on), they are

still exogenous elements, even though they may be structural and permanent. 

Thus, Kondratieff is not able to "close the loop" of his explanation except by assigning a particular and major

role to agriculture, which on the basis of its nature alone, constrains the development of industry and that of

the overall movement of the economy. 

In a very surprising way, we thus come back to a traditional question of standard economic thought: in what
way is the sphere of agricultural production a fetter on capi-talist development? Kondratieff's conclusion does

not relate to the stationary state, but to a development at a particular rhythm. This rhythm of long duration

expresses to some extent capitalism's capacity to adapt to the consequences, on the amount and the struc-

ture of the accumulation fund available, of the amounts tapped off by property ownership from the income of

society.  Unlike  Ricardo  (not  to  mention  Malthus)  the  limit  on  economic  development  is  no  longer  physical

(exhaustion of the fertile lands leading to an upward trend in the rent of land), but social, related to the capa-

city  of  capitalism  to  reconstitute  this  available  accumulation  fund.  In  On  the  Concepts  of  the  Static,  the

Dynamic and the Business Cycle in Economics what Kondratieff objects to in Ricardo and in general in all of

the classical school90 is the failure to study the actual process of change in the elements contributing to the

establishment of the natural state (identified by Kondratieff as being one of equilibrium). 

In so doing, which was the object of his work, he renders dynamic the conditions for the definition of the equi-
librium, and by corollary, as a result of its reversibility, the horizon ceases to be finite91.  But it must be noted
that he can do so only by introducing exogenous elements, and above all by abandoning the embryonic theo-

ry of distribution which is found in Ricardo. It would soon be a constant for the theoreticians of the "long cycle"

that the dialectic of allocation / distribution should not be linked to the analysis of the long movements of accu-

mulation, a constant that would endure right up to the theory of regulation. 

Relatedly, one may note that his explanation is valid only if it is assumed that the relations between the only

two sectors referred to by Kondratieff are stable, something that, by hypothesis, cannot be accepted. Indeed,

the problems of social organisation related to the circulation of goods or to the mobilisation of the accumula-

89 Kondratieff is very explicit: "The shift between agriculture and industry, in the downward trends of their costs of production, is the prin-
cipal cause of the general increase in the purchasing power of agricultural products during the period in question. One can readily under-
stand this delay when one refers to the specific features of the processes of agricultural production, (which is primarily organic), that
make them not very suitable for mechanisation, or their marked dependence with respect to space, etc.," Kondratieff 1928b, p. 50 and
1992e, p. 444 (underlined by himself).  
90 This passage was not included in the English version of 1925, see Kondratieff 1992a, p. 3.
91 Of Ricardo, he wrote: "He studies the economy as if he supposed that these trends have al-ready reached their conclusion and the
elements of economic reality are at a natural level and in a state of equilibrium,", ibid.

107

tion fund (restricting ourselves to the aspects cited by Kondratieff) will necessarily modify the relative weight

and the internal structure of each of the two sectors, but will also generate different activities and forms of

production and of social organisation. Thinking that one could replace this analysis founded on the relations

between agriculture and industry by a different one in more general terms of conditions of access to raw mate-

rials does not change the essence of this criticism. Indeed at this point it sends us back to a question alrea-

dy considered earlier, when we were defining the essential capital goods, namely the understanding of the

degree of the productive forces which cannot be reduced to sectoral relationships. 

* * * * *
* * *
*

In prison, Kondratieff would continue to work on his project of a historical synthesis of the economic dynamics

to render more unified his vision of the alternations between long phases of depression and of expansion,

integrating into it different types of cycle. 

In a letter to his wife, dated at the end of 1934, he presented his plan like this: "As soon as I have finished, I
shall start a short book on long oscillations: the layout and the content of it are perfectly clear to me. Then, I

shall  write  a  book  on  short  cycles  and  crises.  I  shall  then  come  back  to  the  introductory  part,  on  general

methodology, the out-line for which I have already sent you. Finally I shall finish off the whole thing with a  fifth

book on the statistical theory of the genetic or the socio-economic development. But, those are projects which
demand the strength of serenity and faith, so they may remain at the project stage  ...92" 

92 Reported by Makachéva, N.A., Biographical Sketch, in: Kondratieff, N.D.: Problems of Economic Dynamics, Economica, Economic
Heritage Collection, Moscow, 1989 (in Russian). 

108

EUROSTAT COLLOQUIUM

HISTORY OF BUSINESS CYCLE ANALYSIS

Luxembourg, 12 November 2001

TINBERGEN’S BUSINESS CYCLE ANALYSIS

Marcel Boumans
Professor of Economics
(NIAS and University of Amsterdam)

E-mail: boumans@fee.uva.nl

109

TABLE OF CONTENTS

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

Abstract

Introduction

Short Biography of Jan Tinbergen

Critique of Empirical Business Cycle Reserarch

Critique of Economic Theory

Early Business Cycle Scheme

Synthetic Economics

Quantitative Business Cycle Theory

Tinbergen’s Modelling Programm

10.  Conclusions

11.

Bibliographical references

111

111

112

113

114

115

117

118

120

123

124

110

1. Abstract

During the 1930s Tinbergen was employed at the Dutch Central Bureau of Statistics and involved in business

cycle analysis. He was looking for causal mechanisms producing these cycles and found the a-theoretical

approach  used  there  to  be  inadequate.  Therefore,  he  developed  a  variety  of  mathematical  schemes  that

generated wave-like patterns, which could fulfil his specific theoretical and empirical requirements. This case

shows that business cycle analysis cannot be a matter of statistics alone but should integrate three different

disciplines:  economics,  statistics  and  mathematics.  This,  in  fact,  was  the  original  research  agenda  of  the

Econometric Society.

Each discipline on its own was insufficient to provide a complete explanation of a business cycle. Most eco-

nomic theories were narratives and therefore did not include the mathematical tools needed to build repre-

sentations  of  the  cycle  mechanism.  Moreover,  these  accounts  were  largely  static,  lacking  the  dynamics  to

treat cyclic phenomena. Statistical analysis alone can only indicate correlations between economics factors,

but can never elucidate causal connections. Whereas, mathematics can be used to make a range of possi-

ble dynamical schemes, the results still have to be assessed on their economic meaning and statistical signi-

ficance.

Econometrics is often seen as a part of statistics. Although mathematicizing economics is seen as a neces-

sary step towards making economics operational, mathematical models are considered to be more or less

singular.  However,  there  was  no  single  unique  way  that  mathematics  could  or  should  enter  economics.

Economic reality itself does not prescribe any particular kind of formalism. On the contrary, our understanding

of business cycles is determined by the kind of mathematical apparatus we use.

2.

Introduction

If two parties should be brought to an agreement, and they have not so much in common – the differences

are more eye-catching than the similarities, so they are suspicious toward each other –, then usually an auto-

nomous mediator is called upon. The task of this mediator is to bring both parties – step by step – closer to

each  other  by  carefully  formalising  each  result  in  the  negotiations.  After  both  parties  have  entered  into  an

agreement, the task of the mediator has ended, and if everything has been done well, the agreement should

leave the mediator's role indiscernible.

The above metaphor of a mediator, of course, is borrowed from Morgan and Morrison's (1999) account of

models as mediators. This metaphor will appear to be very apt to account for the development of Tinbergen's

schemes of the business cycle mechanisms in the 1930s. The parties that had to be brought into an agree-

ment were on one side the more verbal accounts of business cycle phenomena and its explanations, and at

the other side quantitative economic data describing the cycles and the economies in which they appear. The

agreement was drawn up in mathematics; the negotiations were carefully done by consecutively formalising

bits of both parties and adding them to already obtained results of agreement. The choice of the mathemati-

cal formalisation was very critical in this mediating process, but as soon as the agreement was concluded –

Tinbergen's first macroeconometric models – the essential role of mathematics in this process was no longer
acknowledged. The paper's aim is to bring back to the foreground the essential role of mathematics in the

mediating process of modelling.

Somewhere else (Boumans 1999), I have compared model building with baking a cake without having a reci-

pe. It is a trial and error process by integrating the required ingredients till you have something of your taste.

111

In Tinbergen's case, the ingredients were theoretical ideas, policy views, mathematisations of the cycle, meta-

phors and empirical facts. The theoretical ingredients were verbal explanations of (phases of) the cycle and

Walrasian mathematical static-equilibrium systems. As a socialist Tinbergen aimed at planning instruments to

control the business cycle and was therefore looking for endogenous causal explanations of the cycle. As a

physicist he was familiar with the harmonic oscillation described by second order differential equations. And

as an employee of Statistics Netherlands (Centraal Bureau voor de Statistiek, hereafter CBS) he had at his

disposal  the  statistics  describing  several  economies  and  business  cycles.  The  facts  of  the  business  cycle

phenomenon, the so-called Juglar, were that the cycle period was about 6 to 10 years and that it was a main-

tained cycle, almost not increasing or decreasing in amplitude. Tinbergen succeeded to integrate all these

ingredients into one model and the next sections show how he did it, step by step. Special attention will be

paid to the role of mathematics in this model building process. But first a short biography of Tinbergen in this

period will be given in the next section.

3. Short Biography of Jan Tinbergen

Jan  Tinbergen  (1903-1994)  studied  physics  from  1922  to  1926  at  the  University  of  Leiden  (Netherlands)

where Paul Ehrenfest was his most influential teacher. Tinbergen's strong social feelings led him to become

an active member of the Social Democratic Labour Party. Within the Labour Party there was a strong antimi-

litaristic movement. Tinbergen's sympathized with this movement and refused to serve the army as a cons-

cript. As compensation, he had to work in the prison administration in Rotterdam. His father succeeded in

arranging a job at the CBS. He worked there the last part of his alternative service from August 1927 till July

1928 at the Business Cycle Bureau.

After finishing this period of alternative military service, Tinbergen worked for a year on his doctoral thesis.

His concern for the unemployed made him feel that he could be more useful as an economist than as a phy-

sicist. It was to guide Tinbergen away from theoretical physics to mathematical economics that Ehrenfest pro-

posed the subject for his thesis, minimum problems in physics and economics (1929).  This subject was spe-

cially chosen because of the probable mathematical analogy between the relevant physical problems and cer-
tain economic problems1.  Tinbergen's introduction to economics was mainly through the works of mathema-
tical  economists  recommended  to  him  by  Ehrenfest.  These  works  were  by  Arthur  Bowley,  Vilfredo  Pareto,

Enrico  Barone  and  Charles  Roos.  In  particular,  Tinbergen's  introduction  to  the  ideas  of  Pareto  and  Léon

Walras was primarily through Bowley's Mathematical Groundwork of Economics (1924). This was a moderni-

zed version of the Walras-Pareto system.

After finishing his thesis, Tinbergen returned to the CBS. During his absence, publications on business cycle

research had markedly decreased. It was feared that business cycle research would be taken over by priva-

te organizations. The CBS asked Tinbergen whether he could continue his business cycle research and he

was willing to do so. He stayed till 1945.

In 1930 the Econometric Society was founded in Cleveland, U.S.A., and the first European meeting was to
be held in Lausanne, Switzerland, the year after. Tinbergen became charter member and presented a paper
in Lausanne. It is remarkable how fast he became one of the leading figures within this Society. But also in
The  Netherlands  his  work  soon  found  acknowledgment.  In  1931,  he  became  lecturer  in  statistics  at  the
University  of  Amsterdam  and  in  1933  he  was  appointed  Professor  Extraordinary  of  Mathematics  and

Statistics at the Rotterdam School of Economics.

1 (Boumans 1993) discusses in more detail Tinbergen's application of physical analogies to economic analysis. 

112

In  1936,  Tinbergen  was  commissioned  by  the  Economic  Intelligence  Service  of  the  League  of  Nations  to

undertake statistical test of the business cycle theories examined for the league by Gottfried von Haberler

(1937). He worked at this task for two years and reported his results in two volumes, Statistical Testing of

Business-Cycle Theories, published in 1939.

4. Critique of Empirical Business Cycle Research

The CBS borrowed its methods from the Harvard Committee on Economic Research and the Berlin Institut

für Konjunkturforschung. Business  cycle  research  at  these institutes consisted of the construction of so-

called "barometers" to forecast business cycles. That is to say, their research concentrated on investigating

whether certain economic time-series were correlated. If there is a lag between correlated time-series then it

is possible to forecast the course of one time-series with the aid of the other.

The  Harvard  Committee  on  Economic  Research,  under  the  direction  of  Charles  J.  Bullock,  Warren  M.

Persons and William L. Crum, owed its international fame to the barometer based on three indices of the busi-

ness cycle, the so-called A-B-C curves. These three indices represented "speculation" (A), "business" (B),

and "money" (C), and were lagged-correlated. B lagged about six month after A, and C about four month after

B. Therefore, A forecasted B and A and B forecasted C.

Tinbergen opposed the non-theoretical character of the Harvard barometer. His very first scientific publica-

tion,  'Over  de  Mathematies-Statistiese  Methoden  voor  Konjunktuuronderzoek'  (1927;  On  Mathematical-

Statistical Methods of Business Cycle Research), was a review of business cycle research, which in particu-

lar criticized the Harvard approach for not being based on any kind of theory of causation. Moreover, Bullock,

Persons and Crum (1927, 79) had emphasized that their method was not based on any theory whatsoever;

on the contrary, the curves "derived solely from observation of the facts".

Causal relations have, indeed, received increasing attention from us; but no theory of causation or of time

relation between cause and effect ever entered into the construction of the index (idem, 79).

In  addition,  they  observed  "how  foreign  to  actual  experience  are  fixed  mechanical,  or  exact  mathematical,

relationships in the economic world" (idem, 79).

Tinbergen  (1927)  claimed  that  the  aim  of  correlation  analysis  should  ultimately  be  the  recovery  of  causal

connections, as Karl G. Karsten had done. Karsten (1926), who touched "not without merit" upon this problem

of causal relations (Tinbergen 1927, 718-719), had shown the existence of cumulative relations between the

Harvard  barometer  indices,  which  he  interpreted  as  causal  relationships.  In  the  first  place,  the  cumulative

values of the Harvard B-index parallel those of the Harvard A-index, with a lag of three months:

t

∑

i

1
=

B
i A
+=
t

3

(1)

Secondly, the C-index was a cumulative of both the A and B indices:

t

∑

i

=1

(

1

4

A
i

+

3

4

B
i

)

=

C

t

(2)

Thus, according to Karsten (1926, 417), the B-index was the "generating force" of the three; the other two

indices  depended  upon  and  were  derived  from  the  changes  in  the  business  index.  Tinbergen  found  these

cumulative relations exemplary for the kind of causal relation one could expect in business cycle research.

113

Beside the possibility that cumulative relations could lead to causal connections, they had the advantage that

they could explain the existence of variable lags. "The quadrature theory [i.e., cumulation theory] is that the

time-lags between the cycles of various economic phenomena are constant functions of the periods of the

cycles" (Karsten 1924, 16). Both cumulative relations, (1) and (2), above are formulated for the discrete case.

For the continuous case, cumulations can be expressed by integrals2:

t

∫

0

t

∫

0

B

d
)(
ττ

=

(
tA

+

)3

(3)

[

1

4

A

)(
τ

+

3

4

]
d
)(
ττ

B

=

tC
)(

(4)

But then the cumulative relation between two quantities, X and Y, can also be represented by a differential

equation: 

X

)(
d
ττ

=

tY
)(

⇒

tX
)(

(cid:5)=

tY
)(

(5)

t

∫

0

The second equation shows that the maxima and minima of one cycle (

tY(cid:5)
)(

=

dY
dt

=

0

)  coincide  with  the

zero points of the other (X(t) = 0), so one can say that one cycle lags a quarter-period behind the other, see

Figure 1. If the period of one cycle is not constant neither is the lag.

Figure 1 One cycle is the cumulation of the other

5. Critique of Economic Theory

Tinbergen was looking for causal explanations of the business cycle, but economic theory did not provide the
appropriate mechanisms either. On the one hand, business cycles were explained by exogenous influences;
on the other hand, each cycle was examined and explained individually or worse still, each phase of a cycle
was explained separately. However, there was one exception, Albert Aftalion's (1927) 'Theory of Economic
Cycles Based on the Capitalistic Technique of Production'.

An economic dynamics could be constructed based on the [lag] relation between economic quantities, which
results in the derivation of perfect cyclic oscillations of an economic system. This is the mathematical inter-
pretation of Aftalion's crisis theory.

2 This explains the name "quadrature theory". Quadrature stands for the process of determining the area of a plane geometric figure by
dividing it into a collection of shapes of known area (usually rectangles) and then finding the sum of these areas. The integral denotes
this process for infinitesimal rectangles.

114

I mention this theory in particular because it explains most clearly how the relations considered here can hap-

pen,  in  that  every  cycle  already  contains  the  seed  for  the  next  cycle  and  thus  real  periodicity  occurs

(Tinbergen 1927, 715; trans3).

Aftalion's thesis was "that the chief responsibility for cyclical fluctuations should be assigned to one of the cha-

racteristics of modern industrial technique, namely, the long period required for the production of fixed capi-

tal" (Aftalion 1927, 165). To producers the value of their products depends on the price they expect to obtain

for them, that is to say, the value depends on the forecast of future prices. Aftalion assumed that the expec-

tations of those directing production are, alternately, too optimistic and too pessimistic. "In other words, the

rhythm is a consequence of the long delay which often separates the moment when the production of goods

is decided upon and a forecast is made from the moment when the manufacture is terminated, and the fore-

cast is replaced by reality" (idem, 165). Producers forecast future prices on the basis of present prices and

the present state of demand. "That is the source of their errors. In modern capitalistic technique the actual

state of demand and prices is a bad index of future demand and prices, because of the long interval which

separates  the  moment  when  new  constructions  are  undertaken  from  that  when  they  satisfy  the  demand"

(idem, 166).

In a paper "Opmerkingen over Ruilteorie", published in 1928 (Observations on Exchange Theory), Tinbergen

constructed a numerical example demonstrating how a delayed adjustment of supply to price would genera-

te fluctuations about equilibrium over time. Shortly after this he stumbled across an empirical example of this

numerical construction, a pork market study by Arthur Hanau (1928) (Tinbergen 1928, 548n; see also Magnus

and  Morgan  1987,  120).  Hanau  was  researcher  at  the  Berlin  Institut  für  Konjunkturforschung  run  by  Ernst

Wagemann. According to Tinbergen, this scheme of delayed supply adjustment to price could be extended

by taking into account expectations based on observed past fluctuations, or by attributing a delay to demand.

"All these assumptions lead to the same kind of results, of which the essence was stated above and consists

in the explanation of cyclic motion by the economic mechanism itself" (Tinbergen 1928, 546; trans).

6. Early Business Cycle Schemes

At the first European meeting of the Econometric Society in 1931, Tinbergen (1933a) had several possible

mathematical formalizations of an endogenous business cycle mechanism to offer for consideration. Hanau's

(1928, 1930) research into the pork market, "le cas le plus simple" (idem, 37), served as point of departure:

Scheme I

Supply:

A0 + A1p(t-θ)

Demand:

B0 - B1p(t)

where A0, A1, B0 and B1 are positive constants and p(t) the deviation from the equilibrium price P at time t.θ
was the time needed to produce the relevant commodity. The mechanism represented by this scheme gene-
rated a cycle with a period equal to 2θ. This scheme, better known as the cobweb mechanism because of the
similarity of its graphical representation and a cobweb, was the simplest explanation of an economic cycle
and a mathematical formulation of Tinbergen's earlier numerical example.

3 Some of the texts discussed in this paper are written in German or Dutch. When I have translated quotes from these texts, these are
indicated by "trans".

115

However,  the  aim  was  to  find  mechanisms  that  could  explain  the  so-called  Juglars.  These  were  business

cycles with a cycle period about 6 to 10 years. Scheme I implied a production time of 3 to 5 years, which is

unrealistic  for  most  production  processes.  To  arrive  at  a  more  realistic  representation  of  business  cycles,

Tinbergen examined more complicated schemes to see what influence each "complication" that was introdu-

ced could have on the length of the cycle period.

In a second scheme he introduced "demande spéculative". There was some empirical evidence that demand

could also be influenced by price changes, for example, in the case of wholesale lumber dealers, or in the

case of corn speculation.

Scheme II

Supply:

Demand:

A0 + A1 p(t-θ)

B0 - B1 p(t) + B2

( )p t(cid:5)

where  B2 is  positive  and
Now the period of the solution (T) lies between:

)(tp(cid:5)

denoting  the  time  differential  of  price  p,  dp(t)/dt, indicates  price  changes.

4/3 θ < T < 2θ. So, the introduction of a differential shortened the period of the business cycle with respect to

the production lag. In other words, if scheme II was considered as a possible explanation for the Juglar, it

even assumed a longer production time.

Another way of complicating the scheme was to introduce purchasing power into the demand function. First,

he considered constant purchasing power, C.

Scheme III

Supply:

A0 + A1 p(t-θ)

Demand:

C
)(tpP
+

The solution of this scheme had a period's length equal to 2θ. So, constant purchasing power did not influen-
ce the cycle's period. Next, he assumed purchasing power dependent on economic activity, which he defined

by the numbers of workers employed during the production process:

)(
tN

=

α
t

[
A
0

+

pA
1

] ττ
)(
d

t

∫

−
θ

If the wage is constant and equal to S, then total purchasing power equals SN, and the scheme becomes:

Scheme IV

Supply:

A0 + A1 p(t-θ)

Demand:

S
α
t

[
A
0

+

pA
)(1

]
d
ττ

t

∫

−θ

The cycle's period was equal to 2.7θ. Thus, by assuming a purchasing power dependent on economic activi-
ty, Tinbergen was able to extend the period compared to the production lag, and thus arrived at a more rea-

tpP
)(
+

listic business cycle mechanism.

116

In  1931  Tinbergen  found  another  empirical  example  of  an  endogenous  cycle:  the  shipbuilding  cycle.

Moreover,  a  mathematical  formulation  of  its  mechanism  showed  how  a  lag  of  two  years  could  generate  a

cycle of eight years. The shipbuilding market mechanism was a combined lag and cumulative relation:

tX(cid:5)
)(

−=

aX

t
(

)
θ−

(6)

where X represents world tonnage, and θ the average needed time to build a ship, which was approximately
2 years. The parameter a was a constant value between ½ and 1. The cycle generated by this mechanism
had a period equal to 4θ  = 8 years.

7. Synthetic Economics

With the above theoretical and empirical results in mind, Tinbergen gradually developed a larger program for

business cycle research to deal with its central question:  "is it possible for an economic community to show

a swinging movement without the external non-economic factors on which it is based showing such a move-

ment?" (Tinbergen 1933b, 8; trans). The first public event in which he explicated such a program was his inau-

gural lecture, 'Statistiek en Wiskunde in Dienst van het Konjunktuuronderzoek' (Statistics and Mathematics of

Use  to  Business  Cycle  Research,  1933b)  upon  appointment  as  professor  at  the  Rotterdam  School  of

Economics. This lecture offered a survey of the business cycle research that had already taken place as well

as a kind of program, or work proposal, that remained to be done. Other then the above mentioned schemes

were possible as candidates for movement generating mechanisms, on the condition that they were dynamic.

A scheme was called dynamic when at least one of its equations was dynamic, that is, a relation between

variables that relates to different moments of time. Dynamic relations were obtained by introducing lag terms,

differentials or integrals.

But these mathematical considerations were just one part of the proposed program. Each candidate scheme,

or even each equation in it, had to be statistically verified by regression analysis. Any achieved regression

equation was called "analytical knowledge". A "closed" system of regression equations, that is, a system of

equations  in  which  the  number  of  variables  equals  the  number  of  equations  was  called  "synthetic  know-

ledge". The terminology was clearly borrowed from Henry Moore's Synthetic Economics (1929).

Moore's "Synthetic Economics" was meant to synthesise two bifurcated mathematical approaches in econo-

mics, Walras's "pure" general equilibrium theory and Cournot's statistical approach. However, Walras's equi-

librium system was only a static system, while it was Moore's aim to develop a dynamic economics to "give,

by means of recent statistical methods, a concrete, practical form to the theoretical ideas of moving equilibria,

oscillations, and secular change" (Moore 1929, 4). This "practical form" was to present "all of the interrelated,

economic quantities in a synthesis of simultaneous, real equations" (idem, 5).

There are three special characteristics which I should like the name Synthetic Economics to imply: (1) the use
of simultaneous equations to express the consensus of exchange, production, capitalization, and distribution;
(2) the extension of the use of this mathematical synthesis into economic dynamics where all of the variables
in the constituent problems are treated as functions of time; and (3) the still further extension of the synthe-
sis  to  the  point  of  giving  the  equations  concrete,  statistical  forms.  With  these  implications  Synthetic
Economics is both deductive and inductive; dynamic, positive, and concrete (idem, 6).

According to Moore, the "synthetic method" had three advantages. First, it eliminated many controversies in

economics as to the causes of phenomena. It showed that each causal relation is only a partial truth; "that

117

the sum of the partial truths is not the whole truth; that the proper weight and place of each partial truth may

be specified; and that the ensemble of the determining conditions may be mathematically expressed" (idem,

6-7).

A second advantage was that it indicated precisely when an economic problem was solved. A problem was

not only solved when it was a mathematical solution to a system of as many independent equations as there

are unknown quantities in the problem, but also the equations themselves had to be empirically derived and,

"consequently, that the problem admits of a real solution" (idem, 7).

But, "by far the chief advantage" was that "it gives ground for the hope of introducing into economic life ratio-

nal forecasting and enlightened control" (idem, 8). To solve the problem of the rational forecasting of oscilla-

tions, a complete theory of oscillations could be approached by successive approximations. A first approxi-

mation would be to take first into account the most important cause of perturbation, and subsequently com-

bining this with the effects of other perturbing causes (idem, 9). 

According to Tinbergen two different kinds of synthetic knowledge were possible:

Either there has to be a certain complex of economic phenomena that, by first approximation, behaves inde-

pendently of the rest of the economy, and can be lifted out and studied separately, or one has to consider

economic  society  as  a  whole,  which  can  be  done  in  an  approximate  or  more  detailed  manner  (Tinbergen

1933b, 6; trans.)

An example of an economic phenomena complex, behaving independently of the rest of an economy, was

Hanau's investigation of the pork market, his scheme I. The points of departure of the second possibility were

his schemes III and IV.

8. Quantitative Business Cycle Theory

In a survey on "quantitative business cycle theory", Tinbergen (1935a) systematically and explicitly outlined

his criteria for an appropriate business   cycle theory, which for the  largest  part  fitted  into  Moore's Synthetic

Economics  program: "The aim of  business  cycle  theory  is  to  explain certain movements of economic

variables.  Therefore,  the  basic  question  to  be  answered  is  in  what  ways  movements  of  variables  may  be

generated" (Tinbergen 1935a, 241). And so, the core of the business cycle theory was the "mechanism", that

he defined as "the system of relations existing between the variables; at least one of these relations must be

dynamic. This system of relations defines the structure of the economic community to be considered in our

theory"  (idem, 241-2). But,  what  Tinbergen  more  than  Moore ever did was emphasizing the distinction

between the mathematical form and the economic meaning of the equations.

The mathematical form determines the nature of the possible movements, the economic sense being of no
importance here. Thus, two different economic systems obeying, however, the same types of equations may
show exactly the same movements. But, it is evident that for all other questions the economic significance of
the equations is of first importance and no theory can be accepted whose economic significance is not clear
(idem, 242).

Besides the condition that at least one dynamic equation should appear in the mechanism, the other mathe-

matical requirements were that the mechanism should be a "closed" system of equations, that is, a system

that contains just as many equations as variables, and "the analytical form of the equations is simplified as

much as possible" (idem, 242). One way of gaining simplicity was Frisch's "macrodynamic" approach, that is

"the grouping of the elements, which has its statistical counterpart in the calculation of index numbers of all

sorts" (idem, 243).

118

After outlining these criteria for a business cycle theory, Tinbergen discussed "the most important dynamic

relations existing in real economic life which may, or must, be chosen as starting points of an adequate busi-

ness cycle theory", labelled by him as "the facts" (idem, 243). As examples of adequate business cycle theo-

ries, Tinbergen mentioned the mathematical theories of Frisch (1933a), Kalecki (1935), Roos (1930) and Vinci

(1934). Tinbergen also discussed his own "lag scheme". This five-equation scheme was a generalization of

his earlier scheme IV, in which purchasing power was dependent on economic activity.

Mathematical  shaping  was  an  essential  element  of  Tinbergen's  business  cycle  research  in  the  1930s.

Economic theory did not provide any guideline that could lead to an appropriate formalism. It was a trial and

error process that started with the assumption of a production lag. As was empirically shown by Hanau (1930)

and theoretically by Aftalion (1927), lags generate endogenous fluctuations. But to base dynamics on a pro-

duction lag alone had several disadvantages. In the first place, as discussed above, to explain a Juglar the

assumed production time would have to be far too long. Reason for Tinbergen to introduce into the schemes

all kinds of complications. In the second place, the disadvantage of postulating lags is that they must be given

in advance and have a fixed length. "This has been repeatedly felt as a too rigid representation of reality"

(Tinbergen 1933b, 13; trans). However, besides the lag relation other dynamic relations are possible, name-

ly those containing differentials and integrals. From physics, Tinbergen knew that second order differential

equations generate cycles. For example, differentiating (with respect to time) an equation in which a differen-

tial and an integral term appear lead to the equation of the harmonic oscillator.

(cid:5)
tya
)(

+

tby
)(

+

t
∫
yc
0

)(
d
ττ

→=

0

(cid:5)(cid:5)
tya
)(

+

(cid:5)
tyb
)(

+

tcy
)(

=

0

(7)

An advantage of differential equations is that differentials refer to very small time intervals.
dt can be approximated by a very small difference in time ∆t. So that:

y(cid:5)

=  dy/dt,  where

ty
)(

−

(cid:5)
y

≈

t
∆−

)

ty
(
t
∆

(8)

Considering  the  shorter  time  many  production  processes  need  nowadays,  the  appearance  of  only  direct

affective causes can be called a realistic feature in view of this. Thus, what really matters is the question just

posed: can quantities with an integral character and a differential character, respectively, be found and do

these quantities play an important role in the business cycle? (Tinbergen 1933b, 14-15, trans).

At the Leiden meeting of the Econometric Society in 1933, Tinbergen raised this question most explicitly: "Is

the theory of harmonic oscillation useful in the study of business cycles?" To deal with this question a special

colloquium-lecture  on  harmonic  oscillations  by  Ehrenfest  was  planned.  Because  of  his  sudden  death  on

September  24,  this  lecture  never  took  place  (Marschak  1934,  187).  Tinbergen  proposed  to  start  "from  the

mathematical nature of harmonic oscillations and seeking among the main economic relations those likely to

fit into the harmonic pattern" (idem, 188). Accordingly, he marshalled economic relations into two groups: (1)

"differential phenomena", mainly functions of the rate of price change,

)(tp(cid:5)

,  and  (2)  "integral  phenomena",

mainly  functions  of

∫ pdt

, where p is again the price. Statistical tests, however, had persuaded him not to

give too much credit to most of the hypotheses of group (2), because the correlations he had hitherto found

were too small (idem, 188).

119

In his 1935 survey, Tinbergen discussed this issue again. To make "closer approximations to reality" (1935a,

277), differentials,

)(tp(cid:5)

,  and  integrals,

∫ pdt

, were added to the lag schemes. Thus, in general, the redu-

ced form equation of a business cycle scheme would have the following shape4 :

n

∑

1

(
tpa
i

−

t

i

)

+

n

∑

1

(cid:5)
tpb
(
i

−

t

i

)

+

t

−

t

i

n

1

∑ ∫
c
i

0

p

)(
d
ττ

=

0

(9)

The  requirement  was  that  the  parameters  satisfy  the  "wave  condition"  and  the  "long  wave  condition".  The

"wave condition" indicated that the solution to the above reduced form equation should consist of a sine func-
tion, p(t) = C hτsin(wt), so that the time shape of p(t) is cyclic. The "long wave condition" prescribed that the
cycle period should be long compared with the "time units" and that the cycle should not differ "too much from

an undamped one" (idem, 280). According to Tinbergen, "These conditions will be a guide in a statistical test

of the different schemes as to their accord with reality" (idem, 280). As a first approximation to these condi-
tions, Tinbergen put h = 1 and w = 0. Then the period of the cycle, 2π/w, goes to infinity. A consequence of
these conditions was that:

=∑
ic

n

1

0

(10)

In other words, mechanisms "only then lead to long, not too much damped waves when the integral terms are

of small importance" (idem, 281).

Tinbergen also considered a second approximation of the long wave conditions by assuming that h = 1 + δ

and w = ε, where both δ and ε are very small. Again this resulted in restrictions on the parameters of the pos-

sible  mechanisms.  Tinbergen  considered  several  mechanisms  as  possible  explanations  of  the  business

cycle. The wave conditions were used to detect the correct mechanism by comparing the order of magnitu-

de required by the conditions with the estimated parameter values. But to find out whether these possible

mechanisms "can explain real business cycles and which of them resembles reality" (idem, 281), statistical

verification was again the necessary next step in the analysis.

9. Tinbergen's Modelling Program

Tinbergen's research program of the first half of the 1930s can be briefly characterized as a combination of
two  methods,  mathematical  shaping  and  statistical  verification.  Mathematical  shaping  generated  potential
business cycle mechanisms, which had to be verified empirically. However, this typical combination of mathe-
matics and statistics disappeared in the second half of the thirties, when Tinbergen implemented a new pro-
gram, which products were not called "schemes" but were labelled as "models"5. In macroeconometric model-
ling, which was in fact what this new program was all about, mathematical shaping did not partake anymore.

Tinbergen was the first to succeed in modelling a real economy on the basis of this new program. In 1936 he
presented  a  model  of  the  Dutch  economy  to  the  Dutch  Society  of  Economics  and  Statistics;  the  very  first

4 There is apparently a misprint in the original text (idem, 279). Above I have reproduced the corrected version.
5   The very first time Tinbergen used the term "model" was in his 1935 paper 'Quantitative Fragen der Konjunkturpolitik' (Tinbergen
1935b).

120

macroeconometric model in the history of economics6.  The paper was read and published in Dutch, but in

the same year Tinbergen was commissioned by the League of Nations to undertake statistical tests of the

business-cycle  theories.  The  results  were  published  in  a  two-volume  work,  Statistical  Testing  of  Business-

Cycle Theories (1939). The first contained an explanation of a method of econometric testing and a demons-

tration in three case studies of what could be achieved. The second volume developed a model of the United

States; the second macroeconometric model in the history of economics.

Meanwhile, Tinbergen wrote several reports on his work at the League. They provide us of an explicit account

of what the early modelling practice embraced. On several occasions, Tinbergen stressed the necessity of

simplification.

Mathematical treatment is a powerful tool; it is, however, only applicable if the number of elements in the sys-

tem is not too large. Subjects, commodities and markets have, therefore, to be combined in large groups, the

whole community has to be schematised to a "model" before anything fruitful can be done. This process of

schematisation is, of course, more or less arbitrary. It could, of course, be done in a way other than has here

been attempted. In a sense this is the "art" of economic research, depending partly on the attitude in which

the approach is made. (Tinbergen 1937, 8).

The model was viewed as a system of equations governing the movements of the various elements in eco-

nomic  community.  This  system  consists  of  "a  network  of  causal  relationships",  "relationships  of  definition",

and "technical or institutional connections" (idem, 8).

The  "method"  Tinbergen  employed  to  understand  the  causation  of  business-cycle  phenomena  "essentially

starts with a priori considerations about what explanatory variables are to be included. This choice must be

based  on  economic  theory  or  common  sense"  (Tinbergen  1939b,  10).  The  equations  were  chosen  to  be

linear, with parameters that remain constant over time. "The use of linear relations means much less loss of

generality  than  is  sometimes  believed"  (idem,  11).  The  values  of  the  parameters  were  found  by  multiple

regression analysis. The accuracy of these results was testing by applying "statistical tests of significance".

Apart from these statistical tests, "economic tests of significance" were used. "The most important one is that

of their algebraic sign, which in most cases the economist knows on a priori grounds" (idem, 13). To "unders-

tand the mechanism of business cycles", the aim was to develop an increasing number of relations, "repre-

senting the network of causal connections forming the business-cycle mechanism", until a "complete system"

of "elementary equations" was obtained (idem, 15). Completeness is achieved when a system has as many

relations as there are variables to be explained.

The word "complete" need not to be interpreted in the sense that every detail in the complicated economic

organism  is  described.  This  would  be  an  impossible  task  which,  moreover,  no  business-cycle  theorist  has

ever considered as necessary. By increasing or decreasing the number of phenomena, a more refined or a

rougher picture or "model" of reality may be obtained; in this respect, the economist is at liberty to exercise

his judgement. (Tinbergen 1939b, 15)

The  procedure  he  employed,  to  statistically  test  existing  business-cycle  theories,  consisted  of  two  stages:

Firstly, the variables that a given theory provides must be tested by multiple regression analysis, and second-

ly, the system of numerical values found for the causal relations must be tested to see whether it really yields

a cyclic movement when used in the reduce form equation. Tinbergen was quite aware of the fact that eco-

nomists did not agree upon which were the most important causes of the business-cycle phenomenon. From

6 The original paper of 1936 is available in English under the title: 'An Economic Policy for 1936' in (Tinbergen 1956). For a revised ver-
sion in 1937, which concentrates on econometric aspects, see (Tinbergen 1937).

121

Ehrenfest he had learned to formulate differences of opinion in a "nobler" way than merely as conflicts. His
favourite formulation was cast in the general form: if a > b, scholar A is right, but if a < b, then scholar B is
right. The statement applied to a well-defined problem, and both a and b would generally be sets of values of

elements  relevant  to  the  problem  treated,  with  possibly  a  number  of  components  of  qualitative  nature

(Tinbergen 1988, 67).

This method was exactly the method he would follow in his work for the League of Nations:

It is rather rare that of two opinions only one is correct, the other wrong. In most cases both form part of the

truth … The two opinions, as a rule, do not excluded each other. Then the question arises in what "degree

each is correct"; or, how these two opinions have to be "combined" to have the best picture of reality.

[We can] combine these different views, viz. by assuming that the movements … can be explained by some

mathematical function of all the variables mentioned. We then have not a combination in the physical sense

– an addition of two quantities or of two amounts – but a combination of influences. In many cases the mathe-
matical function just mentioned may be approximated by a linear expression (Tinbergen 1936, 2-3)7. 

Tinbergen's method can be presented graphically as follows:

Figure 2

T1

T2

Tn

y = a1x1

+

a2x2

+

…

+

anxn

statistical analysis

Each model equation had to be assessed in two ways, "deductively" and "inductively". Economic significan-

ce was obtained by deducing from economic theories possible causal factors and conditions on the parame-

ter values. Statistical analysis was used to decide which factors were statistically significant and to measure

how great their influence was.

Tinbergen's method had become the synthetic method in which mathematical moulding had no part anymo-

re. The mathematical shape of the models was made up of linear difference equations. The differentials and

integrals that had played such an important role in earlier mathematical moulding of business cycle schemes

were gone. The integrals were omitted because equations containing them were replaced by their differentia-

ted equivalents; see for example equation (5).

The differentials disappeared because Tinbergen had changed his view on the meaning and role of lags in

the mathematical relations. In his earlier business cycle schemes, lags had the explicit meaning of produc-

tion lags and referred to time intervals of about one to two years. One of the main reasons for introducing dif-
ferentials was that they represented more immediate reactions. But in the later macroeconometric models,

7  Memorandum on the continuation of the League's  business cycle research in a statistical direction (1936, Archive of the League of
Nations, Palais de Nation, Genève). I would like to thank Pépin Cabo and Neil de Marchi for bringing this memorandum to my attention.

122

lags did not have this specific economic meaning anymore; they came to indicate time units of, for example,
one month. If time lags are time units, ∆t = 1, differentials can be approximated by differences, cf. equation
(8):  

y(cid:5)

≈

ty
)(

−

ty
(

−

)1

10. Conclusions

Tinbergen's  method  encompassed  Moore's  synthetic  method.  But  Moore  did  not  discuss  the  appropriate

mathematical  shape  of  a  possible  business  cycle  mechanism.  As  one  can  see  from  the  above  historical

account of Tinbergen's business cycle analysis of the 1930s, mathematical moulding played an essential role

in the development of business cycle explanations. Tinbergen's business cycle explanations are better consi-

dered as exemplars of what could be achieved by the program of the Econometric Society in its early stages.

Its scope was "the advancement of economic theory in its relation to statistics and mathematics" and its main

object "to promote studies that aim at a unification of the theoretical-quantitative and empirical-quantitative

approach to economic problems and that are penetrated by constructive and rigorous thinking similar to that

which has come to dominate in the natural sciences" (Constitution 1933, 106). One of the founders, Ragnar

Frisch, and editor of the society's own journal, Econometrica, emphasized this triple approach of econometrics:

Experience has shown that each of these three view-points, that of statistics, economic theory, and mathe-

matics, is a necessary, but not by itself a sufficient, condition for a real understanding of the quantitative rela-

tions in modern economic life. It is the unification of all three that is powerful. And it is this unification that

constitutes econometrics (Frisch 1933b, 2).

However, in Tinbergen's later modelling practice this founding ideal of the Econometric Society, that is the

union of mathematics, economics and statistics, had started to fall to pieces. In the late 1930s, mathematical

moulding was the first piece that fell out. But the disintegration would continue in the 1940s, as Mary Morgan

has described in her History of Econometric Ideas (1990, 264):

Between the 1920s and the 1940s, the tools of mathematics and statistics were indeed used in a productive

and complementary union to forge the essential ideas of the econometric approach. But the changing natu-

re of the econometric enterprise in the 1940s caused a return to the division of labour favoured in the late

nineteenth century, with mathematical economists working on theory building and econometricians concer-

ned with statistical work.

When mathematical moulding was taken out of the original program an important modelling tool was lost. It

is in fact the most effective tool to build the characteristics of the phenomenon to be measured, described or
explained  into  a  scheme  or  model8.    The  various  characteristics  of  a  business  cycle,  or  of  its  generating
mechanism, were built into a scheme by shaping the mathematical equations of the business cycle mecha-

nism. Whether differentials or integrals should be added was a part of the discussion of how to mould to sche-

me such that it incorporated the right cause-and-effect relations: immediate reactions, variable time lags bet-

ween influences, small production intervals generating large cycle periods, etc.

8 In my (1999) 'Built-in Justification' paper, I give a more general account of the role of mathematical shaping in the modeling process
and apply this to three cases of macroeconomic modeling. Two of them took place in the same period as Tinbergen's work described
here and were closely related it: (Frisch 1933) and (Kalecki 1935).

123

In classical mechanics, there is a close connection between the Calculus of Variations and cause-and-effect

relations. It is because of this connection that Karsten wanted to apply the "theory of quadrature" to investi-

gate the kind of relations that exists between economic quantities.

In the calculus such relations are familiar in the form of integrals and derivatives, and although these func-

tions are purely mathematical, they are useful to describe the behavior of related forces in the physical scien-

ces. It is the quadrature theory that economic data or statistics betray the same relationships when similarly

treated, and that when this is the case, the economic forces or phenomena measured by statistics may be

said to be in quadrature and a real relation is strongly suggested (Karsten 1924, 14).

And it was this connection that made Karsten's approach appealing to Tinbergen. 

However, the nature of economic data is totally different from data gathered in physics, that is, passive gai-

ned data only available in weekly, monthly, or other regular time-interval versus data obtained in a laborato-

ry under ceteris paribus conditions. Therefore, the mathematical tools to deal with these different kinds of data

will be different. Difference equations are simply more suitable to deal with economic data than differential

equations. But this observation is only one step in mathematical moulding. What still need to be done are

decisions upon the shape of the density functions, the metrics to be used, and the range of the parameter

values.

11. Bibliographical references

AFTALION,  ALBERT.  1927.  The  Theory  of  Economic  Cycles  Based  on  the  Capitalistic  Technique  of

Production. Review of Economic Statistics: 165-170.

BOUMANS,  MARCEL.  1993.  PAUL  EHRENFEST  AND  JAN  TINBERGEN:  A  Case  of  Limited  Physics

Transfer. Non-Natural Social Science: reflecting on the Enterprise of More Heat than Light. History of Political

Economy, supplement, ed. Neil de Marchi, 131-156. Durham and London: Duke University Press.

BOUMANS, M. 1999. Built-in Justification. In Models as Mediators, eds. M.S. MORGAN a n d

M . MORRISON, 66-96. Cambridge: Cambridge University Press.

BOWLEY, ARTHUR L. 1924. The Mathematical Groundwork of Economics. Oxford: Clarendon.

BULLOCK,  CHARLES  J.,  WARREN  M.  PERSONS  AND  WILLIAM L.  CRUM.  1927.  The  Construction  and

Interpretation of the Harvard Index of Business Conditions. Review of Economic Statistics: 74-92. Constitution

of the Econometric Society. 1933. Econometrica 1: 106-108.

FRISCH,  RAGNAR.  1933a.  Propagation  Problems  and  Impulse  Problems  in  Dynamic  Economics.  In
Economic Essays. In Honour of Gustav Cassel, 171-205. London: Allen and Unwin.

FRISCH, R. 1933b. Editorial. Econometrica 1: 1-4.

HABERLER, GOTTFRIED von. 1937. Prosperity and Depression. Geneva: League of Nations.

HANAU,  ARTHUR.  1928.  Die  Prognose  der  Schweinepreise,  Vierteljahrshefte  zur  Konjunkturforschung,

Sonderheft 7. Berlin: Von Reimar Hobbing.

HANAU, A. 1930. Die Prognose der Schweinepreise, Vierteljahrshefte zur Konjunkturforschung, Sonderheft
18. Berlin: Von Reimar Hobbing.

KALECKI, MICHAL. 1935. A Macrodynamic Theory of Business Cycles. Econometrica 3: 327-344.

124

KARSTEN,  KARL  G.  1924.  The  Theory  of  Quadrature  in  Economics.  Journal  of  the  American  Statistical

Association 19: 14-27.

KARSTEN, K.G.  1926.  The  Harvard  Business  Indexes  –  A  New  Interpretation.  Journal  of  the  American

Statistical Association 21: 399-418.

MAGNUS,  JAN  R.  AND  MARY  S.  MORGAN.  1987.  The  ET  Interview:  Professor  J.  TINBERGEN.

Econometric Theory 3: 117-142.

MARSCHAK, JACOB. 1934. The Meeting of the Econometric Society in Leyden, September-October, 1933.

Econometrica 2: 187-203.

MOORE, HENRY L. 1929. Synthetic Economics. New York: Macmillan.

MORGAN, MARY S. 1990. The History of Econometric Ideas. Cambridge: Cambridge University Press.

ROOS,  CHARLES F.  1930.  A  Mathematical  Theory  of  Price  and  Production  Fluctuations  and  Economic

Crises. Journal of Political Economy: 501-502.

TINBERGEN,  Jan.  1927.  Over  de  Mathematies-Statistiese  Methoden  voor  Konjunktuuronderzoek.  De

Economist 11: 711-723.

TINBERGEN, J. 1928. Opmerkingen over Ruilteorie. Socialistische Gids 13.5: 431-445, 13.6: 539-548.

TINBERGEN, J. 1929. Minimumproblemen in de Natuurkunde en de Ekonomie, Amsterdam: Paris.

TINBERGEN,  J.  1933a.  L'Utilisation  des  Équations  Fonctionnelles  et  des  Nombres  Complexes  Dans  les

Recherches Économiques. Econometrica 1: 36-51.

TINBERGEN,  J.  1933b.  Statistiek  en  Wiskunde  in  Dienst  van  het  Konjunktuuronderzoek,  Amsterdam:

Arbeiderspers.

TINBERGEN, J. 1935a. Annual Survey: Suggestions on Quantitative Business Cycle Theory. Econometrica

3.3: 241-308.

TINBERGEN, J. 1935b. Quantitative Fragen der Konjunkturpolitik. Weltwirtschaftliches Archiv 42: 366-399.

TINBERGEN, J. 1936. Kan hier te lande, al dan niet na overheidsingrijpen, een verbetering van de binnen-

landse  conjunctuur  intreden,  ook  zonder  verbetering  van  onze  exportpositie?  In  Prae-adviezen  voor  de

Vereeniging voor de Staathuishoudkunde en de Statistiek, 62-108. Den Haag: Nijhoff.

TINBERGEN, J. 1937. An Econometric Approach to Business Cycle Problems. Paris: Hermann.

TINBERGEN,  J.  1939a.  Statistical  Testing  of  Business-Cycle  Theories  I;  A  Method  and  its  Application  to
Investment Activity. Geneva: League of Nations.

TINBERGEN,  J.  1939b.  Statistical  Testing  of  Business-Cycle  Theories  II;  Business  Cycles  in  the  United

States of America. Geneva: League of Nations.

TINBERGEN,  J.  1959.  An  Economic  Policy  for  1936.  In  Jan  Tinbergen  –  Selected  Papers,  eds.  L.H.
Klaassen, L.M. Koyck and H.J. Witteveen, 37-84. Amsterdam: North-Holland.

TINBERGEN, J. 1988. Recollections of Professional Experiences. In Recollections of Eminent Economists

Vol. 1, ed. J.A. Kregel. Macmillan.

VINCI, FELICE. 1934. Significant Developments in Business Cycle Theory. Econometrica 2: 125-139.

125

EUROSTAT COLLOQUIUM

HISTORY OF BUSINESS CYCLE ANALYSIS

Luxembourg, 12 November 2001

BUSINESS CYCLE ANALYSIS IN NORWAY UNTIL THE 1950s

Olav Bjerkholt
Professor
Department of Economics
University of Oslo
E-mail: olav.bjerkholt@econ.uio.no

Einar Lie
Senior Researcher
Centre for technology, innovation and culture
University of Oslo
E-mail: einar.lie@tik.uio.no

127

TABLE OF CONTENTS

1. The economic barometer project in the 1920s – beliefs 

and doubts

2. The empiricist’s approach

3. Ragnar Frisch’s approach to business cycle analysis

4. The disappearance of the cyclical movements

5. Bibliographical references

130

131

133

143

145

128

"That 'good times' follow 'bad times' and 'bad times' again after 'good times' are something most people have

a  vague  understanding  of.  But  not  so  many  have  the  full  understanding  of  how  regular  and  continual  this

changing up- and downward movement in economic life is, and even fewer have the right understanding of

how  the  bad  times  naturally  and  necessarily  are  developed  from  the  good  times,  just  like  rain  follows  and

always must follow sunshine and sunshine follows rain."

This is how the Norwegian economist Einar Einarsen (1868-1913) introduced his book Gode og daarlige tider

(Good and bad times) from 1904. Einarsen's book, which earned him a position as professor at the University

of Copenhagen (Hanisch and Berg 1984: 76), was the first empirical and theoretical investigation of business

cycles in Norway. This book reflected the emerging interest in this field in a number of countries. Also older

studies from Norwegian economists had been interested in the causes of instability in the economic system.

They were, however, occupied with descriptions and explanations of economic crises. As most 19th century

economists, they did not seem to recognize "cycles" as a central concept for economic analysis (Schumpeter

1954,  Morgan  1990).  This  is  particularly  evident  in  the  elderly  Professor    Aschehoug's  (1822-1909)  three-

volume  treatise of  modern economics, published in  the same  decade  as  Einarsen's book. The volume

examining these topics was introduced with a section on "Changing good and bad times: The history of crises",

and the concluding chapter is rightfully titled "The theory of crises" (Aschehoug 1908).

Einarsen obviously drew heavily on Clément Juglar's analyses of economic cycles; his comments on other
theorists also seems to have been inspired by judgments made in Juglar's main study1.  In the concluding
section  he  firstly  rejects  theories  focusing  on  crises  and  explaining  them  by  "accidental  causes".  He  then

moves on to general explanations of the cycles, mainly Jevons' sunspot theory. This was "a great theory from

a man of genius", but, like Juglar, he stated that Jevons' theory was not in line with statistical evidence, and

that  a  theory  of  crises  or  cycles  had  to  be  rooted  in  the  social  and  economic  structure  of  society.    Finally,

Einarsen arrived at "the true cause of the alternating good and bad times", found in the relation between cre-

dits, prices and the volume of production in the economy. As Juglar, he found that the downturn was caused

by factors inherent in the upturn, and vice versa. The cycles were inevitable, like rain and sunshine, though

they did not necessarily appear with a regular periodicity.

Einarsen methodology was quite simple; his numbers were  reproduced  directly  from  the  State's official

statistics without any calculations. Thus he ended up with long columns of absolute numbers, where it was

(and is) extremely hard for the reader to identify trends and cyclical movements. And even if Einarsen's study

was in line with the newer international trends in economic investigation – or maybe just for that reason – its

theoretical approach seems to have had a limited influence on business cycle analyses from the early 1920s,

when this field of study expanded in Norway. The empirical business cycle analysis of the 1920s and '30s lost

interest in the kind of general theorizing Einarsen was occupied with, where causes and effects were discussed

in relations to a few variables measuring the state of the national economy. This is a part of an international

tendency, which in Norway was strengthened as Norwegian economists and statisticians increasingly came

to see business cycles in the domestic economy as a consequence of developments in larger countries or in

trade patterns. – This is particularly evident for the late 1920s and 1930s.

1 Einarsen's  references  are  to  the  second  edition  of  Juglars  Des  Crises  Commerciales  et  de  leur  retour  périodique  en  France,  en
Angleterre et aux États-Unis. Paris: Guillaumin 1889.

129

1. The economic barometer project in the 1920s – beliefs and doubts 

The large economic fluctuations during and shortly after the First World War came to promote an interest for

short-term economic statistics. This interest increased after the construction of the Harvard barometer, which

received considerable attention also in the Scandinavian countries.

The Swedish short-term statistics and analysis of business cycles expanded rapidly in the 1920s. The key

figure behind this expansion was the economist Johan Åkerman, who developed a Harvard-inspired "baro-

meter" that was published regularly from 1922. In Norway, the ambition seems to have been the same as in

Sweden in the early 1920s. The immediate goal was to develop a barometer that could give simple progno-

sis for the economic development, especially early warnings of economic downturns. This became even more

important as the general view was that an immanent socialist threat from the radicalised labour movement

would be strongly reinforced in times of crises and unemployment.

Just before the war, two commercial magazines in Norway had started to construct and publish each their

wholesale price index, and newspapers and magazines constantly brought forward informal prognoses for the

state of the economy. From 1922, The Central Bureau of Statistics presented monthly a number of short-term

statistics in what the statisticians labelled a "business cycle table". In this table, unemployment among trade

union  members,  interest  rates,  volume  of  credits  given  from  private  banks,  some  figures  for  foreign  trade,

bankruptcies, the stock market index and a few other time series were presented. Annually, the tables were

supplied with long verbal comments from the Bureau economists,  and  normally  supplied  with comparative

figures from larger countries (USA, Great Britain, Germany and France). The Bureau's plan in 1922 was to

"make a thorough analysis of each column, to determine their symptomatic value as a measurement of the

economic cycles and thereby approach the construction of a true barometer of crisis" (CBS 1922: 49).

The  next  autumn,  the  Bureau  started  to  print  graphs  illustrating  the  cyclical  movement  of  some  of  these

series. In an article in 1924, this move was presented as the definite step in the making of a "business cycle

barometer". Norway was now, together with Great Britain and Sweden, among the countries that had baro-

meters  of  the  Harvard  type.  The  author  of  this  article,  Ingvar  Wedervang,  explained  that  each  series  did

nothing else than describe the development. However, "by following the series reciprocal [innbyrdes] move-

ments  through  earlier  cycles  one  can  find  out  in  what  order  the  leading  economic  events  usually  happen"

(Wedervang 1924). In the 1923-graphs, efforts were made to remove the long-term trend and seasonal move-

ment, so that the cyclical movements should appear more clearly. The person behind these technical opera-

tions was probably a young economist, Charles W. Røgeberg. Røgeberg graduated from Oslo University in

1917 and worked in the Bureau for two years. From 1919 until 1921 he went to Harvard to study economics

and  statistics,  and  in  these  two  years  he  had  a  temporarily  employment  in  the  Harvard  Committee  on

Economic Research. After having returned to Norway, Røgeberg worked two years for a larger commercial

bank before he re-entered the Bureau in 1923.

From this time on, one would have expected that the Norwegian "barometer" would have been further elabo-

rated and possibly strengthened with new statistical series. But the opposite happened. The short-term ana-

lyses of time series were considerably reduced in 1925, and in 1926 it was stated from the Bureau that the

production of an economic "barometer" was no longer on their agenda (CBS 1926: 251). The reason for this

was said to be that several of the statistical series describing the Norwegian economy covered to short per-

iods of time; hence they could not serve this purpose. An explanation like this was consistent with the alrea-

dy presented idea that the graphs only could be used in constructing a barometer when historical patterns

were revealed. Still, the time series had not become shorter from 1923 to 1926 – it seems that some kind of

overall pessimism with regard to the barometer-project had occurred. 

130

This is indicated also by the annual business cycle analysis. In 1927, the first year after the denouncement

of the barometer-idea, the graphical representation was still made like the Harvard-lines. They were drawn

together in the same picture, so that cyclical correlations or systematic time lags could appear as clearly as

possible. But the reader was explicitly informed that the lines could not "be used as a barometer for future

development" (CBS 1928: 20). And from the next year and throughout the 1930s, the curves were separated

and presented either in different frames or above each other in one large figure. Adrienne van den Bogaard

(1999: 119) has mentioned this difference between the Dutch barometer of the late 1920s and Harvard-origi-

nal: The Dutch economists choose principally the same solution as Norwegians after 1927, and v.d. Bogaard

sees this separation of curves as an indication of Dutch doubts on the philosophy of the barometer. In Norway,

this relation between belief and doubt on the one hand, and integrated and separate graphs on the other,

seems to be even more obvious.

2. The empiricist's approach

So why was the barometer-project left – and for what? Historically, the barometer construction has been seen

as a part of a more analytical-descriptive program, which was succeeded by a macroeconomic research pro-

gram with Ragnar Frisch as one of the protagonists. The redirection in 1926 was not inspired by a more theo-

retical approach, its time was still to come; it was relieved by a more analytical and in some respects less

theoretical approaches to business cycle studies.

Ingvar Wedervang, who had worked in the Bureau with questions related to business cycle studies, moved

on to a position at Oslo University in 1924 – in 1931, he founded the Institute of Economics together with

Ragnar  Frisch.  The  already  mentioned  Charles  Røgeberg  kept  working  in  the  Bureau.  (When  one  of  the

authors of this paper stated to work in the Bureau in 1965 Røgeberg was still in position. But he does not

seem to have published anything in the preceding 40 years since he wrote his article on how to remove sea-

sonal cycles from foreign trade statistics in 1924.)  

The person who came to dominate the business cycle research in the Bureau was Eilif Gjermoe (1887-1980),

educated in law and economics and employed in the Bureau from 1917. From 1926 Gjermoe was appointed

as the head of one of four departments in the Bureau. This was a very large department, dealing with popu-

lation statistics, wages, prices, unemployment and a number of other statistical areas. From the appointment

of Gjermoe and until the mid 1930s, this department coordinated the presentation of short-term economic sta-

tistics. Gjermoe seems to have used the term "barometer" only a few times in 1927/28, and that is when he

– as quoted above explained that the graphs should not be interpreted as one.

Gjermoe had soon got interested in time-series studies. From 1917 he published a number of articles exami-
ning property prices (1917), bankruptcies (1922), quantity of money (1923), the relations between marriages
and selected economic variables (1924), and between crime rates and business cycles (1927). His analysis
of marriages and business cycles had striking similarities to, and were probably inspired by, earlier studies
from e.g. Arthur Bowley and Reginald Hooker (Klein 1997: 232 f.). Common for all Gjermoe's early investiga-
tions were that they directed against areas were relatively long time series were available. His investigations
were methodologically motivated, he was fond of lalgebraic exercises, and he looked for – and often found –
evidence suggesting cyclical correspondence in his time series.

In contrast to the studies carried out in the start of his career, later studies showed an increasing scepticism

to  general  statements  about  social  and  economic  regularities  and  basic  concepts  used  in  cycle  analyses.

While e.g. Ragnar Frisch were among those who maintained the existence of cyclical regularities, Gjermoe

flatly rejected  theories  claiming  that the business cycles  followed a  regular  pattern: "It  is  completely

131

unreasonable that the interplay of different forces in economic life by themselves should create a system of

regular cycles. If one should suppose that, one also has to suppose that the actual cycle is irregular becau-

se  the  number  of  different  external  factors  influencing  the  development  must  remove  any  regularity  in  the

movements. It is easier to accept that a sufficiently strong external factor that gives the economy a 'shock'

can make the economic activity move in cycles that gradually disappears. When these shocks have different

impacts and occur with different intervals, one can also believe that they can create shorter cycles on top of

longer cycles. But it is difficult to accept that these shocks, which presumably must be independent of each

other, can create shorter or longer cycles where each one has a specific duration."

For Gjermoes role as a key operator in the Central Bureau of Statistics, his views on concepts and methods

in  empirical  cycle  studies  in    other  statistical  institutes  are  perhaps  more  interesting.  Normal  procedure  in

business cycle studies was to try to distinguish three types of fluctuations: the long-term (secular) trend, the

cyclical movement, and the seasonal trend. Normally, the cycles were constructed by identifying and remo-

ving  the  long-term  tendency  and  seasonal  trend  from  the  statistical  series.  Gjermoe  had  carried  out  these

kinds of operations himself in his early studies. In the late twenties and early thirties he made no studies of

this kind but in several purely methodologically directed articles he commented on and partly criticised this

starting point. Gjermoe had always been reluctant to accept the underlying economic explanation of what the

long-term trend consisted of. In 1923 he quoted Warren Person's explanation that this trend was "the growth

element  due  to  the  increase  of  population  and  development  of  industry"  (Gjermoe  1923:  90).  This  growth

theory – or its backbone, to quote Schumpeter – was not accepted by Gjermoe. He chose to draw a "normal

curve" that in sum left half the cyclical curves over the "normal curve" and half the cycles below, but without

giving the "normal" any economic interpretation. He was also critical to common methods in the separation of

"seasons" and  "cycles". There was no reason to believe that the seasonal movement was independent of

the business cycle (its strength and composition), Gjermoe explained to his readers, still standard estimation
techniques relied on these assumptions2.  – These and other objections didn't in any way make him leave
these concepts but he wrote a number of articles were he suggested different alteration and modifications in

estimation techniques (Gjermoe 1928, 1929a, 1929b, 1930).

The interwar Bureau's and Gjermoe's most original efforts came in the business cycle analysis of different

industrial branches in the 1930s. Several large in-depth studies were made, probably inspired by the effects

of the depression on the Norwegian economy, and made possible by the considerable expansion in the sta-

tistics produced from the late 1920s. A quite detailed annual statistics covering manufacturing industries was

made from 1927, and in the early 1930 a number of new short-term series were introduced, making it possi-

ble to construct a production index for manufacturing industry from 1933. Between 1935 and 1940 Gjermoe

published three larger and two smaller books on the development of the manufacturing industry in Norway in

"the post-war period", all written in Norwegian (Gjermoe 1935, 1936, 1937, 1938, 1940). Also in these books

he tried to register "normal curves" and cycles of different length, but now a number new methods were intro-

duced.  He  divided  the  manufacturing  industry  into  27  groups,  –  these  were  not  the  groups  used  in  the

Bureaus own statistics, the classifications were made to suit his analytical purposes. For each group he sam-

pled a large numbers of firms, trying to make the samples as representative as possible, and finally he esti-

mated Cobb-Douglas production functions by ordinary least square methods for all the groups. His sources

in the estimation of the parameters were the firms tax assessments and the statistical information reported to

the Bureau.

2  The criticism was directed against Warren Person's and Wesley Mitchell's writings, which were aware of the problem but (according
to Gjermoe) still disregarding it in empirical analysis.

132

The production functions made from the samples were used as a supplement to make reliable time series

where existing statistics was weak. For the most "traditional" part of the business cycle study, Gjermoe focused

his interest on determining turning points in the time series and identifying "leading" and "lagging" sub-sectors

both in the upturns and the downturns. Through these studies, he seems to have gained a new optimism with

regard to the possibility of identifying regularities that could be used in prognostic statements3.  However, the

production functions were developed primarily for the study of the interplay of productivity, profits and wages

during the  cyclical  movements. For Gjermoe, a political radical, it  was central issue also to find out how

incomes, or rather "burdens", were distributed between capital and labour in the times of crises.

From the practitioner we will now turn to the theorist. Gjermoe methodology was fruits of wide readings in

Anglo-american, Scandinavian, German and French literature. However, in both his  inter-war  and  rather

unknown  post-war  writings,  his  more  famous  contemporary  countryman  Ragnar  Frisch  was  completely

absent from his references, as was Frisch's students and younger colleagues. This was a mutual relationship;

when the new "macroeconomics" was constituted after the war and Frisch's students rapidly came to fill the

leading positions in institutions for economic analysis and politics, Gjermoe disappeared completely.  We will

return to Gjermoe and the destiny of his program after having presented the other business cycle research

programme in Norway in the 1930s.

3. Ragnar Frisch's approach to business cycle analysis

Business cycle analysis was one of Ragnar Frisch's major projects, if not the major project throughout his

most creative and productive period. This note does not aim at more than providing some remarks on the

efforts  of  Ragnar  Frisch  in  business  cycle  analysis,  especially  towards  indicating  the  overall  scope  of  his

approach, as  seen from his  own viewpoint, and the elements in his research strategy. The remarks are a

mixture of biographic, bibliographic and other observations, some of which have been gleaned from Frisch's

correspondance and archival material. 

Frisch's business cycle approach has been discussed by several authors, especially by Mary Morgan in the

widely read Morgan (1990) and by Jens Chr. Andvig, perhaps the foremost expert on Frisch's interwar macro-

economic work, in Andvig (1986). Frisch's famous Cassel essay from 1933 figures prominently in the history

of business cycle analysis (as well as in the history of macroeconometric model-building, see Bodkin, Klein

&  Marwah,  1991),  and  is  discussed  by  e.g.  Zambelli  (1992),  Louçã  (1997),    Klein  (1998),  and  Thalberg
(1998)4. 

Frisch's publications in English from his project are primarily Frisch (1927, 1928, 1931a, 1933), also Frisch

(1938) must to be included. He mentioned or touched upon his business cycle ideas also in various other

publications. In addition there are various publications and documents in Norwegian. 

Frisch's business cycle project can hardly be deemed a successful one, as he never finalized it and left it lar-
gely  unpublished.  He  kept  promising  a  major  publication  that  never  appeared5.    This  was  not  unusual  for
Frisch,  he  also  announced  other  publications  that  never  appeared  or  were  published  much  later.  But  with

regard to his business cycle project these repeated announcements (followed by unannounced withdrawals)

3 Here I try to read between the lines, Gjermoe is never explicit about this. But says several places that the study of regularities of lea-
ding and lagging sectors is vital for these analyses. 
4 It was also the paper particularly pointed to by the Royal Swedish Academy of Science when it honored Frisch by awarding the first
Nobel Prize in economics to him in 1969.  
5 This promise can be found e.g. in Frisch (1928, p.220), (1931a, p.76, n.1), (1933, p.29), (1938, p.3, n.2), as well as in other publica-
tions such as e.g. Frisch (1934a, p.271, n.3).

133

perhaps indicates more the effort and priority Frisch gave to this project, and the urgency he felt to come out

with results6.  The publication he promised, was the more complete solution he claimed to have found, to the

problem that Slutsky posed in his 1927 article, rather than a comprehensive publication on business cycle

analysis.   

Then why did he not deliver? The answer to this question is presumably that he either was not sufficiently

happy with the results, or his research strategy simply did not work out. As we shall see, Frisch's approach

required a large number of numerical simulations, something at which he was extremely adept, but the pro-

blems may have turned out to be more demanding than his after all primitive equipment could cope with. 

An eyewitness has confirmed that Frisch reworked his business cycle project as late as the winter 1939/407.
Post-World  War  II  he  did  not  touch  it  again,  but  by  the  outbreak  of  the  war  it  was  already  obsolete.  Jan

Tinbergen  had  initiated  the  macroeconometric  approach.  The  publication  of  J.  M.  Keynes'  General  Theory

with its strong appeal to macroeconomic policy-making did not leave much of a role for non-policy oriented

business  cycle  approaches.  Hence,  Frisch's  project  disappeared  quickly  from  the  scene.  Because  of  the

incompleteness of Frisch's publication of his ideas, the discussions of his approach in the literature do not

fully do justice to his efforts and ambitions. 

After some biographical background and brief remarks on Frisch's views on scientific methods in economics

we shall let a conference presentation Frisch gave (in Norwegian) in 1931 on the methodology of business

cycle analysis play a central role and serve as a focal point for discussing his work and some of the inter-

actions he had with other practicioners. 

Ragnar Frisch (1895-1973) was the jeweller's son who chose to follow a calling to become an econometri-

cian. After studying economics alongside his apprenticeship with a silversmith, Frisch continued his econo-

mic and statistical studies after graduation and accomplishment of his journeyman's probation work in 1920.
After studying in Paris 1921-23, he completed his doctoral thesis at the end of 19268.  For 1927 he had recei-
ved  a  Rockefeller  fellowship  for  studies  in  the  United  States,  a  stay  which  brought  him  in  contact  with  i.a.

Wesley Mitchell, Irving Fisher, and Joseph Schumpeter.

Frisch (1927), written down during the first couple of months during his stay in the United States, was a long

essay criticizing the current periodogram techniques of analysing historical time series with regard to finding

cycles and proposing new methods that allowed for "changing harmonics". It was through the help of Wesley

Mitchell  distributed  by  Rockefeller  Foundation.  And  thus,  though  it  was  not  properly  published,  it  reached

many of the practioners in the field and also found its way to university and research institute libraries. In the

essay Frisch mentioned his inability in Oslo "without organized assistance for tabulating and computing work"

(p.8) to test his proposed methods as far as he had wished, and he expressed the hope that "some well equip-
ped American research bureau will find it worth while to undertake a thorough numerical test of the methods"9.
Frisch (1928) was a briefer journal presentation of essentially the same methods. 

6 The  publication  was  promised  successively  as  an  unspecified  monograph,  a  publication  from  his  Institute  of  Economics,  then  an
Econometrica article in 1933, and finally a Cowles Commission Monograph in 1934. The Econometrica article seems to have been drop-
ped  after  Edwin  B.  Wilson,  refereeing  it,  called  it  mathematics  of  little  interests  to  economists.  The  planned  Cowles  Commission
Monograph were to be called Changing Harmonics: A Study Of The Effects Of Linear Operations Performed On Erratic Shocks.  
7 Petter Jakob Bjerve, as told to Olav Bjerkholt. 
8 His dissertation was titled: Sur les semi-invariants et moments employés dans l'étude des distributions statistiques.
9 Frisch (1927) is disucced at some length in Morgan (1990, 83-90). 

134

In the spring of 1928 Frisch's father died with the jeweller's business in a vulnerable financial state. Frisch as

the only heir,  was at a point of no return. A  generous invitation  from Irving Fisher at Yale University was

decisive. Frisch accepted the invitation, put down his silversmith tools for the last time, and took off for United

States in January 1930. The visit to the United  States  lasted one year and a half. During the visit he took

prominently part in founding The Econometric Society in December 1930. 

Frisch was as a scientist very much a "methods man". When as a young student he surveyed economics, he

found it lacking in scientific rigour in several respects. In drafting the constitution of The Econometric Society,

Frisch proposed the formulation found until the 1990s in every issue of Econometrica: "… to promote studies

that aim at a unification of the theoretical-quantitative and the empirical-quantitative approach to economic

problems  and  that  are  penetrated  by  constructive  and  rigorous  thinking  similar  to  that  which  has  come  to

dominate in the natural sciences." This terminology was adapted from and practically identical to what he had

used to formulate his own research program around the mid-1920s.

As  the  quoted  formulation  hinted  at  Frisch  held  strong  methodological  views  on  the  role  of  theory  in

empirical  work.  He  must  certainly  be  counted  as  a  strong  proponent  of  empirical  studies,  but  he  had

nothing but scorn for empirical analysis not appropriately founded on a theoretical paradigm. He expres-

sed this view many times, e.g. in a panel debate on the status and prospect for quantitative economics

at the AEA meeting in 1927, where he complained about the widespread tendency to take 'economic

statistics' as synonymous with 'quantitative economics'. The latter term according to Frisch had to do
with 'the logic of our quantitative notions'10. 

He vented his view on this in an eloquent and very Frischian way also in his opposition to Johan Åkerman's
doctoral dissertation in 192911.  Referring to the distinction he had drawn in the above mentioned debate he
spoke scorningly about the group of "geschäftige statistics compilers and correlation calculators": 

'Let the facts speak for themselves' has become quite a slogan for this group. It is a dangerous slogan,

prone to lead astray those who think superficially and without  independence of mind. It is true that there

can be cases where we in advance do not have a definite hypothesis, and where it therefore can be use-

ful to play around with the observation material in the hope that this will give us an idea. But this playing

around can never become more than a preliminary step. The fundamental contribution to the understan-

ding of the phenomena comes from another part in the analysis.

Both natural and social  phenomena  adhere to a  peculiar and particular advertisement policy. Often they

present with trumpets and drums as big numbers  a lot of things that cannot avoid attracting the attention of

an observer with no preconceptions, but which are utterly unimportant with regard to a deeper understanding

of the phenomena. 'Facts that speak for themselves' will often speak in a childish tone. And that is especially
true  with  regard  to  those  phenomena  which  cover  really  scientific  problems.  Where  the  explanation  is
obvious, no scientific investigation is needed. And for phenomena where the explanation is not obvious, it
turns out again and again the the key to the phenomena is an idea which is not in the observation material,
but on the contrary is added to it as a heroic assumption that transcends what has been observed. It is just
in such heroic asumptions that the great constructive thinker differs from the average scientific worker. 

10 Mills et al. (1928). Frisch took part as a discussant from the floor and the quote is from the statement he prepared for the procee-
dings, as requested by Frederick Mills, but it was not printed after all. The panel debate may have been a follow-up of Wesley Mitchell's
Presidential Address in 1924, Mitchell (1925). 
11 Frisch (1931c). His rhetorical statements were not meant as criticism of Åkerman. 

135

This is true both for natural and social sciences. The observation material is and remain a dead mass

until animated by a constructive theoretical conjecture. It is the synthesis between theory and observa-

tion that gives fundamental contributions to a real understanding of the phenomena. 

Although no economics or econometric topic seems to have been out of range of Frischs' interest at this time,

his major fields of research effort were at this time "marginal utility analysis", "productivity theory", and "busi-

ness cycles". In each of these he aimed at giving demonstrations of what the "unification of the theoretical-

quantitative  and  the  empirical-quantitative  approach"  meant.  In  both  of  the  micro  fields  he  had  prepared

monograph length elaborations of the theory. In marginal utility analysis he pioneered an axiomatic approach

and applied the theory in various directions, e.g. to labour supply, taxation, price indices, in addition to his

favourite topic of estimating the income flexibility of marginal utility. In production theory he had worked out

the  implications  of  the  basic  assumptions  underlying  the  multi-factor  production  function  in  a  very  detailed

way, clearly preparing to apply it to different kinds of problems, which he indeed did during the 1930s, appli-

cations comprised engineering production studies, the diet problem and demography. 

The applications he pursued in the two micro fields were both static and dynamic, the business cycle analy-

sis, on the other hand, was macrodynamic by definition. The business cycle analysis differed from the other

fields, as there was not much to draw on as a theoretical paradigm as the background for empirical studies.

The theories that had been launched were conflicting, and as Frisch pointed out, hardly any of them could be

said to be a determinate theory. Frisch's approach to business cycle analysis can be interpreted on this back-

ground as a search for a confrontation between theory and reality without postulating a specific macroecono-

mic model. How then to get at the cyclical character of economic variables? Frisch's use of the Slutsky effect,

in fact, a reinterpretation of Slutsky's work seemed in this setting a brilliant idea. 

Thus what is strikingly missing in Frisch's massive work in business cycles analysis is the search for a macro-

economic paradigm, a set of conjectured macrodynamic equations. A model is found in the Cassel essay and

it came to be interpreted as Frisch's theory of the business cycles. But the Cassel essay needs a close rea-

ding to verify whether the model presented there was meant as a specific business cycle theory or just an

exemplification of some kind. Frisch had from much earlier held the doubts that he finally let out in his 1938

criticism of Tinbergen, that simultaneity implied severe restrictions on the possibility of verifying the autono-

mous relationships representing the functioning the economy even if they existed. The ultimate purpose of

business cycle analysis, as for all Frisch's research, was to provide socially useful information, which for the

business cycle analysis meant forecasts. But how could that be offered in a scientific way without an explicit

estimated or calibrated macroeconomic model? Frisch had a solution, but it it turned out to be a remote one.  

In the United States Frisch had gathered, primarily through his lectures at Yale and in Minnesota, a number

of  pupils  of  his  approach  to  time  series  analysis.  They  were  graduate  students,  doctoral  students  and  the

occasional professor including – Joseph Schumpeter.

Just before Frisch returned to Oslo from USA he had been awarded a chair as professor at the University of

Oslo by a special act of the Storting (parliament), which had been notified that Frisch had a pending offer from

Yale University for a permanent professorship and ample research facilities. He at the same time held high

hopes  for  getting  support  from  Rockefeller  Foundation  for  an  econometric  laboratory  in  Oslo,  not  least  for

business cycle analysis. 

136

On  his  return  in  June  1931  he  went  almost  directly  to  Stockholm  to  take  part  in  the  Nordic  Economic

Meeting12.  The meeting took place 15-17 June 1931, and Frisch's contribution was titled: "Business cycles

as a statistical and theoretical problem"13.  He aimed in the paper at presenting a general survey of the natu-

re of the business cycle problem and of the methods, economic-theoretical and statistical, by which it could

be attacked. Frisch had prepared a synoptic note in which he very briefly stated (with slight reference to W.

Wilson) 14 points on the issue and then spoke to elaborate on each one of them. 

The points were brief, not particularly systematic, and some of them even cryptic, for those who did not know

Frisch's terminology (and who would?). Probably the handout was written at short notice. Frisch had unusual

credentials for attacking the business cycle problem in his combination of economic and statistical knowled-

ge,  his  mathematical  abilities  and  his  almost  passionate  skills  in  numerical  analysis.The  points  are  worth

considering as there had never until then been stated anything that came close in comprehensiveness and

analytic depth about constructing business cycle models. 

The 14 points in the synoptic note were the following:

Economic-theoretical part

1.  The connection between the economic-theoretical and the statistical parts of the problem. Necessary

for the business cycle theoretician to handle modern statistical tools.

2.  Cycles of different kinds: shortrun cycles, longrun cycles, etc.

3.  Free and bound oscillations.

4. 

Impulse problems and propagation problems with a free oscillation. Perturbations and half-free oscilla-

tions.

5.  The business cycle must for the most part be dealt with as a free oscillation.

6.  The business cycle theory (understood as a theory for a free oscillation) must be determined. It must

contain exactly the same number of conditions as variables.

7.  None of the until now proposed business cycle theories have been determined. 

8. 

In a determined business cycle theory at least one of the conditions must be dynamic. From this fol-

lows inter alia that a system of Walrasian equations never can lead to a business cycle theory. A dyna-

mic condition is a condition which connects the values of a certain variable at two (or more) points in

time. 

9.  A complete business cycle theory comprises three problems: 

a) The specification problem: The specification of the relevant variables.

b) The determination problem: Analysis of the number and the independence of the posed conditions
and comparison with the number of variables.

12 The Nordic Economic Meetings were joint meetings at four-year intervals of the national political economy associations in Sweden,
Denmark,  Norway  and  Finland,  normally  with  one  speaker  from  each  country.  The  senior  of  the  two  professors  in  economics,  Oskar
Jæger,  had  urged  upon  Frisch,  while  in  the  United  States,  to  provide  the  Norwegian  contribution.  Frisch  yielded,  but  found  it  "very
inconvenient". The reason was a forthcoming meeting in Oslo with representatives of the Rockefeller Foundation immediately after the
Stockholm event, to discuss the proposal of establishing the Institute of Economics, an issue of absolute concern to Frisch, see Bjerkholt
(2000c).
13  The  source  for  Frisch's  presentation  is  the  official  proceedings,  see  Frisch  (1931b).  The  proceedings  volume  from  the  meeting
contains his introductory speech, with the handout appended. (The handout and the quotes from Frisch's presentation translated by O.
Bjerkholt.) 

137

c)  The  shape  problem:  Clarify  that  the  posed  conditions  really  lead  to  cyclical  movements.  This

depends upon not only which variables enter which condition(s), but also of the numerical relationship.

Certain  values  of  the  numerical  parameters  characterizing  the  conditions  will  may  lead  to  cyclical

movements, while other values of the same parameters do not lead to cyclical movements. The nume-

rical character of the conditions is thus essential. 

10. An attempt at erecting a determined scheme for a business cycle theory [a model sketch was included

in the synoptic note, but omitted here].

Statistical part

11. The decomposition problem for statistical time series.

12. The distinction between prim-relations and confluent relations (phase-relations). Inflated and deflated

phase-relations.

13. Pitfalls to watch out for when trying to determine the numerical character of the economic-theoretical

laws by means of statistical data. In principle the phase-relations can always be determined, but the

prim-relations can only be determined in certain cases. 

14. Conditions under which it is possible to determine prim-relations statistically. Even if prim-relations can-

not be determined statistically, there is a loophole: a systematic "interview" method which very likely

will give useful results.

In his presentation Frisch referred to the points in the handout as a research programme or "lines of advan-

ce"  in  business  cycle  analysis,  necessary  to  achieve  more  fruitful  and  above  all  more  definite  results  than

achieved through the many different and partly contradictory business cycle theories. He emphasized (point
1) the role of statistics as no longer being just a descriptive tool, but also an important element in the expla-
nation of economic waves. This called for the business cycle theoretician to be appropriately equipped with

statistical knowledge. He asserted that within 10-15 years it would be an absolute necessity for the business

cycle theoretician to possess a wide range of statistical-technical tools. 

He reiterated some of his favourite scientific maxims, such as the need to get – as in physics – the theoreti-

cal concepts from the observation technique itself, i.e. to define the concepts such that they can be observed

empirically through statistics or in other ways. Another maxim was the indispensable need for business cycle
mechanisms to be analysed quantitatively, the essential mechanisms could not be arrived at through a pure-
ly  qualitative  analysis,  as  they  typically  would  be  contingent  on  the  quantitative  relationship  between  the

magnitudes of key parameters.

The key issues of the "economic-theoretical part" was Frisch's tenets for a business cycle theory. It had to be

determinate (point 6), it had to be dynamic in the Frischian sense (point 8), and it ought to conceive the cycle

as a free oscillation (point 5).  

Frisch also went over more familiar ground to the benefit of the assembled Nordic economists and expres-

sed his concern (point 2) that one had to be prepared for at the outset of analysis that the business cycle that

came to the fore after eliminating seasonal movements as well as the underlying trend, could consist of cycles

of different length, and interference between different waves might very well make the business cycle look

very irregular. This was, indeed, Frisch's home ground, he had conducted countless numerical simulations

while in the United States and posed as a test to students in exams he gave, to retrieve the original cycles in

time series of constructed data of superposed cycles and shocks. 

138

Frisch explained the difference between free and bound oscillations (point 3), which was a distinction relative

to the model or system of equations representing the cycle mechanism. He spoke at some length to elaborate

using examples from astronomy, locust invasions, meteorology, Jevons' sun spot theory, Moore's Venus theory,

and Beveridge's wheat prices to make his point. 

The key terms from the title of the Cassel essay, not yet written, appeared (point 4), clearly referring to the

use that Frisch would make of Slutsky (1927) in his modelling of Wicksell's rocking-horse. Frisch had been

aware  of  Slutsky's  work  earlier  than  most  others.  Frisch  and  Slutsky  had  been  in  correspondence  and
exchanged reprints for a couple of years before 192714.  Slutsky had sent a reprint of his 1927 paper to Frisch
in New York in May 192715.  Frisch could not read Russian, but the English summary was sufficient for him

to immediately see the importance of Slutsky's results16.  As a passionate numerical analyst himself he could
appreciate the vast effort Slutsky had put into the paper17.  At the meeting Frisch elaborated only very briefly
on these concepts, perhaps finding it too difficult for the audience. He explained the impulse-propagation as

kicks given to a pendulum. A real strong impulse (kick) could force the pendulum and cause a perturbation

and thus a half-free oscillation. 

Frisch had thus clearly worked a lot the implications of Slutsky's while he was in the United States. Slutsky's

numerical  experiment  raised  doubt  that  "observed"  cyclical  fluctuations  were  entirely  spurious,  created  by

mechanical smoothing or more generally any kind of linear operators applied to a random series. This was a

valid point, hence a need for time series analysts to safeguard the procedures from this pitfall. But it was ano-

ther aspect that could be derived form Slutsky's result that Frisch was more concerned with, namely that the

economic structure, conceived as a linear dynamic model, worked as a linear operator on random disturban-

ces and cumulated their effect as cycles. Frisch was determined to penetrate this problem such that he could

find the exact nature of the cycles generated when a given linear operator was applied to random shocks.

How  far  he  had  advanced  along  this  line  by  1931  is  unknown,  but  he  would  make  it  a  major  issue  in  the

ensuing years. 

Then Frisch moved on to modelling issues. Without equality between the number of conditions (equations)

and  the number of variable to be explained by the model, no  theory could  adequately  explain  how  the

successive phases of the cycle followed from each other and thus would have to refrain from completeness

in the explanation. This was, indeed, the case, the typical cycle explanation would, according to Frisch, assume

that something, say the price level, moved cyclically, and from that try to explain the cyclical movements in

other variables. Without referring to any specific business cycle theory Frisch asserted (point 7) that they all

across the board were indeterminate. The way of getting around the determination problem in the explana-

tion of, say, the turning points of the cycle, was always the same. At the decisive point in the analysis "… one

14 Frisch was one of few people who had received from Slutsky his famous 1915 paper, not yet rediscovered!
15 Slutsky intimated to Frisch what the paper had meant to him in human terms: "… ich während aller dieser Zeit so mit einer Arbeit ein-
genommen wurde, so in der Arbeit lebte, dass ich für Alles in der Welt fast vollständig blind und stumpf wirde. Krank war ich - fast könn-
te man sagen - mit dieser Arbeit. Meine Freunde Scherzten., dass ein Wurm "Gordius stochasticus" (siehe Fig. 10 und Fig. 12) mir an
der Mark frass und mein Blut saugte." (Slutsky/Frisch, 9 May 1927). 
16 "I am sorry I am not able to read the 'Summation of …' in extenso. Anyhow the summary is sufficient to show the extreme importan-
ce of your problem. I have found your treatment very suggestive indeed. It can be no doubt about the fact that you have here a very fruit-
ful idea the following up of which seems highly promising." (Frisch/Slutsky, undated answer to Slutsky/Frisch 9 May 1927).
17 Soon after Frisch sent Slutsky a copy of his own paper (Frisch, 1927). Slutsky also drew Frisch's attention to Yule's paper published
the same year (Yule, 1927) and even sent Frisch his recent correspondence with Yule. Frisch's appreciation of Slutsky (1927) is also
apparent  from  the  fact  that  practically  his  first  act  as  Editor  of  Econometrica  was  to  ask  Slutsky's  permission  to  publish  the  paper  in
English. He addressed Slutsky 10 months before the first issue of Econometrica appeared, but five years would still pass before the arti-
cle was finally revised, translated and published (Slutzky, 1937).

139

stretches  the  hand  out  and  and  pulls  in  a  new  variable  by  which  one  'explain'  that  the  turning  point  in  the

others will occur"18!  

Then Frisch offered a prescription (point 9) for setting up a proper business cycle model, reiterating some of

the points above. The dynamic character of the proposed model, Frisch's shape problem, cannot be ensured

ex ante, but requires calibration (estimation) of the parameters. Frisch also included an example in the han-

dout  of  a  dynamization  of  simple  demand-supply  scheme  to  "illustrate  the  nature  of  the  theoretical  tools

necessary for a properly determined business cycle theory". Finally, Frisch offered (point 10) nothing less than

a sketch of a large business cycle model (see below).

In the "statistical part" Frisch first (point 11) referred just briefly to the decomposition problem, i.e. the topic of

Frisch (1927, 1928). At this time he had revised his view of some of the original methods and suggested new

directions in Frisch (1931). 

His next issue was a highly interesting one, as it touched upon the theme of his 1938 paper. The terminology

was a little different. By 'prim-relations' Frisch meant autonomous relationships: "When we try to verify economic-

theoretic laws by means of statistical data, we are in the strange situation that if our data satisfy several prim-
relations,  then  these  data  can  in  principle  not be  used  in  the  determination  of  these  prim-relations."    The
(deflated) confluent relations or phase-relations (in 1938 called coflux relations) on the other hand, can always

be determined. This was the problem of passive observations simultaneous fulfilling several relationships. He

must have spoken over the heads of the audience on this topic, although he tried to exemplify by some very

simple mathematical examples. 

He  reiterated  a  favourite  criticism  he  had  raised  before,  that  many  parameters,  say  of  demand  elaticities,

which were "estimated" in the literature, were in fact estimated as the ratios of two error terms and thus fun-
damentally indeterminate19.  But there were ways out of this dilemma, namely "in situations where one can
introduce an additional variable about which it is plausible to make distribution assumptions". Another way

was a pet idea of Frisch – the interview method.

What then was Frisch's model? It was specified as  list of 38 (endogenous) variables followed by a list of 37

equations, defined only suggestive verbal formulations. Hence, it can hardly be called a properly specified

model. Frisch confessed without embarrassment that he had not been able to find the missing equation! He

had left out a number of accessoric variables, such as various aggregates, that could be added as variables

and definitional equations at the same time, and indicated that some of the variables and equations were too

aggregate. Hence, it  was a  really  large  model  sketch he had outlined. Several key equations were just

suggested by names such as "the supply function for labour", the demand function for consumption gods",

"the general price level", etc. The lack of corroboration was very un-Frischlike and suggests that the whole
model sketch had also been drawn up at short notice. It is thus difficult to work out if the model made sense20. 

In  the  ensuing  years  the  business  cycle  project  was  a  major  priority  at  Frisch's  University  Institute  of

Economics, established from January 1932, financed by Rockefeller foundation. Needless to say, the busi-

ness cycle project was a major priority. When he reported to Rockefeller Foundation after four years, half of
the money and time spent was on the business cycle project21.  The report dealt with the project under the
following five sub-headings, indicating how Frisch structured the overall project.

18 Tinbergen's long survey of business cycle theory in Econometrica (Tinbergen, 1935) confirmed Frisch's view on this point. He found
only two mathematically formulated closed system in the literature, Frisch's and Kalecki's theories, both presented at the Leyden mee-
ting of the Econometric Society in 1933, and subsequently published.  
19 He would elaborate much more on this topic in his Pitfalls criticism of Leontief and in his Confluence Analysis. 
20 The model sketch is mentioned in Andvig (1986), who dismissed it as "Gargantuan" (p.80). 
21 Frisch  (1936).  The  other  half  was  divided  between  "Productivity  Studies",  "Demand  and  Utility  Studies"  and  "Statistical  Technical
Studies". Each of the two first headings covered a number of empirical studies, the last one comprised the confluence analysis.

140

1. The mechanical decomposition problem.

2. The creation of cycles by the cumulation of erratic shocks.

3.  Why an economic structure acts as a linear cumulator. The role of economic theory in business cycle

analysis.

4.  The structural decomposition problems.

5.  The problem of structural forecasting

The first sub-heading was the old decomposition problem. He concluded tentatively about this part of the pro-

ject that it was more difficult than originally conceived, adding that is "has never ceased to occupy my mind".

Once the simplified assumptions underlying the periodogram analysis were abandoned "the problem beco-

mes of tremendous complexity." The original ideas in Frisch (1927) had not worked out as well as expected

and needed "a more careful formulation". Frisch explained to Rockefeller Foundation that the most important

advances towards an understanding of the conditions under which the mechanical decomposition problem

had solution had been done by the study of constructed data. But he could not show much of a gain from the

work. His concluding statement sounded more like a confession of belief: "I am more than ever aware of the

great difficulties of the problem and also of the many pitfalls that exist in this field, I am confident that progress

is possible." 

The second sub-heading was the problem inspired by Slutsky. An enormous amount of numerical simulation

had gone into this project. His best students, Trygve  Haavelmo and Olav Reiersøl, had worked on it. Part of
the Norwegian documentation of the project was in the form of (incomplete) lecture notes22.  In the report
Frisch expressed his conviction that observed cycles were in fact created by the Slutsky effect. He asserted

that the work at the Institute had succeeded in constructing experimental models of series which resembled

very  closely  those  actually  observed.  Frisch  had  been  determined  to  penetrate  this  problem  such  that  he

could  find  the  exact  nature  of  the  cycles  generated  when  a  given  linear  operator  was  applied  to  random

shocks. In the report he claimed that he was "in possession of a theory which answers in a fairly complete

way most of the questions that are of interest in this connection", adding that most of the manuscript was

ready and could be brought out at short notice. This was undoubtedly the publication he had promised on so

many occasions, but in 1936 he still preferred to wait to publish until he had results also from the other parts

of his project.  

When coming to the role of economic theory in businesss cycle analysis, Frisch's use of the Slutsky effect

implied that the time shape of the evolution of the economic variable was not determined by the economic

structure per se, but the economic structure defined instead the weight system by which the random shocks

were transmitted. An economic model with dampened oscillations would exposed to random shocks, have the

oscillations maintained with irregularities. Thus, typically, one would find cyclical components corresponding

to the dampened cycles of the model, i.e. the rocking horse, but besides this also other components could be

present, caused by the Slutsky effect. The amplitudes and other proeprties would be explained by the theo-

ry that Frisch had developed.

Frisch seemed fascinated by the dual nature of the cause of the cycle, one part explained by economic theo-

ry, the other part by statistical theory: "Personally I am convinced that it is only through a combination of these

22 Frisch (1934b). The section headings of these lecture notes may have some interest: (1) Preparatory part: generally about time series
and  components,  (2)  Linear  operations,  (3)  Quadratic  operations,  (4)  Factorization  algebra,  test  determinants  and  key  equations,  (5)
Cycle  creation  by  erratic  cumulation,  (6)  Linear  operations  and  key  functions  adaptation  according  to  the  nature  of  the  data,  (7)
Decomposition in practice, examples, (8) Decomposition techniques as a means for smoothing. 

141

theories together with an intensive utilization of actual data that a realistic explanation of economic phenomena

connected with the business cycles can be arrived at."

He outlined a research strategy where he would test out various types of theoretical schemes and then deter-

mine by means of this theory what kind of cycles the scheme would lead to ("… a systematic scrutiny of this

sort is at the present time one of the most urgent needs in business cycle analysis"). He mentioned the Cassel

essay from three years earlier, but almost apologetically as "a small study which may be mentioned in this

connection".  

Having conceived  the  generation of  business cycles as set out above, he posed as the structural decom-

position problem to invert this process. Can from a given series, produced through the Slutsky effect by a

given model, the shape of the weight curve by which the random occurrences have been accumulated, be

determined? And further, can the individual random disturbances be determined as well. Frisch's line of attack

was theoretical  analysis and  numerical  simulations. He had  developed a number  of methods which he

subsequently tested out, but admitted in his report to  Rockefeller Foundation that "it goes without saying that

a number of ideas thus suggested has turned out to be valueless." He added on a more hopeful note that

"through these assiduous tests certain general lines of approach now begin to stand out as fundamentally

sound." But did this really mean that he saw light at the end of the tunnel, or was he just defending a wasted

effort?

The inversion problem was however, very important in his overall strategy, because the ultimate purpose of

the business cycle project was after all forecasting. Frisch's conception of forecasting relied completely on the

structural decomposition. The forecasting itself was simple, namely, take the weight system as determined in

the decomposition, include the effects of random shocks in the past and project the further development of

the system on the assumption that no more random disturbances occur. The uncertainty of the forecast could

also be assessed through the clear separation in this problem of what was known and what was not known.

Forecasts further into the future would be increasingly indeterminate. In his report Frisch referred to "attempts

at forecasting by this method have been made at the institute with a fair degree of success", but clearly this

part of the work could not have had advanced far as long as the inversion problem was not properly solved.

At about this time the steam must have gone out of the project. From 1936-37 the Institute got involved in a

government sponsored project to investigate the problems and prospects of the Norwegian economy. Frisch

took upon himself to be in charge of developing Norwegian national accounts, an idea he had proposed some

years earlier. 

In the aftermath of these intensive four years of work on the business cycle projects some further incidents

may be mentioned. In September 1936 Frisch took Haavelmo with him to the Econometric Society meeting

in Oxford, at which the discussion of Keynes' General Theory was the big topic. Frisch seemed to have kept

a low profile (unusual for him) in this discussion. His own paper was titled "Macrodynamic Systems leading

to Permanent Unemployment", drawing on a model of a corn economy he had lectured on, but remote both

from the Keynesian model and from his business cycle project. Frisch's concluding remark, according to the

report, was that as there already existed 10-15 fully-developed mathematical systems of some plausibility "the

task was no so much to develop new systems as to test different systems against the facts". Jan Tinbergen

who was already well ahead in his project for the League of Nations spoke on "Dynamic Equations Underlying

Modern Trade Cycle Theories". Later during the meeting Frisch unannounced presented an "ideal programme"
for macrodynamic studies which reflected the conclusions he had reached in the business cycle project23.  

23 Frisch's "ideal programme" is discussed in Aldrich (1989). 

142

In the autumn of 1937 Tinbergen visited the Institute for about one month. Although no documentation is avai-

lable about the discussions during the visit, one has to presume that Tinbergen's League of Nations project

was the main topic. Shortly afterwards Haavelmo left the Institute for studies abroad, visiting Berlin, Geneva

and Paris. The Berlin visit was an assignment from Frisch as Haavelmo brought constructed data with him to

test the more advanced equipment for time series available in Berlin at the Institut für Konjunkturforschung,

directed by Ernst Wagemann, and the Meteorologisches Institut's department for 'Periodenforschung', direc-

ted by Professor Karl Stumpff which had a range of advanced equipment for harmonic analysis. Haavelmo

tried Stumpff's equipment on data that had been analysed in Oslo by Frisch's methods to compare the effi-

ciency24.  Stumpff's harmonic analysers were based on light interference and were described in a note by

Haavelmo25.    Haavelmo  was  not  impressed  with  the  results,  they  were  hardly  as  accurate  as  the  results

achieved in Oslo. On the eve of his departure from Berlin he sent home his report concluding that the methods

were useful as they required little work, even with several components included in the series, but they were

not able to solve Frisch's inversion problem. Frisch studied the results and concurred.

Frisch  was  invited  to  the  Cambridge  meeting  convened  18-20  July  in  1938  to  discuss  the  results  of

Tinbergen's project and sent his note Frisch (1938) too  late to arrive in time for the meeting. The note rea-

ched Tinbergen who wrote a reply which raises some doubts as to whether he had understood Frisch's criti-

cism correctly. Frisch's note was a bit strange as he did not really comment upopn any equation or result by

Tinbergen,  but  asserted  very  generally  that  Tinbergen's  work  could  not  be  considered  as  test  of  business

cycle  theories.  Tinbergen  had  estimated  relations,  but  Frisch  clearly  doubted  the  connection  between  the

theoretic rationale Tinbergen had given his equations and the estimates he had produced. In Frisch's view

Tinbergen had not been able to estimate any autonomous relation, due to the confluence caused by simulta-

neity, while Tinbergen did not seem neither to understand nor accept Frisch's assertions. 

Jan Tinbergen, who of course also was a strong "methods man", differed perhaps from Frisch also in his atti-

tude towards the subject matter. Mary Morgan gives an apt expression to this difference when she writes:

"Good intellectual reasons apart, Frisch, unlike Tinbergen, preferred to work on problems of the methods and
methodology of econometrics rather than on applied econometrics using real data26."  

If nothing else, the war killed Frisch's business cycle project. After one year's imprisonment during the war

Frisch was in very good shape at the liberation, ready to devote his entire efforts to continued research. The

new keyword in Frisch's work was decision models. In a classification of modelling ambitions he introduced

in a somewhat derogatory sense the term "onlooker models" for any modelling effort that was not meant for

policy analysis. Presumably, it would cover also his own previous efforts. 

4. The disappearance of the cyclical movements

What happened to the business cycle research after the war? This sort of economic analysis continued to be
the responsibility of the Central Bureau of Statistics. Moreover, most branches of economic research were
strengthened considerably in the early 1950s. In 1949, the Frisch-student Petter Jakob Bjerve, was appointed
General  Director,  and  he  kept  this  position  until  he  retired  in  1980.  Bjerve  soon  established  a  separate
research department within the Bureau, which came to be occupied with national accounting, research on
taxation issues, construction of  input-output  tables and  macroeconomic  models  for policy-making, and
business cycle studies (Bjerkholt 2000a, 2000b).

24 Frisch had constructed test data sets from drawings of a Norwegian lottery ("Pengelotteriet") and sent data to Haavelmo by mail. The
data were held up for a while by the German censorship suspecting that the data were ciphered messages!
25 Stumpff's methods had been set out in his book Grundlagen und Methoden der Periodenforschung, to which Haavelmo made page
references.
26 Morgan (1990, p.98).

143

The Bureau kept on publishing a number of statistical series on a monthly basis, labelled the "konjunkturtabell".

This table was expanded during the 1950s and new short-term indicators for specific parts of the economic

life were produced. During the 1950s and 1960s, the Bureau took part in the OECD cooperation around the

development of new methods for removing seasonal trends and later for developing leading indicators. In the

three decades from 1945, the short-term statistics was expanded and methods refined. Still, the big change

what we might call business cycle analysis came in the interpretations and presentations of the short-term

statistics.

In very general  terms, the main project for the Research Department in its early years was to establish a

coherent system for macroeconomic policy and analyses. The meeting point for the establishment of statistical

standards, of new economic concepts, and practically oriented discussions of aims and priorities, and failures

and successes, in economic policy, was the national accounting system. In Norway, national accounts were

produced on a quarterly basis already from 1953, as a part of the short-term analyses of the economy. (A

large part of the abovementioned expansion in short term series and indicators were made in relation to the

quarterly national accounts.) Thus, the business cycle analyses became closely integrated with the national

accounting system, and, although more indirectly, with policy advising and policy analyses.

In some respects, Eilif Gjermoe fate illustrates the role of the inter-war analysis of economic cycles. From the

start, Gjermoe had little contact with the new leadership in the Bureau and the newly established Research

department. He resigned as head of his department in 1952 but he kept on making retrospective studies of

the business cycles (Gjermoe 1951, 1953, 1955). However, the Bureau did not publish these writings (as they

have used to do with the writings of distinguished retired researchers). But an other study of the same period

was made in the Bureau by a young economist (later professor in economics) Gerhard Stoltz, in the early

1950s,  Economic  Survey  1900-1950 (Stoltz  1955).  The  book  was  printed  in  the  Bureau's  new  series  for

important research publications, and Stoltz must have written most of it in Gjermoes last years in the Bureau.

Still, Gjermoes writings were not mentioned or referred to at all in this book. Neither did Gjermoes basic unit

of analysis, the cycle, play any role in the analysis. Like other retrospective studies of economic development

in the Norwegian economy, the long-term trend was the focus, and exceptions, called "crisis" or "setbacks",
were commented in words and figures27. 

The major study "The Norwegian Post-War Economy" published in 1965 had a short chapter with an over-
view of the "business cycles" (konjunkturbildet)28.  The Bureau explained that the situation at that point of time
was entirely different from the 1920s and 1930s. No deep crisis like the one in the 1930s had been experienced,

nor  had  there  been  any  cyclical  movements  like  those  seen  in  the  inter-war  years.  The  shared  reason  for

these changes were explained like this: "It is in the economic policy one must search for the main cause of

this improved economic development […] The breakthrough in the field of theoretical economics in the 1930s,

(exemplified with Keynes), national accounting, econometrics, and making of quantitative economic models

have been important steps in this development" (CBS 1965: 341 ff.). In a wider perspective, this vision of past

and present must be seen in relation to the long governing Labour Party's rhetoric in the filed of economic

management: Crisis and cycles could be avoided by demand management and regulation of various kind,

and for example the impact of the depression in the 1930s was described as a consequence of hamstrung

and incompetent liberal and conservative government. – Also Frisch's turn from business cycle analysis to his

attempt to construct decision models can be seen in the light of these developments. Frisch's left his cycles

27 In addition to Stoltz (1954) but also CBS 1965 and CBS 1966 ought to be mentioned.
28 Norway and Scandinavia use the German term konjunkturer for 'business cycles'. In the inter-war years one talked about 'konjunk-
turbølger', in German-English 'konjunktur-waves'. What happened after the war was that 'waves' (bølger) disappeared in the languages
used, as well as in the analyses.

144

– the inter-war unit of analysis – and concentrated on economic models open to demand management and

other types of economic governance.

In other words, in the 1950s and 1960s the Bureau and other hosts of modern economic theory and tech-

niques had eliminated the cycles – not only as a unit for analysis, but as a reality of economic life. Today,

many expert commentators would prefer a more modest variant; that the "cycles" became less evident becau-

se of changes in technological potentials and transfers, and in trade patterns. Yet, it is interesting to note how

Stoltz and later several high-ranking economists in the Bureau also disregarded "cycles" as an analytical term

when they investigated the long-term development of the Norwegian economy, even in the periods before the

macroeconomic  enlightenment  had  waved  the  waves  farewell.  Moreover,  the  "cycles"  re-emerged  in  the

1970s. In the more turbulent years from the early seventies, the post-war optimism on behalf of economic

management  was  gradually  weakened.  In  1978,  Kjell  Wettergreen,  the  person  responsible  for  konjunktur-

analysis in the Bureau, published a study titled "Konjunkturbølger i norsk økonomi" (International cycles in
Norwegian economy29).  The study covered period from 1955 to 1976. In this book, the cycles ('bølger') exis-
ted, not only in the seventies, but even all the way back to the mid 1950s. In the foreword, Wettergreen explai-

ned to his readers that he had tried to identify "turning points", as this was the recommendation given by the

international expertise in this field. 

At the time Wettergreen made his study, the now rather unknown Gjermoe was still active30.  From time to
time he published short statistical surveys in a working paper series of the Institute of maritime economics at

the Norwegian School of Economics and Business Administration in Bergen. His field of study since the late

1950s had been the development in the shipping sector. In this sector, national oriented macroeconomic data

and analysis had little relevance. And, of course, shipping industry was the sector where even Norwegians

still talked about "cyclical movements" in prices and volumes. 

5. Bibliographical references

ALDRICH, J., 1989: Autonomy, Oxford Economic Papers, 41, 15-34.

ANDVIG,  J.  Chr.  (1986):  Ragnar  Frisch  and  the  Great  Depression.  A  Study  in  the  Interwar  History  of

Macroeconomic Theory and Policy, Doctoral dissertation, Oslo: Norsk Utenrikspolitisk Institutt.

ASCHEHOUG,  T.  H.  (1908):  Socialøkonomik:  en  videnskabelig  fremstilling  af  det  menneskelige  samfunds

økonomiske  virksomhed.  [Economics:  A  Scientific  presentation  of  the  society's  economic  activity].  Vol.  3.

Kristiania: Aschehoug.

BERGH, T. and T. J. HANISCH 1984: Vitenskap og politikk. Linjer i norsk sosialøkonomi [Science and poli-
tics. An outline of the history of economics in Norway]. Oslo: Universitetsforlaget.

BJERKHOLT, O. (2000c): A turning point in the development of Norwegian economics – the establishment of

the  University  Institute  of  Economics  in  1932,  Memorandum  No.  36/2000,  Department  of  Economics,

University of Oslo.  

BJERKHOLT, O. (2000a) [1998]: Interaction between model builders and policy makers in the Norwegian tra-
dition",  in  Frank  A.G.  den  Butter  and  Mary  Morgan:  Empirical  Models  and  Policy-Making:  Interaction  and
Institutions. London: Routledge.

29 Wettergreen himself was not a new-comer in this field of analyses, but had worked in the Bureau in this area since 1960.
30 Not only for Norwegian economists has Gjermoes writings been regarded as irrelevant. In the late seventies and early eighties, a lar-
ger economic history project was launched to investigate the development of the Norwegian economy - the manufacturing industry in
particular - in the 1930s. The questions asked were strikingly similar to those Gjermoe dealt with in his studies. The historians and social
scientist involved were obviously unaware of Gjermoes research. Anyhow, after some years they ended up with a set of conclusions
nearly exactly similar to Gjermoes (1935,1936,1938, 1951) with regard to the how the sectors were affected

145

BJERKHOLT, Olav (2000b): Kunnskapens krav. Om opprettelsen av Forskningsavdelingen i Statistikk sen-

tralbyrå. Sosiale og økonomiske studier 103. Oslo: Statistisk sentralbyrå.

BODKIN,  R.  G.,  L.  R. KLEIN and  K,  MARWAH (1991):  A  History  of  Macroeconometric  Model-Building,

Aldershot: Edward Elgar.

BOGAARD,  A.  v.d.  (1999):  Configuring  the  Economy.  The  emergence  of  a  Modelling  Practice  in  the

Netherlands. Amsterdam: Thela Thesis.

CBS  (1965):  Norges  økonomi  etter  krigen [The  Norwegian  post  war  economy],  Oslo:  Central  Bureau  of

Statistics.

CBS (1966): Langtidslinjer i norsk økonomi [Long term trends in Norwegian economy], Oslo: Central Bureau

of Statistics

CBS (1926): Statistiske Meddelelser, vol 44, Oslo: Central Bureau of Statistics

CBS (1928): Statistisk-økonomisk oversikt over året 1927, [Statistical and economic overview of 1927.Central

Bureau of Statistics, Oslo. 

GJERMOE,  E.  (1923a):  Seddelomløpet  1851-1922  [The  circulation  of  money  1851-1922],  Statistiske

Meddelelser vol 41, p. 58-89. 

EINARSEN, E. (1904): Gode og daarlige tider [Good and bad times], København: Gyldendal.

FRISCH, R. (1927): The Analysis of Statistical Time Series, Mimeographed, 121 pp.

FRISCH,  R.  (1928):  Changing  Harmonics  and  Other  General  Types  of  Components  in  Empirical  Series,

Skandinavisk Aktuarietidskrift, 11, 220-236.

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EUROSTAT COLLOQUIUM

HISTORY OF BUSINESS CYCLE ANALYSIS

Luxembourg, 12 November 2001

THE SHORT-TERM ECONOMIC ANALYST, 

THE NATIONAL ACCOUNTANT, 

THE ECONOMETRICIAN AND THE PLANNER: 

CONTROVERSIES ABOUT FORECASTING IN FRANCE 

AND THE NETHERLANDS (1930-1980)

Alain Desrosières
Administrator
INSEE
Department of Compared Methods

E-mail: alain.desrosieres@insee.fr

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TABLE OF CONTENTS

1.  Abstract

2.  Difficulties and pitfalls of a historical comparison between

two countries

3.  A combination of eight different approaches

3.1 Quantification and observed regularities

3.2 Markets and their general equilibrium

3.3 Short-term economic analysis

3.4  Mathematical statistics derived from biometrics

3.5 National accounting

3.6 Economic dynamics

3.7 Models become probabilistic

3.8 A benchmark for economic policies

4. Governments and universities: a specifically French division

5.  For Lenoir, the variable to be explained was the price

6. Accounting balance or market dynamics

7. The future and the past are built in the same manner

8. Pulsation and planning: two philosophies of time

9. Political model and econometric model

10.

Is the economy comparable to a large corporation ?

11. Optimization or self-fulfilling prophecy

12. The Plan as project and picture

13. Bibliographical references

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1. Abstract

Since the 1920s, the efforts to describe and forecast economic fluctuations on the basis of statistical series

have led several countries either to broaden the functions of government statistical offices or to set up new

agencies dedicated to short-term economic analysis (instituts de conjoncture). The methods used for these

purposes have evolved, sparking many debates. Our paper examines the birth and dissemination of three

such methods in two countries: France and the Netherlands. The three are not, of course, mutually exclusi-

ve, but they have often been wielded against one another in different ways in each country.

(cid:122)  The first method, that of the short-term economic analysts, was exemplified in France by Alfred Sauvy

and Jacques Méraud. It consists in examining intra-year series – typically monthly – supplemented since

the 1950s by confidence surveys among business executives. The consistency of the approach is "qua-

litative" and is backed neither by book-keeping balances nor by econometric modeling.

(cid:122)

The second method, that of the "national accountants," is symbolized in France by Claude Gruson. It

involves the compilation of annual national accounts, which are then "projected" for the current or follo-

wing year into "economic budgets" (budgets économiques) or in medium-term forecasts (planning à la

française). These consist of annual-flow forecasts (often based on expert opinion) expressed within the

national-accounts framework, which is assumed to be consistent and comprehensive.

(cid:122)  The third method, associated with the Dutch economist Jan Tinbergen, relies on an econometric modelling

of regular patterns observed in the past. It appears in the Netherlands in 1936, and is used in dynamic

planning, very different from the French planning used until the end of the 1960's.

The three methods were developed in very different ways in France and the Netherlands between the 1930s

and  the  1970s.  Both  countries  have  witnessed  controversies  between  the  advocates  of  each.  This  paper

seeks to relate the debates to their national contexts. We try to explain how and why the methods for studying

current economic trends and preparing economic forecasts diverged so sharply between the two countries.

2. Difficulties and pitfalls of a historical comparison between two 

countries

In 1946, two European countries, France and the Netherlands, emerged from the same tragic ordeals and

began to reconstruct. For this purpose, each established an "economic planning" agency: the Commissariat

Général du Plan (CGP) in Paris, and the Central Planning Bureau (CPB) in The Hague. The political context,

the debates prior to their establishment, and the goals assigned to these innovative institutions all resembled

each other. Both agencies were supposed to implement an "indicative," "consensus-based" planning focused

on decentralized forecasting and decision-coordination. Their common goal was to rebuild a free market after

the  gradual  dismantling  of  wartime  bureaucratic  regulations.  Both  explicitly  distanced  themselves  not  only

from the authoritarian command economies of the Soviet Union and Nazi Germany, but also from the refusal

(as a matter of principle) to even use the word "plan" to denote a public institution. Such reluctance was obs-

erved in the postwar U.S., Britain, and Germany, even though all three countries did contemplate some form

of economic-policy planning.

However, in spite of their comparable initial choices – which set them apart from their counterparts in other

countries – the Dutch and French planning systems diverged on a key point. In the Netherlands, econome-

tric models of the overall functioning of the economy were developed by the early 1950s. Their results have

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been widely quoted and discussed in the major social and political debates, elections, and varied crises that

have marked the country's history in the decades since the war. In France, by contrast, such models have

been built and used – nominally along the same lines as in the Netherlands – only since 1970 or so, and their

role in the social debate has never been as extensive. In fact, it has sharply diminished since the early 1980s.

Can such a difference be explained? This question may provide an opportunity for an exercise in comparati-

ve sociology, to which we shall apply two types of instruments: the first pertain to the internal history of tech-

nical tools for economic description and analysis (conceptual frameworks [economic and non-economic], sta-

tistical  methods,  national  accounting,  and  econometrics);  the  second  are  drawn  from  the  external,  social,

intellectual, and political history of the two countries1. 

As  it  happens,  the  very  first  macroeconometric  model  was  built  –  back  in  1936  –  by  a  Dutchman,  Jan

Tinbergen, specifically to address economic-policy issues relating to unemployment and the foreign-trade cri-

sis of the 1930s. Moreover,  Tinbergen  was the  CPB's  creator and  first director from 1946 to 1955.  This

circumstance makes a comparison between France and the Netherlands even more interesting, but also raises

a tough question for the analyst who wants to adopt a historical sociology perspective: can the differences be

explained by the personality and role of a single individual, however outstanding? This exercise on a closely

defined issue may therefore lead to a wider examination of the links between a (micro)sociology of science

and technology, as practiced today with increasing frequency, and a (macro)sociology, more classical and his-

torical, focusing on national institutions, cultures, and groupings. This paper seeks not only to answer a spe-

cifically  historical  question  on  France  and  the  Netherlands,  but  also  to  examine  a  problem  of  sociological

method: what elements are deemed relevant in addressing such a question? Indeed, what does it mean to

"explain" such differences? Can one do anything other than select items and organize them into a narrative

that will take the shape of a network of facts held together more or less successfully?

But one can build very different narrative networks. Indeed, the explicit elaboration of these multiple narrati-

ves is a crucial step in comparative analysis. We can see this, for example, in the diversity of documentary

and historiographic sources already available. There is a wealth of literature on the history of statistics (INSEE

1987) and national accounting (Fourquet 1980) in France. For the Netherlands, by contrast, there has been

less ground-breaking research on these topics (de Vries et alii 1993), but the literature on the origins of Dutch

econometric models is abundant given their role (and that of Tinbergen) in the general history of modeling

(Bodkin, Klein, and Marwah 1991; van den Bogaard 1998). Studies on the French models exist as well, but

are of course more modest. This historiographic difference is both significant (it anticipates the findings reported

below: an emphasis on national accounting in France, on modeling in the Netherlands) and a hindrance to a

term-by-term comparison.

The diversity of possible narratives is part of the problem that needs to be addressed. While keeping this fac-

tor in mind, we will present a selection (among several) of micro – and macro – social features that provide

the outlines of two scientific, administrative, and political constellations. The Dutch breakthrough in modeling

owes much to the complex, multi-faceted personality of Jan Tinbergen. For this reason, we will center the

analysis of the French situation on a few comparable individuals, but each will be examined from a different

angle: Marcel Lenoir, E. Dessirier, Alfred Sauvy, Jean Monnet, Claude Gruson, Jacques Méraud and Edmond

Malinvaud; we will also mention the part played by other Dutch figures.

1 The following analysis owes much to information provided by Dutch researchers: Marcel Boumans, Johan Heilbron, Frank Kalshoven,
C.A. Oomens, and Adrienne van den Bogaard. Special mention must be made of Jan Tinbergen's biographer Albert Jolink, who taught
me much about him. Jolink allowed me to accompany him on one of his regular visits to Tinbergen. Shortly before his death in 1994 at
age 91, Tinbergen was kind enough to answer my questions, in the perfect French once spoken by European intellectuals. In France,
Edmond Malinvaud, Jacques Mayer, and Pascal Mazodier also replied to some of my queries. My thanks go to all mentioned. 

152

The two narratives are fairly independent to the extent that, despite similar goals and planning, there have

been few exchanges between the two countries. Reciprocal references are rare, and the protagonists, in both

the academic and political spheres, have little knowledge of one another. French economic forecasting has

long  been  inward-looking.  The  Netherlands  has  been  more  open,  first  toward  Germany,  then  toward  the

English-speaking world, but scarcely toward France. Behind this lies a major factor: France sees itself (righ-

tly or wrongly) as an intellectually sufficient "biggish country" — in contrast to the image of the Netherlands

as a "small country" with a strong trading tradition and a more spontaneous openness. The varying degree

of closure of the technical-political networks represented by the two countries seems to justify macro-social

analyses of features of the two national cultures that we can assume to be deep-rooted and long-term. It may

therefore  be  tempting  to  summarize  them  in  simple  expressions  that  are  easy  to  memorize  and  transmit,

potentially for purposes of argument or condemnation, for example on the "backwardness" or "archaism" of

France (from the standpoint of econometric modeling). To multiply the points of view shows that such sum-

maries are intellectually stimulating, but also risky. More prosaically, the diversity of narratives and the selec-

tion of the features presented also depend, in a partly random manner, on the information sources available:

one cannot neglect this contingent nature of historical analysis. But our task, after all, is to provide food for

thought more than to reveal a hitherto hidden truth.

3. A combination of eight different approaches

The macroeconomic modeling taught today and used all over the world rests on a common core of methods

and constraints, even though the economic hypotheses and statistical techniques differ from one model to

another. To understand how and why two apparently similar countries elaborated such models at very diffe-

rent times and following very different paths, we need to remember one important fact: this common core –

now well-formed and accepted – is the historical product of the combination of many cognitive and institutio-

nal  tools,  which  are  relatively  independent  of  one  another.  This  combination  was  achieved  gradually,  and

there was no prior script showing the order and the form in which the different approaches were to link up

with one another in succession. In the 1950s, the Klein-Goldberger model was the temporarily unified synthe-

sis of these approaches, and it later spawned a wide variety of other models (Artus, Deleau, and Malgrange

1986).

We can break down this now solid core of economic modeling into eight approaches issued from highly dif-
ferent paths2.  Without charting this complicated genealogy in detail3,  we must stress that, depending on the
circumstances, a particular approach or a particular combination of some of the approaches has been high-

lighted in order to characterize the essence of a modeling method, or the defining moment (and the toughest

watershed) in a historical sequence. That is precisely why the history can differ from one country to another,

the term "history" being used with its two possible connotations: as reality (history as it "really" happened), or

narrative (history as constructed and recounted). As an academic exercise, one could show that the history

of modeling can be told in eight different ways, by successively following each of the strands originating in the

eight ideas. These are listed here merely to show how they advance and combine differently according to the

national context.

2 There is nothing absolute about the figure eight. Other approaches could certainly be added to the list. 
3  Much  information  on  it  will  be  found  in  Stigler  (1986);  Morgan  (1990);  Bodkin,  Klein,  and  Marwah  (1991);  Armatte  (1995);  and
Desrosières (1998). 

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3.1 Quantification and observed regularities

Economic and social phenomena can be quantified and described by "statistics," and these measurements

are endowed with regularities and constancies over time. That is the central idea propounded by Quetelet and

fought by "statisticians." The latter either denied the very possibility of equivalences and additions (the eigh-

teenth-century "German" approach to statistics) or accepted quantification but denied the existence of stable,

regular  patterns  (Moreau  de  Jonnès,  founder  of  the  Statistique  Générale  de  la  France  [SGF]  in  1833).

Meanwhile,  the  theoretical  economists  (Say,  Walras)  were  rather  suspicious  of  the  gap  between  abstract

concepts and concrete statistical measures whose purity cannot be guaranteed (Ménard 1987).

3.2  Markets and their general equilibrium

The economy can be conceptualized as a comprehensive system of market transactions, whose participants

interact in conformity with general laws expressible in mathematical form. This is the general equilibrium des-

cribed by Walras and Pareto. The notion does not imply a priori that interactions and their regularities can be

effectively measured. It is a formal construct whose very strength is based on this possibility of turning the

general market laws into abstractions. By the late nineteenth century, reliance on statistics was perceived as

creating the risk that economic thought would backslide into contingency and historicity. A controversy erup-

ted between the German historicists (and their U.S. institutionalist descendants down to Wesley Mitchell and

Rutledge Vining), who were heavy users of statistics, and the "hypothetico-deductive" and mathematical eco-

nomists. The quarrel specifically centered on the opposition between descriptive statistics and mathematical

formalism,  which  were  regarded  at  that  time  (late  nineteenth  century)  as  incompatible  (Armatte  and

Desrosières 2000).

3.3 Short-term economic analysis

Temporal regularities do not necessarily imply the constancy postulated by Adolphe Quetelet. Historically obs-

erved fluctuations can be analyzed as such, and connections can be drawn between them. They are often

cyclical. The cycles can be described and in some cases "explained" by external "causes" (Clément Juglar,

Henry Moore). This notion led to the construction of "economic barometers" (Harvard) and the founding of

organizations dedicated to the analysis of current economic trends (instituts de conjoncture), which flourished

in the 1920s and 1930s. In France, Dessirier and Sauvy attempted-with scant success-to promote the lan-

guage of "short-term forecasting" (prévision conjoncturelle). These circumstances fostered the development

of  graphic-representation  methods,  moving  averages,  and  seasonal  adjustments.  A  shade  of  difference

appeared  among  these  "short-term  economic  analysts"  (conjoncturistes)  between  those  who  discerned,  in

each phase or cycle, singular moments warranting specific analysis (Mitchell), and those who sought to regis-

ter empirical regularities in stable forms, thereby anticipating econometrics (Lenoir 1913; Moore 1914).

3.4 Mathematical statistics derived from biometrics

Indeed, regularities and statistical relationships could themselves be formalized and "measured" with the tools

of incipient mathematical statistics (regression, correlation, tests), derived from biometrics (Francis Galton,

Karl Pearson). These tools were imported into the social sciences and economics, first by Yule and Bowley,

and later in the form of probabilistic inferential statistics (estimations, tests) by Fisher and Neyman-Pearson.

In the early days of econometrics (which did not yet bear that name), between 1900 and 1930, these first non-

probabilistic tools were imported for the purpose of estimating the laws of supply and demand and analyzing

cycles (Lenoir in France, Benini in Italy, Henry Moore and the Working brothers in the U.S.).

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3.5 National accounting

Economic life can be summarily measured and described through broad "aggregates" such as national inco-

me, gross national product, and consumption. This notion of national accounting successively developed in

three different and partly unrelated ways, each linked to one of the three approaches still used today to deter-

mine GNP: (1) The measurement of national income forms part of an analysis of income: wages, profits, and

rents (Bowley, in the early twentieth century). (2) The measurement of a national product proceeds from an

analysis of output by economic sector (Wesley Mitchell, Simon Kuznets, and Colin Clark in the 1920s and

1930s). (3) The measurement of demand components (consumption, investment, public spending) is tied to

the dissemination of Keynes's ideas on the macroeconomic equilibrium between overall supply and demand

(1940s). The theoretical conceptualization of national accounting, and the cumbersome, expensive establish-

ment of the statistical infrastructure needed for its effective implementation, have been viewed in diametrical-

ly  opposite  ways.  In  France  until  the  1970s,  they  were  seen  as  the  defining  moments  in  macroeconomic

modeling. In the Anglo-Saxon countries, on the contrary, they were almost entirely downplayed as a purely

technical step without historical significance or major scientific implications.

3.6 Economic dynamics

The time variations in the components of the economy – interlinked by the predefined book-keeping balan-

ces of the national accounts – may be described and analyzed with the tools of descriptive statistics listed in

3.3 above. But they may also be viewed in terms of dynamic sequences. That was the main contribution of

Tinbergen  in  the  1930s.  His  exercise  combined  several  different  conceptual  approaches:  overall  systemic

equilibrium, itself a synthesis between a Walrasian theoretical economic equilibrium (3.1) and an empirical,

book-keeping equilibrium (3.5); time analyses (3.3); and mathematical statistics applied to economics (3.4) –

not to mention even other formalisms, derived from physics and mechanics (harmonic oscillators, differential

equations). This dynamic aspect was not fully integrated into French modeling until the mid-1970s (DMS and

METRIC models).

3.7 Models become probabilistic

Econometric relationships, estimated either statically or dynamically, can be incorporated into a probabilistic

model,  which  allows  two  things:  (1)  a  conceptualization  of  the  relationships  between  theoretical  economic

hypotheses,  observed  empirical  regularities,  and  the  heterogeneity  of  isolated  cases;  (2)  a  solution  to  the

question of the simultaneity of the estimated relationships. This "probabilization" of models was absent from

Tinbergen's  work  in  the  1930s.  It  was  fully  elaborated  by  Trygve  Haavelmo  (1944)  and  the  Cowles

Commission in the U.S. (Morgan 1990), one of whose key members was the Dutch economist Koopmans. At

that point, a synthesis was achieved with yet other conceptual approaches based on probability theory as a

branch of mathematics, via the Britons William S.Gosset (Student), Ronald Fisher, and Egon Pearson, the

Pole Jerzy Neyman, and others. Although some French specialists (Emile Borel, Maurice Fréchet, Georges

Darmois, and Paul Lévy) played a central role in developing probability calculus, they do not seem to have

participated significantly in its introduction into economic models. In France, this formalization was underta-

ken by Edmond Malinvaud in the 1950s.

3.8. A benchmark for economic policies

The notion of closely linking theoretical speculations (economic or mathematical) to series of statistical and

accounting data did not gain acceptance until the 1930s and 1940s. It was also then that such constructs

were  explicitly  presented  as  necessary  for  guiding  macroeconomic  policies  in  the  dramatic  context  of  the

Great Depression, the war-related mobilization of industry, and the post-war reconstruction. This almost mili-

155

tant rationale was strongly defended by the creators of the first models. It is comparable to the physicists'

engagement in the Manhattan Project to build the atom bomb, in terms of the costly mobilization of vast teams

as well as  the swift progress in scientific research that resulted. This direct involvement in public affairs –

henceforth conceptualized through the new tools – led to a change not only in the scale but also in the natu-

re of the now tight-knit combination of the seven approaches described above. Depending on the country,

however, the links were drawn and articulated in different ways. As we shall see, it is not enough for a new

idea to be formulated at a given time in a given country. It will not produce effects later on unless it is capita-

lized and embedded into stable networks, both cognitive and political. In what conditions can this be achie-

ved? The decisive factors are the relative weights of, and interactions between, universities, research cen-

ters, statistical offices, other government agencies, political institutions, and even corporations, labor unions,

political parties, and churches. This configuration differs from country to country.

4. Governments and universities: a specifically French division

The content, style, and importance of economic forecasting in a country's administrative and scientific space

give a good idea of the implicit role of the State, particularly as regards scientific and technical expertise. In

some countries, the expertise lies more or less outside the government establishment; it is found in universities

or scientific centers, which, even if they receive public funds, maintain contractual relationships with govern-

ment-the two sectors pursuing distinct goals. France displays a more complex profile. To begin with, socially

recognized technical expertise – and even scientific expertise – has long been (and to some extent still is)

internal to the State. Its "carriers" are the cadres of engineers (corps d'ingénieurs) graduated from the élite

grandes écoles, whose prototype is the École Polytechnique. As a result, the university has played a lesser

role, as is clear in the teaching of mathematical economics (Le Van-Lemesle 1991).

The French tradition of science in the service of the State has long had decisive consequences4.  The engi-
neers' expertise, geared to administrative action, tended to fragment and specialize in their distinct fields of

involvement.  Circulation  between  fields  was  unlikely.  For  example,  by  the  late  nineteenth  century,  French

artillery  officers  had  developed  high-level  probabilistic  and  statistical  formalisms  for  their  own  use  (Crépel

1994)  –  but  these  were  unknown  to  contemporary  statisticians  and  economists.  Another  example:  the

exchange  of  ideas  between  physicists  and  economists  –  which  triggered  the  work  of  Tinbergen  and

Koopmans – would have been hard to imagine in France. The administrative focus was not an incentive to

the accumulation of knowledge in a systematized form. Bibliographies were slim and haphazard. Exchanges

with other countries were infrequent, or confined to official institutions with little academic content. In other

words, the scientific networks were very limited, since any potential innovators were isolated, if not excluded;

or else they hooked up with administrative or economic networks – which were hardly conducive to the capi-

talization of knowledge – rather than with academic networks.

These historical hypotheses – doubtless too summary and general, hence reductionist – merely aim to shed
light on the work and careers of a few individuals who sought precisely to break with this general context, but
whose work was not recovered and incorporated into a broader, more cumulative complex. Our purpose here
is not so much to judge with hindsight than to seek to understand a history and a tradition (even if this means
assessing, in conclusion, what remains of either). It is time now, therefore, to take temporary leave of a reduc-
tionist macrosociology and to examine in greater detail the work and efforts of a few statisticians and econo-
mists who can in various ways be compared to their Dutch counterparts described later5. 

4 We use the past tense, for the French landscape-as broadly sketched out here-has undergone major changes in the past three deca-
des. These would deserve another analysis, even though some aspects we discuss persist. 
5 Discussions on the internal history of French econometric models will be found in Artus, Deleau, and Malgrange (1986), Boyer (1987),
and Courbis (1991). On the more general history of official statistics in France, see INSEE (1987), vols. 1 and 2. 

156

The notion of quantifying the overall fluctuations of the economy – first by aggregating them and treating them

as a whole, then by modeling the connections between them – was not self-evident. It was generally linked

–  more  or  less  openly  –  to  an  action  plan,  to  the  idea  that  one  can  influence  the  course  of  economic  life:

Quesnay's Table is one of the earliest examples. The history of the quantification of social life illustrates this

approach. The task is to identify and construct objects that hold together, in order to act upon them and adjust

the planned action to circumstances. In the nineteenth century, "moral" statistics, then demography, develo-

ped around the political issues raised by epidemics, poverty, crime, and the size of the national population.

At the century's close, between 1875 and 1895, the industrial nations were hit by a severe economic crisis.

Wage-labor regulations were introduced; labor offices were founded in many countries in the 1880s (U.S.)

and 1890s (Europe). In 1891, the Statistique Générale de la France (SGF), in operation since 1833, became

affiliated with the national labor office (Office du Travail). The SGF launched surveys on wages and working

conditions, followed by price surveys. New categories of perception of economic life – and of the means to

act upon it – were formulated. They remained in use roughly from the 1880s to the 1940s. Their focus was

on the cyclical recurrence of crises characterized by fluctuations in stock markets, wages, and commodity pri-

ces, by the production and circulation of precious metals, and by exchange rates between currencies. The

economy was not yet perceived in terms of national production and of an integrated circuit of overall supply

and demand, as it would be after Keynes (in theory), and Tinbergen and Frisch (in practice).

5.  For Lenoir, the variable to be explained was the price

The  observations  by  Juglar  and  the  subsequent  research  by  the  statistician  Marcel  Lenoir  were  framed  in

terms of price and wage cycles. In 1913, Lenoir, an SGF staffer, defended a doctoral dissertation on "Price

formation and movement of prices," whose originality and limits were symptomatic (Chaigneau and Le Gall

1998). The passage of an official statistician through the university circuit was an exception that would not be

repeated for several decades. But from either point of view – that of his civil-service affiliation and the univer-

sity – Lenoir's work was so atypical that it had no posterity on either side. It was virtually forgotten. No net-

work, whether scientific or political, reclaimed it.

What did Lenoir do? Quite simply, he invented econometrics – without giving it that name. Significantly, his

object of study is the movement of prices, not of production. Price is the variable to be explained: it was the

focus of attention at the time. Lenoir  sought  to  combine  three  of  the  eight approaches listed above –

something  no  one  before  him  had  yet  done.  His  theoretical  analysis  of  price  formation  was  inspired  by

contemporary mathematical economics (3.2). Walras, Pareto, Marshall, Edgeworth, and Jevons are mentioned.

The procedures for adjusting between supply and demand functions are examined. But, unlike present-day

practice in France, it is the quantities (supplied or demanded) that are plotted on the x-axis, whereas prices

are shown on the y-axis. Prices are the endogenous variable to be explained, resulting from the trial-and-error

interactions between supply and demand. This detail is a significant indication of the line of inquiry: the pro-

blematic issue is the price cycle. Moreover, Lenoir  intuited  that supply and demand curves shift from one

period to the next, and that the path of their intersection is neither a supply function nor a demand function.

However, depending on whether the goods are agricultural or industrial, the widest swings occur in the sup-

ply functions or the demand functions; as a result, according to the pattern, the intersection paths "resemble"

supply functions or demand functions. Lenoir was thus on the trail of what eventually became the "identification

problem" in econometrics.

In the second section of his book, Lenoir relates annual price series to consumption series, production series,

and financial series, in order to analyze their changes and cycles (3.3). For this purpose, he uses the brand-

new tools of mathematical statistics: multiple linear regression and partial correlation (3.4). Like Tinbergen

157

twenty years later, he seeks the root cause of cycles in a theory, borrowed from Lexis and Aftalion, of the lag

between capital spending and production:

The root cause of the periodic fluctuations in economic life – in the theory to which we subscribe – is

the intermittent demand for the fixed capital needed, from time to time, to refurbish and expand econo-

mic tooling (Lenoir 1913).

Lenoir also explains the long-term ("secular") variations in prices by the "production of numeraire," i.e., the

production,  circulation,  and  stocks  of  gold  and  silver.  He  successively  analyzes  monetary  movements,  the

cycles of coal, wheat, cotton, and coffee, and the fluctuations in overall prices, measured by "index numbers."

The  innovative  aspect  is    his  attempt  to    associate    formal    theory,  empirical    series,  and    "econometric"

regressions (the term "econometric" did not appear until 1930). Admittedly, the two parts of the book are not

completely related. But if Lenoir does not actually evaluate supply and demand functions – something that

the U.S. economist  Moore was already trying to do (and Tinbergen was to accomplish in the 1920s) – it is

no doubt  because he has a clear  intuition of  the difficulty of the task due to the double translation of the

theoretical curves from one period to the next.

Lenoir's research, which was pioneering in every respect, did not spawn significant developments. He made
no allusion to its potential use as a guide for economic policy: such a claim would have been barely concei-

vable before 1914, especially from a young SGF statistician. After World War I, Lenoir was sent by the SGF

to Hanoi to set up the Service Statistique de l'Indochine, and he died in Indochina in 1927. He was still occa-
sionally mentioned by academic economists until the 1950s, then fell into total oblivion6.  The SGF, for its part,
did not support short-term economic analysis and forecasting, and its then director, Michel Huber, defended

a highly administrative notion of the role of "official" statistics.

That  same  year,  in  1927,  the  very  young  Jan  Tinbergen  joined  the  Central  Statistical  Bureau  of  the

Netherlands, where he was to invent econometric modeling, and a Frenchman of the same age, Dessirier,

joined  the  SGF.  As  "Economic  Analysis  Offices"  were  then  doing  in  several  countries,  Dessirier  sought  to

compile,  publish,  and  prepare  commentaries  on  economic  series.  But,  fearing  disapproval,  he  did  not  talk

about his plans immediately with his boss. When he learned of Dessirier's plans, the SGF director urged him

to  resign  if  he  wanted  to  continue  his  project.  The  minutes  of  a  meeting  of  the  Board  of  the  Statistique

Générale de la France of October 31, 1929 (a week after the Wall Street crash), recounts this episode in a

manner that reveals the lack of legitimacy that such an activity still had at the time:

... Monsieur Dessirier has undertaken to publish a monthly collection of statistical curves entitled "current

economic and financial conditions," containing assessments of the situation and forecasts. He admits

that  he  started  this  publication  in  May  1929  and  that  he  deliberately  refrained  from  informing  [SGF]

about it, as he feared being barred from an enterprise to which he was deeply committed. Monsieur

Huber [the Director] pointed out that this initiative seemed incompatible to him with Monsieur Dessirier's

official position, and that serious inconvenience could result from economic and financial forecasts voi-

ced by a civil servant on active duty, which might cause them to be regarded as almost official. The

present  format  of  the  publication,  which  is  covert  and  without  publicity,  cannot  be  maintained.

Accordingly, the director should refer the matter to the minister, as he cannot take the responsibility for

allowing  Monsieur  Dessirier  to  continue  a  private  undertaking  of  this  kind  ...  (Archives  of  the  SGF

Board, October 31, 1929)

6 André Marchal, in 1952, stated that he had died in World War I, which shows just how little known he was. 

158

The minutes do not mention any discussion of the value or usefulness of a study of current economic trends.

They are signed by the Chairman of the SGF Board, Clément Colson, professor of economics at the École

Polytechnique, and Dugé de Bernonville, who authored the first estimates of French national income.

Another member of the SGF, Alfred Sauvy, was more prudent or more clever than Dessirier. In the 1930s, he

started building a network in academia, politics, and journalism that gave credibility to – then demonstrated

the need for – the construction, dissemination, and commentary on short-term economic series. In 1938, he

founded an Institute of Short-Term Economic Analysis (Institut de Conjoncture) modeled on those of other

countries. In twenty years, between 1930 and 1950, this activity became one of the key factors in establishing

the legitimacy of the government statistical office. In 1946 – after the merger of several agencies, including

the  one  in  charge  of  short-term  economic  analysis  –  that  office  became  INSEE,  the  National  Institute  for

Statistics and Economic Studies. The first monthly sampling "Business confidence surveys" were carried out

in the 1950's by André Piatier and Jacques Méraud (Monier 1987).

We can interpret this moment as a deliberate integration of some of the eight approaches in our list, whose

synthesis is needed for econometric modeling. The notion of quantification (3.1) is advocated as an alterna-

tive to "literary" and verbal economics. But formalization in terms of mathematical economics (3.2) is lacking.

By  contrast,  the  sensitivity  to  changes  recorded  by  time  series  (3.3)  is  central  to  the  new  synthesis.  But

regressions and correlations (3.4), national-accounting balances (3.5), and, a fortiori,, mathematically expressed

economic  dynamics  (3.6)  and  probabilistic  models  3.7)  are  totally  lacking  from  the  "short-term  analysis"

(conjoncturiste) approach-which also heavily emphasizes its usefulness as a guide for economic policy (3.8).

The new method had its rationale, its language, and its audience. It was later criticized, in the 1950s, by the

defenders of book-keeping consistency in "economic budgets," then, in the 1970s, by model-builders – in par-

ticular  the  developers  of  quarterly  models  (METRIC)  –  who  were  achieving  a  broad  synthesis  of  the  eight

approaches.

The work needed to make the successful combination of the eight approaches technically feasible and poli-

tically credible was complicated and fraught with specific pitfalls in each country. In France, for example, a

network  of  engineers  contributed  to  this  undertaking  in  the  1930s,  to  a  degree  and  with  an  efficiency  that

remain in dispute. The X-Crise group, set up in 1930 by members of the École Polytechnique, aimed to serve

as a forum for exchanging ideas on "rational solutions" to the economic and social crisis. It was not, strictly

speaking, a locus of scientific research and innovation, but a place where one could circulate and connect

ideas hitherto separately advocated in widely different settings (Armatte 1994). Dessirier and Sauvy edited a

bulletin of short-term economic analysis (bulletin de conjoncture). Divisia described a conventional system of

economic statistics, while Roy, Ullmo, and Gibrat began to report on the nascent field of econometrics. Marc

Bloch and Simiand spoke on economic history. In February 1938, the Belgian Bernard Chait gave a paper

entitled "The problem of economic crises," in which he outlined the dynamic model that Tinbergen had been

developing for the Netherlands and the U.S. in the previous three years. Chait stressed the models' useful-

ness as a "basis for government decision-making." Tinbergen himself gave a talk in June 1938 on his "eco-

nomic research on the importance of the stock market in the U.S." Speaking in French, he gave a vivid, peda-

gogic presentation of his concept of dynamic models, seen as mixed systems of differential equations and

simultaneous finite-difference equations comprising as many variables as equations. He showed charts giving

the results of the regressions and their interpretation. This type of methodology was not applied in France
until more than thirty years later, in the early 1970s. The dissemination and applications of the ideas debated

by the X-Crise group, and their actual impact, remain to be studied. We can see a discontinuity between these

discussions of the 1930s on econometrics and the "French-style" national accounting that emerged a deca-

de later.

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6. Accounting balance or market dynamics

There is a striking difference between the course charted by Tinbergen's econometric modeling and the post-

war French work on national accounting and economic budgets. On the one hand, the spontaneous fluctua-

tions of an essentially market-based economy were monitored as closely as possible, and incorporated into

a formal approach to reveal their  endogenous dynamics and to test possible effects of specific economic-

policy measures. On the other hand, the national economy was treated, in practice, more or less implicitly as

the economy of a large corporation, whose internal flows needed to be analyzed in detail and organized so

as  to  satisfy  the  variety  of  needs  with  the  limited  resources  available.  This  approach  is  symbolized  by  the

book-keeping method of balancing "resources" and "uses," with a cross-tabulation of balances by "agent" and

by "transaction."

But it would be too simple to equate this distinction with the stereotyped opposition between "liberalism" and

"dirigism,"  between  left  and  right,  between  market  and  State.  In  the  Netherlands  of  the  1930s,  Tinbergen

developed his cycle model and tested different economic-policy scenarios because, as an active member of

the Socialist Party, he wanted the State to intervene judiciously in a serious crisis. By contrast, French policy

in the 1940s and 1950s spurned the construction of a heavy, authoritarian planning system like that of Eastern

Europe.  Indeed,  Jean  Monnet  skillfully  crafted  the  Commissariat  Général  au  Plan  (CGP)  as  a  light-weight

structure, designed to organize consultations and dialog between government agencies and "social partners"

(management and labor unions) who had previously ignored one other. This political line was, word for word,

identical to that of the Central Planning Bureau (CPB) created by Tinbergen in that same year 1946. The bit-

ter debates that preceded the two births were identical and ended in the same way in both France and the

Netherlands: they pitted the supporters of "heavy-weight" planning that set direct guidelines for economic poli-

cy against the advocates (such as Monnet and Tinbergen) of "light-weight" consultative planning. From this

common starting point, however, the two histories diverged. In the Netherlands, after a brief trial-and-error

period, model construction resumed in the early 1950s, and the models were to exert a considerable influen-

ce on the social debate for years to come (Barten 1991). In France, by contrast, the construction of the natio-

nal accounting system became a vast political and administrative undertaking, but did not generate substan-

tial models until two decades later. Moreover, the influence and authority (in academic and political terms) of

the French Plan rarely matched that of its Dutch counterpart. This shows that a simplistic opposition between

"French-style" Statism and "Dutch-style" economic liberalism fails to account for the differences between the

two histories.

In  most  of  the  leading  countries,  the  design  and  implementation  of  a  national  accounting  system  (and  the

necessary statistical infrastructure) were treated as technical operations – vital and costly, but nevertheless

of secondary political and academic importance. The available histories of macroeconomic modeling do not

feel the need to discuss this phase of the work. Statistical data exist in the same way as roads and telepho-

nes. Their non-existence is an index of under-development. In France, by contrast, this episode in the cons-

truction of the economic information system was experienced in two ways in the approximately twenty years

from 1950 to 1970 or so: first, as a tool that soon came into routine use; second, as the vector of a much big-
ger political plan to rationalize and modernize French government7.  The venture was, of course, marked by
the distinctive post-war conditions, which were in fact common to France and the Netherlands: reconstruc-
tion; investment in infrastructure partly financed by a Marshall plan dependent on the existence of an econo-
mic  accounting  system;  shortages;  inflationary  situation  contrasting  with  that  of  the  1930s;  persistence  of

heavy red tape; and decolonization (Indochina and Algeria for France, Indonesia for the Netherlands).

7 For a lively account, based on interviews with the key players, see Fourquet 1980. 

160

The specific feature of the French experience was the transformation of the State's role, accomplished from

within by a team of senior civil servants. Although they wanted to modernize the administrative system, they

were the product of the old structure described above, which assigned greater legitimacy to the State's inter-

nal expertise than to a more academic form of expertise. The intellectual matrix of French national accoun-

ting was a combination of (1) the book-keeping and budgeting tradition of the Finance Ministry bureaucracy,

extended to all economic players, and (2) a simplified version of Keynesianism, stressing the numerical gap

between total demand and total supply measured with precision by the new tool. Paradoxically, this enterprise

led to an elaborate system of accounts far more detailed and sophisticated than those of other countries, but

less  used  in  economic  models  drawing  on  recent  developments  in  econometrics  and  macroeconomics.  In

sum, the sophistication of the French system served a purpose other than modeling.

Indeed, how do we explain this apparently limited use, by comparison with the standards being introduced

elsewhere  in  the  same  period?  To  understand  this,  we  need  to  delve  into  the  internal  mechanisms  of  the

national-accounting  process  and  of  the  short-  and  medium-term  forecasts  derived  from  the  process.  The

national-account tables offer a subtle, consistent, and comprehensive theoretical description of all economic

flows between agents. As the statistical sources available are spotty, incomplete, and contradictory, filling the

tables is a collective process consisting of successive approximations, through trial-and-error, negotiations,

and compromises between the persons responsible for each line and column of the accounting matrices. In

a way, the process mimics (or thinks it is mimicking) the real functioning of an economy perceived as a series

of book-keeping adjustments and not as a dynamic market-based mechanism. Significantly, projections by

volume are central to the reconstructed past series and to short- and medium-range forecasts. Prices and

values are, of course, observed and recorded in the accounts of the past, but their rationales remain, in part,

mysterious.

7. The future and the past are built in the same manner

This  modus  operandi  had  another  consequence,  which  doubtless  explains  why  a  formalized  econometric

modeling of short- and medium-term forecasts was not introduced in France at that time, whereas it had been

developed in the Netherlands by the early 1950s. The task of constructing the accounts of the past, present

(current year), and future was being performed by the same people, on a continuous basis, under ultimately

similar constraints: this may come as a surprise, to the extent that the two tasks – forecasting and national

accounting  –  so  apparently  different  in  nature,  ought  to  be  conducted  by  separate  institutions  (in  the

Netherlands, CBS and CPB). Such a division of labor is more consistent with a realistic epistemology, in which

statisticians would measure past flows and lock them up in black boxes – data bases made available to eco-

nometricians and forecasters. The discontinuity between the statuses of the two sets of numbers would thus

be clear.

But that is not how things were done in France. The accounts of the past, in any event, require trial-and-error
and negotiated evaluations. Moreover, in each year, they are reworked several times in response to the cons-
tant inflow of new information. The recalculations are performed by projection (in volume and price terms)
from the previous year's accounts, which are also in a state of continuous revision. In turn, the accounts of a
relatively recent past are used to assess the accounts of both the current year and the near future (economic
budgets). In other words, there is a series of about five or six accounts (from t - 3 to t + 2) that are under
ongoing construction; they are modified using ultimately similar procedures for the past and future, in the light
of information or partial "forecasts" concerning a given portion of the table. The difference between past and

future is thus blurred: there is a continuous shuttling between future and present, then to the past – with spe-

cialists constantly on the look-out for the twists and turns in an economic life already framed and scripted by

"economic budgets." These are, in turn, cited in economic-policy discussions in government or in the press,

161

which helps endow them with a status of reality and increases their convergence with the accounts of the

past8. 

This relative indistinction between the two categories of accounts has naturally been debated. Some partici-

pants did not fail to denounce the ambiguity of these "accounts of the future," both descriptive and normati-

ve, which extrapolated "objective" trends and at the same time were the outcome of deliberate policies. Some

parts  of    these    accounts    (in  particular  price movements)  were  strongly  suspected  of  being  performance-

oriented  and  "unrealistic"  (announcing  sharp  rises  in  advance  is  enough  to  trigger  them).  This  debate  has

recurred ever since national accounts and economic budgets were invented. In 1962, however, the most

institutional aspect of the ambiguity was dissipated: in principle, past accounts were henceforth to be compiled

at  INSEE;  those  of  the  future,  in  another  government  office  (the  Finance  Ministry's  Forecasting  Office:

Direction de la Prévision). In practice, however, the teams stayed close, and the continuity between past and

future accounts held firm, at least until the 1970s. Then, computerized econometric models, first annual then

quarterly, diminished the importance of the direct (and partly informal) negotiations between people who knew

each other well – a phenomenon that underlay the construction of future accounts and past accounts alike

(Kramarz 1989).

The logic and consistency of this set of procedures cannot be understood unless we relate them to their ori-

gins and institutional introduction. The term "economic budget," which denotes what the Dutch call "short-term

planning,"  effectively  symbolizes  the  purpose  of  this  enterprise.  Just  as  a  company  or  the  State  compiles

accounts of its past revenues and expenditures (which must necessarily balance) in order to assess the bud-

get forecast for its future revenues and expenditures, so the entire nation sets up an accounting system to

record all the flows of exchanges between its main categories of players, in order to prepare a forward-looking

"economic budget" in the same framework. The chief aim of this "budget" is to provide economic evidence

and justification for the "central-government budget," i.e., the revenues and expenditures of a specific player.

In  the  initial  period,  therefore,  French  national  accountants  were  entirely  focused  on  those  same  goals  of

book-balancing and fiscal equilibrium. While they were effectively striving to incorporate budget decisions into

a macroeconomic-equilibrium framework, the equilibrium did not fit into an endogenous dynamic path, as in

the Dutch models based on Tinbergen's 1936 model.

Yet the notion that filling the theoretical cells of the forecasting tables could be helped by "modeling" occurred

very early. The inspiration and leadership for the operation came from Claude Gruson, who in 1950 proposed

a theoretical model comprising 88 equations, of which 11 accounting identities. Seeking to reveal an "inflation

gap," this complicated model remained virtual and was never quantified. In the fifteen years that followed, the

tools  used  by  forecasters  were  not  systematic  econometric  relationships,  but  constraints  and  relationships

reflecting a  "basic Keynesian" logic that linked overall supply and demand, on a case-by-case basis. This

strenuous collective effort to compile accounts of the past and future simultaneously was carried out by a new

office of the Finance Ministry created by Claude Gruson in 1950: the Office of Economic and Financial Studies

(Service des Études Économiques et Financières: SEEF). The Office was separate from INSEE. The latter,

founded  in  1946,  was  the  successor  of  the  Statistique  Générale  de  France  (SGF)  and  the  Institut  de

Conjoncture set up by Alfred Sauvy in 1938. In 1962, Gruson became head of INSEE. SEEF – the breeding-

ground of national accounting – was split into two units. The first, responsible for the accounts of the past,

was  incorporated  into  INSEE,  turning  the  Institute  into  the  producer  of  the  national  accounts.  The  second
became the Ministry's "Forecasting Directorate" (Direction de la Prévision).

8 The national accountants of that period believed that if the accounts of the recent past were known in detail, the forecasting of accounts
in the near future would become almost child's play. This notion resembles that of Quetelet, who boasted that he could make predict the
exact number of suicides and crimes that would be committed the following year. In this connection, he even talked about the "inexora-
ble budget of crime." 

162

Between the 1950s and 1970s, "economic forecasting" was conducted in parallel, in two different and partial-

ly competing ways. The "budget people" (budgétistes) at SEEF incorporated annual forecasts in the accoun-

ting framework described above, while the "short-term economic analysts" (conjoncturistes) at INSEE carried

on  the  old  tradition  of  Dessirier  and  Sauvy.  They  constructed  intra-year  series  (monthly  or  quarterly),  then

organized specific business surveys (enquêtes de conjoncture) among executives. The INSEE analysts thus

cultivated an intuitive approach to current trends, based on information items that were admittedly quantitati-

ve but not formally interlinked; their methods and language were very different from those of the "budget peo-

ple." These approaches typically correspond to two of the points in our list: 3.3 for the forecasters, 3.5 for the

national accountants. At the time, the Dutch began a synthesis between 3.3 and 3.5, with the aid of tools from

3.4 (mathematical statistics) and 3.6 (dynamic modeling).

Despite their long-running quarrels, the common feature of the French "budget people" and "forecasters" –

by comparison with the Dutch – is that they do not postulate long-term regularities embedded in economic

laws and econometric relationships. A similar opposition is described by Mary Morgan (1990) in her "history

of econometric ideas." She divides the students of "business cycles" into two opposing two groups: econo-

mist-statisticians, who see each cycle as unique, with its specific life-course and logic (two typical represen-

tatives are Mitchell and Burns at the NBER), and econometricians, who seek to isolate regular patterns and

atemporal laws, first using exogenous cycles (Jevons and Moore, with their astronomical and climatic expla-

nations), then by means of an endogenous dynamic linked to market adjustments (Tinbergen). On these cri-

teria, the forecasters and national-accounting "budget people" belong to the first tradition (Mitchell was one

of the founders of U.S. national accounting).

The oppositions are not, of course, so clearcut. For example, French forecasters long justified the absence

of econometric models comparable to those of Tinbergen and of Klein and Goldberger on the grounds that

there were no statistical series long enough to feed them. They stressed the urgency and importance of

massive  methodological  and  statistical  investment  before  the  search  for  possible  regularities  could  begin.

While true, this explanation may not be entirely adequate: models relying on short, approximative series have

been constructed elsewhere. More profoundly, the French approach seems closely linked to the partly common

positions and roles of SEEF national accountants and INSEE forecasters in the government bureaucracy. Being

close to fiscal decision-making or the immediate interpretation of the economic "climate," they are inclined to

emphasize the specificity of the present, or rather that of a perception immersed in action-as against the broader

perspective adopted by observers (for example, academics) who can detach themselves from the contingencies

of that present. Even if, like Tinbergen, the detached analyst performs a service requested by the political

sphere, he or she maintains an academic behavior, and writes articles and books of wider import than admi-

nistrative memoranda. The particularity of "French-style" expertise is very obvious here. The main players in

national  accounting  were  essentially  engineers  who  had  become  senior  civil  servants.  They  wrote  little,  or

produced "methodology volumes" for direct operational use.

8. Pulsation and planning: two philosophies of time

The above distinction between senior civil servants and academics does not, however, overlap an apparent-

ly similar opposition between the short term (the politician prisoner of emergencies) and the long term (the

academic specialist who reputedly takes the longer view). "Taking long-term requirements into account" was

actually a leitmotiv of the group of post-war planners and modernizers in the French civil service. The crea-

tion of the Plan was specifically aimed at satisfying a need that "government departments in charge of day-

to-day matters" could not meet. There is a seeming contradiction between the stated desire to place short-

term action in a long-range perspective and the refusal to embed temporality in the regular patterns revealed

163

by econometrics. But are we dealing with the same "long" time? Is the cyclical time produced by the endoge-

nous  dynamics  of  the  market  economy  comparable  with  the  "long  term"  of  the  "prospective"  approach?

Cyclical time is the "substrate" for specific movements comparable to the pulsations of a mechanical or bio-

logical system. The long term is the distinctive action space staked out by the experts in "structural trends,"

who believe in shaping change. However forcefully the existence of such trends is asserted, they are incor-

porated into balanced tables reflecting the long-term effect of book-keeping constraints, but they do not result

from a specific temporal dynamic of mutual, lagged causes and effects. While cyclical-fluctuation time is typi-

cal of market economies, the time scale used in long-term project planning can characterize economies of

very different kinds, once rational-minded agents prepare accounts of resources and their uses. These two

approaches rest on two different philosophies of time.

The comparison between the French and Dutch plans reflects the differences outlined above. The goals of

the French plan are recorded in the national accounting tables; they are framed in terms of an overall consis-

tency  between  extrapolated  equilibria  and  willful  initiatives,  for  a  horizon  year.  By  contrast,  the  Dutch  plan

incorporated, econometric formulations of spontaneous trends in a market economy as early as the 1950s,

notably  via  "sliding  plans"  that  connected  short-term  forecasts  with  medium-term  forecasts.  This  approach

effectively showed the long term to be as much the consequence of the summation of short time periods as

the horizon for pre-assigned targets.

Yet,  at  their  origin,  the  two  plans  were  informed  by  similar  political  goals,  partly  due  to  the  1930s  crisis  of

democracy. The aim was to invent a consensus-building technique based on a system that partly differed from

conventional parliamentary representation, but was complementary to it and engaged in dialog with it. On this

count, the Dutch seem to have gone further and their planning has undoubtedly had a deeper impact on the
democratic debate9 than was the case in France, at least in the long run. In both countries, ad hoc commissions
of  experts  appointed  by  the  main  business  organizations,  labor  unions,  and  (in  the  Netherlands)  religious

bodies began iterative interaction with a team of technical experts whose role was to verify the consistency

and economic consequences of each player's plans and demands. The administrative workings of these two

new machineries were not strictly identical, but the philosophy was.

The two undertakings differed, however, in the technical procedure for verifying the consistency of the plans.

The  French  prepared  a  detailed,  complex  framework  of  double  book-keeping  balances  –  by  agent  and  by

transaction – that was projected onto the Plan's horizon year. Its detailed breakdown was supposed to gua-

rantee the plausibility of the overall enterprise. This total consistency was the outcome of iterations between

the  technical  experts  responsible  for  the  calculations  and  the  specialized  commissions,  each  a  forum  for

important but partial points of view. The technical process of filling the tables for the horizon year (t + 5) closely

resembled the one described above for compiling accounts of the past and near future (the economic budgets).

The alchemy was the same: it involved transforming partial, contradictory information into matrices exhibiting

line-and-column  balances,  without  worrying  about  the  dynamic  path  leading  to  that  horizon.  The  social

consultative procedure, meanwhile, sought to promote not only the overall equilibrium of the future accounts,

but also a political pedagogy: this consisted in comparing points of view and plans in a now common language

– in other words, the establishment of a new type of public space that differed from elected representation.

9 One of the topics most actively discussed and explored in the period was wage policy (Hessel 1965). 

164

9. Political model and econometric model

In the Netherlands, the overall political enterprise was the same, but it was based on a very distinctive tradition

– dating back to the mid-nineteenth century – of distributing and balancing power between the religious and

political communities: this politics of "pillarization" (verzuiling) authorized and organized a strict, fair division

of social life (marriages, schools, labor unions, social protection, press, radio, and political parties) between

Protestants, Catholics, Liberals, and Socialists (De Voogd 1992). The system flourished until the 1970s and

informed the Plan's creation. Indeed, the notion that these communities could lead partly separate lives but

also get along and jointly form the "pillars" of a State that would guarantee them autonomy and civil peace

was deeply rooted in the Dutch political tradition10.  For instance, the Social and Economic Council, in charge

of discussing the results of CPB forecasts and estimates, is composed of qualified representatives of each

"pillar"  appointed  by  specific  labor  unions,  employers'  organizations,  and  community  groups.  The  Plan's

neutrality and objectivity are guaranteed by this representation.

On this criterion, the Dutch State seems less omnipresent and sovereign than the French State11.  This may
perhaps shed light on the differences between the procedures and tools used for interactions between technical

experts and representatives of social forces. The Netherlands was able to use an econometric construct of

academic origin – sophisticated in terms of both economic analysis and mathematical formalism – as a

legitimate, accepted medium for the interactions. France, by contrast, used a tool for book-keeping consis-

tency  of  a  more  administrative  kind.  Developed  in  the  most  solid  core  element  of  the  French  State  (the

Finance Ministry, Rue de Rivoli), it provided the necessary legitimacy with little recourse to academic language.

Thus a different relative equilibrium between the State and other forces (universities, labor unions, churches,

etc.) can shed light on the existence and success of tools that are both technical and political – tools whose

definition cannot be reduced to a list of the model's equations, even if these need to be incorporated into the

analysis.

This situation is illustrated by Jan Tinbergen's atypical career, which was an essential feature of the Dutch

academic and political constellation. Born in 1903, Tinbergen was the son of a Dutch teacher, who belonged

to a very small Protestant denomination. He studied physics at Leiden in the 1920s, in a scientific environ-
ment  that  included  some  of  the  best  physicists  of  the  period12.    In  1929,  on  the  advice  of  his  teacher,
Ehrenfest, he defended a doctoral thesis on "the problems of minima in physics and economics," in which he

drew on mathematical formalisms used in physics (Hamiltonians, Euler equations, and differentiable dynamic

systems) to deal with the dynamics of a Walrasian economic equilibrium based on maximizations of utility or

profit  (Boumans  1992).  But  he  did  not  want  to  embark  on  a  career  in  theoretical  physics  because,  in  his

words, "the problems of society seem more urgent to [him]." Moved by the plight of workers in the Leiden

10  This arrangement rested on two partly different theological traditions. For the Catholics, the notion of subsidiarity, derived from the
papal encyclicals, guaranteed a division of competencies between the levels of a hierarchy: the State had sole (but complete) responsi-
bility for performing the tasks that the lower ranks could not carry out. For the Protestants, the notion of sovereignty in one's communi-
ty gave more prerogatives to small communities and expressed greater reservations toward the State. For this reason, the Dutch Plan
was promoted more energetically by alliances between Catholics and Socialists, although Protestants and Liberals also played an acti-
ve role (van Altena, van den Bogaard and Kalshoven 1998). One would surely find similar distinctions in the history of European inte-
gration, marked by the figure of Jean Monnet, the founder of the French Plan. 
11 Its capital, The Hague, is a small town by comparison with Amsterdam or Rotterdam. The CBS and CPB are located in The Hague
or its environs. (The CBS building, in Voorburg, is also the seat of the permanent secretariat of the International Institute of Statistics,
IIS). Tinbergen lived in The Hague. The main universities are distributed between Amsterdam and three other cities: Utrecht, Leiden, and
Rotterdam. According to Johan Heilbron (1988): "This polycentric system, based on coexistence rather than open competition, goes back
to the origins of the nation, which was formed by the union of the provinces, without a commanding center, prestigious court, or central
authority." 
12  Following a secondary-school reform of the 1860s that promoted scientific education, well-endowed physics laboratories flourished
in the early twentieth century, and the Netherlands won five Nobel prizes in physics between 1901 and 1913 (Willink 1991). One laurea-
te, Paul Ehrenfest (1880-1933), a father of quantum mechanics, had a decisive influence on the young Tinbergen. 

165

region, he joined the Socialist Party, in which he remained active all his life. A pacifist, he applied for cons-

cientious-objector status in 1927 so as to be assigned to civilian duty. His father secured him a place at the

Central  Bureau  of  Statistics  (CBS),  where  he  eventually  worked  until  1945,  while  teaching  economics  at

Rotterdam University and carrying out missions for the League of Nations.

Tinbergen had thus studied the most advanced mathematical economics of his time and even contributed to

its development. His contact with empirical data made him want to use them to address tough social issues.

The conditions for the potential grouping of approaches 3.2 (general equilibrium), 3.3 (short-term analysis),

3.4 (mathematical statistics), 3.6 (dynamics), and 3.8 (political goal) – needed to give birth to econometric

modeling – were assembled. Two other components, national accounting (3.5) and probabilities (3.7), were

still missing but would be added a short while later. Tinbergen's modus operandi bears some resemblance to

that of Lenoir – also a member of the official statistical corps – but it goes much further. He not only raised

the issue of identifying supply and demand functions; he was also practically the first to solve it – in an arti-

cle  published  in  German  in  1930  –  by  adding  more  explanatory  variables  and  calculating  a  reduced  form

(Morgan 1990). He applied this method concretely to the market for potato starch, an important commodity in

the Dutch economy.

Tinbergen then turned to the study of "spider's web" movements that generated market equilibria. This led

him to the structure of the first dynamic model of the business cycle, which he formulated, estimated, and pre-

sented in public in 1936 (Boumans 1992). His work was in answer to a request from the Socialist Party. What

measure is most likely to revive economic activity and restore the country's trade balance? A public-works

program,  protectionist  measures,  an  industrial-rationalization  policy,  a  reduction  in  monopoly  prices,  wage

cuts, or a devaluation of the guilder? Tinbergen tested these alternatives. He also studied the effects of mea-

sures aimed at counteracting an imported cycle through exchange-rate management or public investment. He

concluded that by far the most effective measure was devaluation, which the government decided on shortly after.

This study is little known outside the Netherlands, but Tinbergen was later asked by the League of Nations to

test the cycle theories compiled by Haberler. For the project, he worked hard to prepare a clear, educational

presentation of his model by stripping it of its most arid mathematical formalism while preserving its essence:

the combination of an endogenous dynamic of market mechanisms and the possibility of influencing these by

measures whose effects are analyzed within the logical framework of that dynamic itself. The big issue at the

time was the "stabilization of the business cycle." Do stabilization measures actually diminish economic acti-

vity even further, through the chain of repercussions that can be predicted from the cyclical structure of the

model's core? This question is discussed in detail in a book written and published in French in Paris in 1938,

The Mathematical Foundations of the Stabilization of Business Movements (Les fondements mathématiques

de la stabilisation du mouvement des affaires), in a series on "theoretical economics and economic statistics"
edited by Georges Lutfalla13. 

The construction and early experimental uses of Tinbergen's model in the late 1930s could rely only on rudi-

mentary data. In 1937, this situation prompted CBS to undertake the establishment of a permanent system

of national accounts (or, as it was then called, "national income"), focused on income statistics and corrobo-

rated by production statistics (Derksen, CBS). The war economy and the ensuing reconstruction quickened

this research program during the 1940s in the Netherlands, as it did in France and elsewhere. An organized

economy facing shortages, emergencies, and an intensive, concentrated deployment of resources requires

direct intervention by the State and government agencies-hence the introduction of new statistical systems,

13  Unless further research proves otherwise, the book seems to have been little read or quoted by the French economists who created
national accounting and economic budgets. Malinvaud remembers having bought it and read it closely in 1943. 

166

particularly  to  document  industrial  production.  This  happened  in  both  the  Netherlands  and  France.  During

such periods, the notion of an independently functioning market economy with its own cycles and tempo –

explored by Tinbergen in the 1930s – gave way to the vision of an economy managed like a big corporation.

Within this shortage economy, an increasing number of manufactured goods circulate between workshops

(the "industrial branches") interlinked via the "technical coefficients" of a Leontief matrix. Prices do not seem

to act as key variables, as in market transactions.

10.

Is the economy comparable to a large corporation?

The notion that the overall economy resembles a "single big enterprise" was expounded by the first produ-

cers of national accounts. In 1941, the Dutch statistician Van Cleeff proposed the expression "book-keeping,"

which remained in use in the Netherlands for many years, to emphasize the analogy with standard business

accounting. And he stressed the importance of such a tool for a "centrally planned economy" (Bakker 1992).

In 1943, the Frenchman Louis-André Vincent – one of the precursors of French national accounting – articulated

the same analogy between the entire economy and a big company (Fourquet 1980), which persisted among

post-war national accountants. But it then gradually drifted from a literal meaning, still very plausible in the

1940s  context,  toward  a  more  metaphoric  meaning.  Managing  the  economy  like  a  single  large  enterprise,

Soviet style, was no longer on the agenda. However, the image continued more or less explicitly to inform the

vision of the founders of the major systems of national accounts. The tendency was all the stronger as the

founders were close to the core of the State, i.e., the place where it is most plausible to conceptualize the

economy as a whole. At the time, however, Keynesian language, in its simplified version, was better suited

than the language of the Taylorist rationalizer for describing the actions that could be envisaged in the context

of an economy freed from its wartime regulations – an economy  where  the  notion of macro-economic steering

was now accepted. The tool modeled on the detailed book-keeping of an industrial firm thus gradually evolved

into a system of more general estimates required by economy ministers.

However, the evidence suggests that this transition, which began from comparable situations, followed diffe-

rent paths in the Netherlands and France – notably under Tinbergen's influence. In the immediate aftermath

of the war, the Dutch plan had to deal with rationing and the urgent problems of reconstruction. By 1953, the

planners, almost all of whom had been trained by Tinbergen, sought to build a model that could reflect the

movement of the economy. But this initial model was not as dynamic as its 1936 precursor: its only dynamic

part  was  the  investment  equation,  based  on  the  mechanics  of  the  flexible  accelerator  (Central  Planning
Bureau 1956; Barten 1991)14.  By the 1960s, however, the "sliding plans" system, which linked the short –
and medium-term plans together, reintroduced the idea of an endogenous movement of the economy: the

economy's course could be influenced by economic-policy measures tested by the model, whose results were

widely disseminated and discussed.

The French Plan was informed by a partly different philosophy. It held on longer, at least implicitly, to the meta-

phor  of  the  large  corporation  (with  emphasis  on  the  importance  of  projections  in  volume  terms,  Leontief

tables, and technical coefficients). At the same time, it combined the metaphor with a more political goal of

attenuating market effects by a sort of consultative simulation of the market through the planning commis-

sions. In these conditions, as we have seen, national accounting was the ideal tool for achieving consistent,

collectively  transparent  plans.  By  contrast,  macroeconomic  modeling  –  with  its  mysterious  and  automatic

14 Some of the Plan's originators-particularly van Cleeff, who created the first national accounts in 1941-may have had a different vision
than Tinbergen's; they may have wanted a Plan less centered on the market and more focused on a sort of communitarian socialism.
By  his  sensitivity  steeped  in  religious  thought,  van  Cleeff  resembles  Gruson  (an  active,  influential  member  of  the  French  Reformed
Church). Unlike Gruson, however, van Cleeff did not play a major role after 1950 (these comments owe much to Frank Kalshoven and
Adrienne van den Bogaard).

167

hypotheses  and  regressions  –  would  deprive  the  social  partners  of  their  capacity  to  discuss  an  economy

clearly reflected in a detailed, efficient system of statistical information. This concept of planning is expoun-

ded with near-prophetic vigor in Claude Gruson's many writings on the topic since the 1950s (for example,

Gruson 1968).

In 1963, the Brookings Institution in Washington held a conference on "quantitative planning of economic poli-

cy"  (Hickman  1965).  France  was  represented  by  a  member  of  its  Planning  Commission  (CGP),  Bernard

Cazes; the speakers from the Netherlands were Henri Theil, an econometrician in the Tinbergen tradition,

C.A. Van den Beld, of CPB, and Willem Hessel, a labor-union expert and member of the Economic and Social

Council. Cazes confined his talk to the French Plan's institutional organization and the consultative procedu-

res between commissions and technical experts. All the other speakers – including, of course, the Dutch –

presented models. French planners at the time explained the difference by the fact that (in their view) France

was the only country with an actual planning procedure, whereas the other countries could only "model in the

abstract." While no doubt accurate for the other countries, this analysis  was incorrect for the Netherlands,
which combined the two procedures, political and econometric15. 

French distinctiveness faded by the late 1960s, when it began implementing the FIFI model followed by the

DMS model (Boyer 1987; Courbis 1991). The FIFI model, however, was still limited to a final-year forecast

(année horizon); its main specific feature was its distinction between an "exposed sector," for which prices

are exogenous and determined by the rest of the world, and a "sheltered sector," where a classical supply-

demand equilibrium remained possible. By contrast, the DMS model (acronym for "multi-sector dynamics":

dynamique  multisectorielle,  1975)  was  explicitly  dynamic.  In  those  years,  however,  the  initial  institutional

mechanism of the planning commissions gradually lost importance. Attempts were made in the 1970s to use

the FIFI and DMS models (in that order) to test alternative scenarios at the request of the "social partners,"

but the procedure never assumed the scope and resonance that it has displayed in the Netherlands since the

1950s.

Econometrics as a mathematical tool for economic analysis was introduced in France by economists trained

first as engineers then as statisticians. Their intellectual profile differed both from that of academic economists

– who long resisted the formalization of economics – and from that of the planners and national accountants

we have just discussed. René Roy, an ingénieur des ponts et chaussées (i.e. trained in bridge and road engi-

neering), studied and estimated consumption functions as early as the 1930s and was the first to train students

in the method (given that Lenoir had gone virtually unnoticed since his 1913 research). After Roy, Edmond

Malinvaud – back from a visit to the U.S. Cowles Commission in 1950 – introduced and reformulated

probabilistic econometrics in France and trained generations of econometricians, in particular at the INSEE-

run École Nationale de la Statistique et de l'Administration Économique (ENSAE). An academic more than a

political person – in contrast to Claude Gruson – Malinvaud was not driven by the same motives as, for

example, Tinbergen in the 1930s. His priority was to train specialists who would be familiar with the latest

developments, and who would maintain close contacts with research in the English-speaking world. In this

respect as well, the economists trained by Malinvaud differed sharply from the traditional academics and the

planners. In the 1970s, this new economic culture began to spread in the French universities, drawing French

economics closer to that of other countries including the Netherlands. In the Netherlands, econometrics

loomed large in the academic curricula since the 1950s, notably though the influence of specialists such as
Tinbergen, Theil, and Koopmans.

15 A third country follows planning procedures that may be compared to that of the Netherlands and France: Japan (Hickman 1965). 

168

11. Optimization or self-fulfilling prophecy

The  specific  configuration  in  the  Netherlands  explains  why  the  country  witnessed,  very  early  on,  a  close

connection between a high-level econometric investment and the formalized expression of economic-policy

goals. This combination was already at the core of Tinbergen's initial project. It continued, after the war, with

the investigations by Tinbergen and his student Henri Theil on economic-policy optimization (Hughes Hallett

1989). Their approaches were partly different. Tinbergen assumed that the political decision-maker specifies

the values to be reached by the "objective" variables of economic policy ("fixed targets"). The model makes

it possible to determine the values of the action variables ("instruments") compatible with the chosen targets.

The decision-maker can choose among these solutions, if they exist. Theil, by contrast, does not start with

predetermined fixed targets. He specifies a decision-maker preference function that includes both the target

values  and  the  instrument  values,  without  setting  either  in  advance.  The  function  is  maximized  under  the

constraints expressed by the model's relationships. The inclusion of the action variables in the decision-

maker's utility function means that targets cannot be totally separated from instruments. Thus public expen-

ditures may be regarded at the same time as instruments (in a Keynesian vision where they contribute to total

demand) and as targets (to the extent that they are useful to social welfare) (Hickman 1965). The two approaches,

in terms of fixed targets or preference functions, require a complete econometric model comprising targets

and action variables. In the early 1960s, the Dutch CPB used an annual model of this kind with 36 equations,

designed to support both forecasting and a short-term stabilization policy (referred to as "short-term planning")

– following Tinbergen rather than Theil. The aim here was to use the model, combined with information on

political decision-makers' preferences, to delineate a set of possible government actions capable of reaching

numerically specified targets.

The French Plan – which reached the apogee of its glory in the 1960s as well, under the leadership of Pierre

Massé  –  was  guided  by  a  different  political  and  intellectual  agenda.  The  goal  was  to  set  a  medium-term

growth slope compatible with human and technical resources, and with social structures. The prime concern

of this willful enterprise was to choose a growth rate. The maximum horizon was defined by a "Japanese-style

growth" scenario: this was the planner's dream, but was deemed too violent because of the upheaval in social

structures that it would require. Empirical sociology – then in its infancy – was needed to analyze "resistan-

ces to social change" that inhibited growth. The planning exercise was a socio-political process in which indi-

vidual projects were set out in ad hoc commissions, coordinated through the national-accounting balances,

and gradually adjusted to comply with the book-keeping, economic, and social constraints. The basic idea

was that the exercise would convince the social players that the proposed growth target was possible and

plausible. The prophecy was self-fulfilling as it did not become reality unless people believed in it beforehand.

This vision was the key to the deliberate rationalization of growth that the French national accountants sought

to achieve.

The  then  Planning  Commissioner  was  Pierre  Massé,  ingénieur  des  mines and  an  economist  familiar  with
research  in  other  countries.  Under  his  impetus,  several  pilot  optimization  models  were  constructed  in  the
1960s, notably by a center for mathematical-economics research set up by the planning authorities: CEPRE-
MAP (Moustacchi 1965). Unlike the work of Tinbergen and Theil, however, these projects were not incorpo-
rated  into  policy-making;  they  remained  textbook  exercises.  The  models  actually  built  and  used  later  on  –
ZOGOL, DECA, STAR, and COPAIN for economic budgets; FIFI and later DMS for medium-term planning –
were in fact increasingly detailed and sophisticated formalizations of forecasting practices previously conducted
through trial-and-error and iterative negotiations. These trend projections, sometimes diversified into "scenarios"

of different shades of "pink" or "gray" depending on the growth rate, could also serve as the basis for economic-

policy  simulations  (variantes)  at  the  request  of  political  or  labor  leaders.  But  this  "customized"  simulation

never assumed major proportions.

169

Each approach had distinct implications in terms of negotiation and construction of socio-political networks.

In the Netherlands, the concrete expression of the goals of decision-makers' "preference functions" is achieved

in the discussions at the Economic and Social Council, where employers and employees are represented. In

the early 1960s, for example, a heated debate took place on alternative wage policies. At the time, wages

were surging in what was viewed as an inflationary pattern. One labor-union participant noted the extent to

which "preference specification is essentially a negotiation process, subject to the vicissitudes of politics, in

which  the  commission  members'  preferences  interact  without  necessarily  converging"  (Hessel  1965).  This

issue of the specific effect of the negotiation dynamics on the formulation of political goals was clearly percei-

ved by the Dutch planners. Their French colleagues preferred to emphasize the scope and intricacy of the

vast network of government departments, commissions, and working parties that participated in the gradual

elaboration of the Plan, which was then discussed and approved by Parliament. For them, it is the extension

of this involvement by social players that makes the Plan more credible, since a greater number of players

are incited to act in conformity with a collectively defined horizon. In either case, the style of the technical

formulation – optimizing and econometric for the Dutch, coordinative and accounting-based for the French –

interacts with the academic, intellectual, and social network into which the formalization is incorporated.

This procedural difference may explain why Dutch planning seems to have shown greater resilience than its

French  counterpart  in  the  turning-point  of  the  1970s  and  the  advent  of  global  market  crises.  In  the

Netherlands, the technical tool proposed by the modelers encountered few objections. Each of the main poli-

tical parties agreed to elaborate its own proposals within the planning framework, which it accepted as an

"arbiter." The debates centered on the expression of political priorities, under the new constraints introduced

by a situation partly resembling the one modeled by Tinbergen in the 1930s. The market's broadly cyclical

fluctuations could now be analyzed and predicted. The impact of price mechanisms on income distribution

and employment was taken into account, in the model language, by the political players – just as the religious

and philosophical "pillars" formerly cooperated in verzuiling. The model was thus integrated into a superstruc-

ture overarching pillars that remained separate but were willing to discuss under these rules.

In France, by contrast, the collective consultation process, originally designed to discuss the medium-term

growth rate measured by volume, was no longer suited for tackling issues that now lacked a common language

– issues raised by market mechanisms and the employment crisis. Modeling, which flourished and was diver-

sified  in  various  institutions  founded  around  1980,  has  become  an  exercise  involving  technical  experts  far

more competent in econometrics and economic theory than their predecessors of the 1950s and 1960s. But

their work is harder to incorporate into a collective social practice, as the issues raised are more controver-

sial and harder to discuss in a neutral and relatively dispassionate forum such as the commissions of yester-

day.  Moreover,  the  very  language  of  models  and  economic  theory  is  no  longer  a  common  ground  broadly

accepted  by  all.  Once  again,  therefore,  we  have  a  separation  between  technical  experts  using  ever  more

sophisticated tools and a social debate that partly ignores them, or is perplexed by the diversity of the experts'
diagnoses and proposals16.  For example, the arguments in the controversies over the minimum wage seem
to have remained frozen for the past sixty years, at least in France. A close comparison of the style and social
impact of this chronic debate in two countries that resemble each other in so many ways would be instructi-
ve. How have the two planning and modeling traditions shaped the connections between model-backed argu-
ments  and  policy-making?  Is  there  a  significant  difference  between  the  Netherlands  and  France  on  this
score? Indeed, do the words plan and model have the same connotations depending on whether they des-
cribe things to do, things that are being done, or things that have been done – in either country?

16 This rough comparison between the two countries is largely a hypothesis. It may seem simplistic-especially for the Dutch, who, as
insiders to their situation, perceive its contradictions better; perhaps they will see the consensus described here as their national utopia.

170

12. The Plan as project and picture

The  concept  of  plan is  two-faceted.  First,  the  plan  organizes  and  coordinates  a  sequence  of  actions  for  a

given purpose. Second, the plan is a graphic representation, a fence around a complicated and potentially

unlimited space, reduced to the sole features needed to move inside that space and act upon it. The concept

of model has the same ambivalence: an exemplary figure to which one should aspire versus a conventional,

manipulable stylization of a system of interactions. In both cases, the possibility of viewing and describing and

the possibility of acting are closely combined (Thévenot 1990). However, at least in their economics-related

uses,  the  term  model appears  to  lie  on  the  side  of  description,  whereas  the  term  plan seems  linked  to  an

action that is being contemplated. This distinction may perhaps enable us to summarize what we have said

earlier by separating the course of the economy itself from the course of the activity involved in planning that

economy.

The Dutch rely on the dynamic sequence of fluctuations of an autonomous market economy, as one would

try to mount a galloping horse. The designation of fixed or flexible targets is conditioned by a keen sensitivity

to the movement of the economy. Meanwhile, the planning procedure implies a close link between modeling

and the negotiation of targets and instruments. The emphasis seems to be on the procedure's outcome. The

Dutch Plan mimics the economy's course by its model.

The French (before 1975) had a more technical and quantitative vision of an economy whose price dynamics

long remained a mystery. Whereas the economy's movement was summed up by its horizon, the emphasis

was  on  the  social  procedure  for  defining  the  horizon  in  detail,  via  a  complicated  circuit  involving  national-

accounts experts, commissions, and working parties. The French Plan mimicked the economy's course by

the negotiation between social partners.

One should not, however, expect too much from these macrosociological comparisons. Their main purpose

is to underscore the conventional descriptions of individual countries. Comparisons, whether international or

historical, enable us to see by giving us perspective. But from that point on, everything remains to be done.

The  microsociological  study  of  interactions  between  academics,  statisticians,  delegates  of  French  "social

partners" or Dutch "pillars," legislators, and decision-makers can in no way be replaced by the mere study of

declarations of intent, administrative organization charts, or model equations. This motley set of factors pro-

vides a wide variety of resources, rooted in national networks with differing profiles. These profiles are not the

result  of  broad  cultural  traits;  rather,  they  are  tied  to  birth  processes,  to  specific  and  contingent  selections

whose outcomes consist of the State's practices, constructed by knitting knowledge and action together.

13. Bibliographical references 

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Meanings  of  Planning  and  the  Prehistory  of  the  Central  Planning  Bureau:  1930-1950",  in  :  SAMUELS

W.J.(ed): European Economists of the Early 20th Century, vol. 1,Studies of Neglected Thinkers of Belgium,

France, The Netherlands and Scandinavia, Cheltenham (UK), Edward Elgar, pp.283-305

ARMATTE, M., 1994: "L'économie à l'École polytechnique," in BELHOSTE, B., DAHAN-DALMÉDICO, A., and
PICON, A. (eds): La formation polytechnicienne, 1794-1994, Paris: Dunod, pp. 375-396.     

ARMATTE, M., 1995: Histoire du modèle linéaire. Formes et usages en statistique et économétrie, doctoral

dissertation, EHESS, Paris.

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ARMATTE, M. and DESROSIÈRES A., 2000 ; « Méthodes mathématiques et statistiques en économie : nou-

velles questions sur d'anciennes querelles », in : BEAUD J.P. AND PRÉVOST J.G. (éds) : L'ère du chiffre,

systèmes statistiques et traditions nationales, Presses Universitaires du Québec, Montréal, pp. 431-481.

ARTUS, P., DELEAU, M., and MALGRANGE, P., 1986: Modélisation macroéconomique, Paris: Economica.

BAKKER, G.P. DEN, 1992: "Origin and Development of Dutch National Accounts," in 22th IARIW Conference,

The Value Added of National Accounting, pp. 73-92.

BARTEN, A., 1991: "The history of Dutch macroeconometric modelling, 1936-1986," in BODKIN, R, KLEIN,

L., AND MARWAH, K. (eds): A History of Macroeconometric Model-Building, Aldershot (UK): Edward Elgar,

pp. 153-94.

BODKIN,  R.,  KLEIN,  L.,  and  MARWAH,  K.  (eds),  1991:  A  History  of  Macroeconometric  Model-Building,

Aldershot (UK): Edward Elgar.

VAN  DEN  BOGAARD,  A.,  1998:  Configuring  the  Economy.  The  Emergence  of  a  Modelling  Practice  in  the

Netherlands, 1920-1955, Academisch Proefschrift, Universiteit van Amsterdam.

BOUMANS,  M.,  1992:  A  Case  of  Limited  Physics  Transfer:  Jan  Tinbergen's  Resources  for  Re-Shaping

Economics, Amsterdam: Tinbergen Institute Research Series, no. 38.

BOYER, R., 1987: "Les modèles macro-économiques globaux et la comptabilité nationale (1950-1980)," in

INSEE, 1987, Pour une histoire de la statistique, vol. 2, Matériaux, Paris: INSEE-Economica, pp. 635-60.

CAZES,  B.,  1965:  "French  Planning,"  in  HICKMAN,  B.  (ed),  Quantitative  Planning  of  Economic  Policy,

Washington: The Brookings Institution, pp. 179-211.

CENTRAL PLANNING BUREAU, 1956: Scope and Methods of the Central Planning Bureau, The Hague.

CHAIGNEAU, N. and LE GALL, P., 1998 : « The French Connection: The pioneering Econometrics of Marcel

Lenoir",  in  :  SAMUELS W.J.(ed)  :  European  Economists  of  the  20th  Century,  Vol.  1,  Studies  of  Neglected

Thinkers of Belgium, France, The Netherlands and Scandinavia, Cheltenham (UK), Edward Elgar, pp.163-189.

CHAIT, B., 1938: "Le problème des crises économiques," in X-Crise, 1982, De la récurrence des crises éco-

nomiques, Paris: Economica, pp. 231-43.

COURBIS, R., 1991: "Macroeconomic Modelling in France," in BODKIN, R., KLEIN, L., AND MARWAH, K.

(eds), A History of Macroeconometric Modelling, Aldershot (UK): Edward Elgar, pp. 231-66.

CREPEL, P., 1994: "Le calcul des probabilités: de l'arithmétique sociale à l'art militaire," in Dahan-Dalmédico,

A., BELHOSTE, B., AND PICON, A. (eds); La formation polytechnicienne, 1794-1994, Paris: Dunod, pp. 197-215.

DESROSIÈRES,  A.,  1998:  The  Politics  of  Large  Numbers:  A  History  of  Statistical  Reasoning,  Cambridge
(U.S.): Harvard University Press.

DE VOOGD, C., 1992: Histoire des Pays-Bas, Paris: Hatier.

FOURQUET, F., 1980: Les comptes de la puissance. Histoire de la comptabilité nationale et du Plan, Paris:
Encres-Recherches.

GRUSON, C., 1968: Origines et espoirs de la planification française, Paris: Dunod.

HAAVELMO, T., 1944: "The Probability Approach in Econometrics," Econometrica (supplement), 12, pp. 1-118.

HEILBRON, J., 1988: "Particularités et particularismes de la sociologie aux Pays-Bas," Actes de la recherche

en sciences sociales, 74, pp. 76-81.

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HESSEL,  W.,  1965:  "Quantitative  Planning  of  Economic  Policy  in  the  Netherlands,"  in  HICKMAN,  B.  (ed),

Quantitative Planning of Economic Policy, Washington: The Brookings Institution, pp. 163-78.

HICKMAN, B. (ed), 1965: Quantitative Planning of Economic Policy, Washington, The Brookings Institution.

HUGHES  HALLETT,  A.,  1989:  "Econometrics  and  the  Theory  of  Economic  Policy:  The  Tinbergen-Theil

Contribution  40  years  on,"  in  DE  MARCHI,  N.,  AND  GILBERT,  C.  (eds),  History  and  Methodology  of

Econometrics, Oxford Economic Papers, vol. 41, Jan. 1989, pp. 189-214.

INSEE,  1987:  Pour  une  histoire  de  la  statistique,  2  vols.,  1:  Contributions,  2:  Matériaux (Affichard,  J.,  ed),

Paris: INSEE-Economica.

KRAMARZ, F., 1989: "La comptabilité nationale à la maison," in BOLTANSKI, L., and THÉVENOT, L. (eds),

Justesse et justice dans le travail, Cahiers du Centre d'études de l'emploi, Paris: PUF.

LENOIR, M., 1913: Études sur la formation et le mouvement des prix, Paris: Giard et Brière.

LE VAN-LEMESLE, L., 1991: "L'institutionnalisation de l'économie politique en France," in BRETON, Y. and

LUTFALLA, M. (eds), L'économie politique en France, Paris: Economica.

MENARD, C., 1987: "Trois formes de résistance aux statistiques: Say, Cournot, Walras," in Pour une histoi-

re de la statistique, vol. 1, Contributions, Paris: INSEE-Economica, pp. 417-29.

MONIER, F., 1987 : « Les enquêtes de conjoncture », in : AFFICHARD, J.(éd), Pour une histoire de la sta-

tistique, tome 2/matériaux, Paris, INSEE-Economica, pp. 447-461.

MOORE, H., 1914: Economic Cycles - Their Law and Cause, New York: Macmillan.

MOUSTACCHI, A., 1965: "Application d'un modèle d'allocation des ressources à la planification française.

Ses enseignements," World Congress of the Econometric Society, Rome.

MORGAN, M., 1990: The History of Econometric Ideas, Cambridge (UK): Cambridge University Press.

STIGLER,  S.,  1986:  The  History  of  Statistics:  The  Measurement  of  Uncertainty  Before  1900,  Cambridge

(U.S.): Harvard University Press.

THEVENOT, L., 1990: "L'action qui convient," in PHARO, P. and QUÉRÉ, L. (eds), Les formes de l'action,

Paris: EHESS, pp. 39-69.

TINBERGEN,  J.,  1938a:  Les  fondements  mathématiques  de  la  stabilisation  du  mouvement  des  affaires,

Paris: Hermann.

TINBERGEN,  J.,  1938b:  "Recherches  économiques  sur  l'importance  de  la  Bourse  aux  Etats-Unis,"  in  X-

Crise, 1982: De la récurrence des crises économiques, Paris: Economica, pp. 243-55.

TINBERGEN, J., 1954: L'économétrie, trans. M. VERHULST, Paris: Armand Colin.

DE  VRIES,  W.F.M.  et  ALII,  1993:  The  Value  Added  of  National  Accounting.  Commemorating  50  years  of

national accounts in the Netherlands, Voorburg, Central Bureau of Statistics.

WILLINK,  B.,  1991:  "Origins  of  the  Second  Golden  Age  of  Dutch  Science  after  1860:  Intended  and
Unintended Consequences of Educational Reform," Social Studies of Science (SAGE), vol. 21, pp. 503-26.

X-CRISE, 1982: De la récurrence des crises économiques, Paris: Economica.

173

EUROSTAT COLLOQUIUM

HISTORY OF BUSINESS CYCLE ANALYSIS

Luxembourg, 12 November 2001

BUSINESS CYCLES: REPRESENTATION AND MEASUREMENT

Mary S. Morgan
Professor of the History of Economics
London School of Economics and University of Amsterdam

E-mail: m.morgan@lse.ac.uk

175

TABLE OF CONTENTS

1.  Early Representation of the Business Cycle

2. Establishing the Business Cycle with Quantitavie

Rules

3. Strategies for Making Measuring Instruments

4. The Problem of Interpreting Business Cycle Indicators

as Measuring Instruments

5. Establishing New Things with “Standardized Quantitative 

Rules”

6. The Dangers of Standardized Quantitative Rules and 

Unprincipled Measuring Instruments

7. Bibliographical references

177

179

182

184

186

188

189

176

The history of business cycle measurement is instructive in a number of respects, particularly in allowing us

to understand various standard problems of economic measurement and their relevance for current concerns

about  business  cycle  indicators.  From  this  history,  we  can  make  the  distinctions  between  establishing  the

phenomenon  of  business  cycles  and  establishing  facts  about  business  cycles,  and  between  establishing

measurements of the cycle and establishing the causes of the cycle.  These projects were muddled in that

early  history,  nevertheless,  that  conflation  leads  us  directly  into  considerations  about  what  is  required  for

taking measurements of the cyclical activity of the economy.  Questions about representation and the use of

standardized quantitative techniques that arise from a study of the early 20th century work on business cycles

remain informative for thinking about measurement problems in a similar domain of economics in the early

21st century.

1. Early Representations of the Business Cycle  

A considerable number of graphic representations of the business cycle was produced by economists in the

late 19th through to the mid 20th century. The favourite, and the most widely copied, kind was the Harvard

A-B-C  curves,  originally  constructed  by  Warren  Persons  (see  Morgan  1990,  chapter  2;  Armatte,  ibidem,

figure 8). Several points about the nature of business cycles spring out from these representations, points

which are well worth our notice. 

First, as we learn from the visualization given in the A-B-C curve picture, this is a multi-dimensional concept:

the business cycle cannot be represented by a single series of  data but is  represented by many series of

different economic entities charted together. 

Second, lots of information about the phenomenon of the business cycle are shown in the variations in the

curves: their lack of regularity, their lack of congruence in timing, their jaggedness, etc.. Observed in this way,

the business cycle is not a well-behaved, regular kind of phenomenon. 

Third, although these graphs provide lots of information in the sense of data series and pictures, it is striking

that it is not easy to pull out any measurements of the characteristics of business cycles (such as average

durations, degree of variation etc) from these representations of them. At most, we could, like the early users,

ask these indicators to provide dates of the turning points and the leads and lags between the series (though

there are considerable difficulties in which curve should be used for that dating and how the timing of the cur-

ves should be related).  

Fourth, the fact that this method of representation was immediately and widely adopted by many other busi-

ness cycle institutes in the 1920s shows its extreme flexibility.  The business cycles of different economies

can be shown using the same basic ideas and methods of construction, but with curves particular to the natio-

nal economy both in timing and in the series chosen.  One good example of this is Lucien March's 1923

economic "barometer" (see Jovanovic and Le Gall, 2001). March produced a basic Harvard-style barometer

(but with different elements), showing three different countries so that the charts could be used to point out

the localised differences and symmetries between the cycles experienced in France, the UK and the US.  In

producing these pictorial, descriptive accounts of the cycle in the 1920s, economists conveyed their beliefs

about  the  nature  of  the  cycle.    Thus,  for  example,  in  contrast  to  March's  French  conception,  Ernst
Wagemann's development of the methods in Germany took a somewhat different slant (see Tooze, ibidem).

Fifth, and to offer some modification of the third and fourth points, the example of March's work immediately

shows  us  that,  while  not  providing  measurements  of  the  characteristics  of  business  cycles  and  whilst  not

being entirely standardized, the representations did not just provide indications of the direction that economic

177

activity was heading.  They also enabled comparisons within national boundaries (for example, to indicate a

stronger or weaker than usual upturn) and for cross-national comparisons. The A-B-C curves were good at

indicating things about the economic history and the current state of the cycle, but were, in fact singularly poor

at providing measurements of the general characteristics of economic cycles.  Like real barometers in rela-

tion to the phenomena of our weather, these business cycle barometers could be useful instruments provi-

ding information for every day usage but not for providing measurements of law-like behaviour.   

The agendas and methods of different economists and statisticians moved then in various ways between des-

cription, forecasting and analysis (Desrosières, ibidem).  From the point of view of measurement issues, the

most important change was between the 1920s descriptive aims of the A-B-C curves and the analytical aim

of representations we find in business cycle modelling work in the 1930s.  One of the heroes of this move to

analysis  was  Jan  Tinbergen  (see  Desrosières,  ibidem,  and  Boumans,  ibidem).    We  can  find  a  number  of

representations  accompanying  Tinbergen's  famous  Dutch  model  of  the  1930s  –  famous  for  being  the  first

macroeconometric  model  but  equally  important  in  the  history  of  business  cycle  analysis.  Tinbergen's

representations in his later 1930s work on the US model were of several different forms: the set of data

observations; the set of equations which made up his model; the individual relations showing how the various

terms in each equation "stacked up" to form the individual measured relationships in the model; and finally a

schematic arrow diagram showing the causal linkages between elements in the model at different time points

(see Tinbergen 1939, and Morgan, 1990, chapter 4, for examples).  Compared to the A-B-C curves, it is not

nearly so obvious what these various different representations meant. Taken together they amount to all the

elements that made up his statistical model of the underlying relations in the economy, relations which were

both causal and dynamic for the model represented a dynamic process with a causal structure.  This was not

only the dynamics of historical events over time, but also the dynamics of a structure through time. For exam-

ple, Tinbergen graphed each of the relations in his US investment analysis to give both the causal dynamic

of the actual history of each particular variable (eg basic iron output) and to provide some sense of this part

of the structure by "stacking up" (in a vertical display) the time paths of the causal variables in the relevant

regression equation.  Whereas the Harvard A-B-C curves attempt to reflect the path of the business cycle as

indicated by the various data series mapped on the paper, Tinbergen's graphs aimed to analyse the causes

of each main business cycle element and map the path of these causes and their outcome. 

The other hero of cycle analysis was Ragnar Frisch (see Bjerkholt and Lie, ibidem).  Frisch used little causal

flow  schemas  as  sketches  for  his  business  cycle  theory  in  his  1933  "Propagations  and  Impulse"  paper  in

which  he  worked  out  the  economic  structure  of  a  business  cycle  model.  These  schema  (reproduced  in

Boumans, 1999a) is of a very different format both from the A-B-C curves and the econometric models of

Tinbergen.  It doesn't give you any sense of the historical dynamics or timing but does suggest his idea of the

causal relations involved. Boumans (1999a) has analysed the construction of this model in the context of his

own account of economic modelling using his cake-making analogy of this morning.  Boumans' account sho-

wed how Frisch's model was constructed by combining a rocking horse metaphor with the Slutsky effect: the

structural  modelling  of  the  cumulative  process  analysis  which,  by  the  addition  of  a  stochastic  process  of

errors, can be simulated into the kind of dynamic data we find reflected in the A-B-C curves (see Morgan,

1990, chapter 3).

These two kinds of business cycle representations are of two very different things:- the former A-B-C curves
are visualisations of cycle data into time-series graphics, the latter schemas and graphics of Tinbergen and

Frisch are the representations of the business cycle into structural equation models.  On the one hand, consi-

dering the barometers of the 1920s, we are dealing with the history of the attempts to represent the business

cycle in a theoretically neutral mode, to picture the economy, to see how it moves cyclically through time.  On

178

the  other  hand,  with  the  1930s  developments,  we  are  talking  about  the  history  of  attempts  to  build  good

models (theoretical and econometric) of the processes which cause business cycles.

I want to stress, and be more exact about, the points of that difference between the barometers and the struc-

tural models in relation to claims which might be made about the measurement of business cycles.  The point

here is not that historically we moved from a case of measurement of the cycle without theory in the 1920s

to  measurement  of  the  cycle  with  theory  in  the  1930s.    As  already  hinted  in  the  above  discussion,  I  have

doubts about how far these early business cycle indicator projects should be understood as measurement

projects at all, for, as noted, the power of the A-B-C representations as a device to measure the cycle was

limited indeed.  This (largely) 1920s project aimed to map the business cycle in terms of a set of indicators

or  barometer  outputs.  By  contrast,  in  the  1930s  work,  we  see  attempts  to  establish  the  causal  structures

which result in business cycles.  This latter set of business cycle models might be useful for suggesting eco-

nomic policy towards cycles (as in Tinbergen's case), or in providing an indication of how to uncover periodic

cycles hidden in the structural solutions (as in Frisch's case), but they too did not provide measurements of

any general characteristics of any actual business cycle. While the move to the analysis of causal models

may have been theoretically and policy progressive, it was not necessarily a progressive step in terms of mea-

suring the business cycle.  Thus, we can best interpret this interwar change as a move from representation

of the cycle to representation of the causes, not from measurement of the cycle without theory to measure-

ment of the cycle with theory.  Measurement of the cycle was not the aim of either group, nevertheless, as

we shall see, quantitative techniques to establish the data of the business cycle were an integral part of the

indicator project.

2. Establishing the Business Cycle with Quantitative Rules 

Perhaps the most important general question to ask of this early work on business cycle indicators, and a

useful organising notion for later discussion, is: Were they trying to establish a phenomenon or facts about

that phenomenon?

This is the question raised in a well-known paper in philosophy of science by Bogan and Woodward (1988)

who  wrote  very  carefully  about  the  difference  between  establishing  facts  about  the  phenomenon  versus

establishing the phenomenon. Their example is the melting point of lead, a straightforward example: if you

establish that the lead melts when you heat it, then you are establishing a phenomenon, but if you establish

that  lead  melts  at  a  certain  temperature,  you  are  establishing  facts  about  the  phenomenon.  Logically,

perhaps, you need to establish that lead melts before you establish facts about it. But, in the business cycle

case, the problem rumbling around in this earlier period – and possibly still rumbling around – is that these

activities were conflated.  Nevertheless, analysis of the history and of the general problem of measuring

business cycles relies on our clarifying the difference between establishing the phenomenon of the business

cycle and establishing facts about that phenomenon. 

Let me first suggest that, despite appearances, the Harvard A-B-C or indicator project is essentially about
establishing the phenomenon, not about establishing facts about it – to use Bogen and Woodward's useful
distinction.  It does so by making the business cycle observable.  And so the project is best interpreted in
terms  of  techniques  of  observation,  that  is,  the  quantitative  and  statistical  techniques  produce  data  series
which are then graphed so that the investigators can then observe, in the charts, the revealed business cycle

phenomenon. 

A comparison will help to emphasize this point.  This indicator project of producing data in which cycles will

be revealed to observation is clearly different from Wesley Clair Mitchell's quantitative or statistical project of

179

"measuring business cycles" which was concerned with establishing facts about the business cycle. Mitchell's

work provides the most strongly contrasting visual representations of business cycles available in the history

of business cycle analysis.  Mitchell and Burns constructed their "specific" and "reference" cycle diagrams in

the 1940s at the National Bureau of Economic Research in the USA.  These representations were designed

to provide immediate measurements of many different characteristic aspects of the business cycle elements

such as shape, duration, variability, etc. (see Burns and Mitchell, 1946 for the full report and Morgan 1990,

chapter 2, for an example). Their calibrated diagrams (each had measurements attached) were the outcome

of a long measurement project started by Mitchell before the First World War and only coming to full publica-

tion in 1946 at the end of the Second World War. To this day, these methods form the basis for dating US

cycles (see Epstein, 1999).  But more important for us, they provide an excellent foil to help us interpret that

much more vital, and internationally wide-spread, indicator project which began in the early part of the 20th

century and remains active today: most official statistical bureaux produce regular leading and lagging indi-

cators of economic activity which are the direct descendants of the A-B-C curves.  

This contrast in quantitative business cycle studies between the A-B-C indicator project and the Burns and

Mitchell measurement project is comparable to the difference between establishing by observation that lead

melts when you heat it and bringing measurement techniques to the question of establishing at what tempe-

rature lead melts.  The difficulty in making the same distinction in this business cycle case perhaps lies in the

fact  that  both  of  these  processes,  observation  and  measurement,  rely  on  quantitative  techniques  and  the
manipulation of economic data1.   Both of them look like measurement projects for both of them produce num-
bers.  But the comparison clarifies that some techniques, the A-B-C ones, not only bring the phenomenon into

observation, but by so doing they also go far to establish it as a phenomenon.  The second ones, the NBER

techniques, are used to establish facts about the observed phenomenon. 

The  second  point  to  make  in  the  context  of  this  economics  case  is  that  these  quantitative  procedures  are

more than just tools of observation or measurement to establish the phenomenon and facts about it.  The

quantitative procedures of the indicator project used to observe/reveal the cycle in economic activity at the

same time defined the phenomenon of the cycle. It is in this sense that we might almost say that the quanti-

tative procedures "created" the phenomenon; at least in establishing its details. Such a role for quantification

is well rehearsed in the work of the renowned historian of the social sciences, T.M. Porter, who, in a 1994

essay, wrote that "standardised quantitative rules have been almost as fertile as standard experiments and

mass produced instruments in the making of new things" (Porter, 1994/6, p 36).  In other words, in the social

sciences, we come to an understanding and appreciation of new phenomena not by a series of experiments,

nor by the development and adoption of physical instruments, but by establishing quantitative techniques to

access them and, over time, these techniques then become standardized and our knowledge of the pheno-

menon becomes likewise fixed.  

The phenomenon of the business cycle was in some sense a new one in the early 20th century.  In the early
19th century, most economists thought in terms of irregular crises manifest in harvests and grain prices; later
this turned into an irregular, but limited, external trade cycle. The notion of a rather more regular and more
generally widespread business cycle really took off in the late 19th and early 20th centuries.  So, it is impor-
tant to keep clear in our minds that economists and statisticians were, in this early period, essentially grap-
pling with both the problem of establishing that there was such a thing as the business cycle at the same time
as defining its nature and qualities and attempting to determine some facts about it.  

1 A similar dual process might be observed in a parallel economic and statistical case of the period, namely in work on the distribution
of income.  Using statistical and quantitative techniques and a graphic representation, Pareto and Lorenz made the distribution of inco-
me (the phenomenon) observable; the measurement of income inequality (establishing facts about the phenomenon) was provided by
the Gini coefficient which was easily interpretable in terms of the observed Lorenz curve.  I owe this example and thanks to Pedro Teixeira
(2002), whose paper helped me clarify this point. 

180

We can follow these conjoint problems through the literature  (see for example Michel Armatte's paper in this

book which shows a wonderful time trawl through attempts to represent the business cycle). In that early period

there was no collective agreement on what the business cycle phenomenon was. The questions for those

earlier years (and they may still be relevant) were: Is the business cycle a cycle in output or prices or some-

thing else? And what is it like: Is it regular or irregular? Is it multidimensional or unidimensional? Are cycles

homogeneous or are they always particular and different? Are all countries' cycles the same? These are the

questions which are in a sense going round and round internationally between the various research institu-

tes and national statistical agencies of those days. Most of these questions are questions of fact about business

cycles but they are also questions directed at clarifying and conceptualising the phenomenon of the business

cycle itself.  It is problematic to conceptualise a phenomenon and clarify its characteristics at the same time

as trying to establish numerical facts about it.  There should be no surprise then that, historically, it proved

extremely difficult to get conceptual agreement on the business cycle (either as a statistical phenomenon or

in economic theoretical terms).  It was difficult to establish facts about the cycle because it was very difficult

to establish the phenomenon in the first place.  

Amongst all these difficulties, the Harvard A-B-C techniques (in their many national versions) were critically

important in establishing the, then relatively new, phenomenon called the business cycle and in effect their

techniques  defined  the  cycle.    What  were  these  techniques?    The  Harvard  A-B-C  method  uses  a  basic

decomposition method: you begin with a time series of economic data, you de-trend it and then you smooth

it to get rid of the small changes and, lo and behold, what you have left is a data series which is combined

with other similarly treated series to create the charts of the business cycle. Thus the cycle, and so to a large
extent its measurable characteristics, are defined by the initial quantitative procedures2.  The project of esta-
blishing the phenomenon effectively crosses into  that of defining the cycle and of providing measurements

or data for it.  Establishing the data in which the phenomenon would be revealed crosses into providing mea-

surements of the business cycle itself.  Of course this all creates a difficulty of circularity. Can we break into

this impasse and, if not solve the definitional and the measurement problems here, at least see what is nee-

ded to do so?  

In this context, we should note two important points from Bogen and Woodward's lead example.  First, you

do not necessarily have to have a theory about what causes the phenomenon of lead melting, but you do

need  to  have  the  concept  of  lead  melting  in  order  to  establish  facts  about  it.  If  you  have  a  well  defined

concept, you do not necessarily need to have a good theory of causes and effects about it before you can

establish facts about it.  This runs contrary to claims that appeared in several of this morning's papers: the

traditional view of the role of theory, namely that you cannot have measurement without theory, that theory is

necessarily  prior  to  measurement,  and  that  the  term  "theory"  here  means  theory  about  how  the  economy

works, i.e. economic theory.  I suggest that for establishing the phenomenon and facts about the business

cycle (both the raw A-B-C data and any derived summary statistics), that is, measurement, as opposed to

explaining the causes of business cycles (or business cycle analysis), the need to have an economic theory

of the cycle is over-rated.  You might think this claim about the non-necessity of theory is a somewhat bold

claim that I am not willing to stand by, but let me point once again to support from Porter (1994), who reminds

us that the history of science is ridden with examples where there is theoretical disagreement over the nature of

2 On the question of circularity, and why it may not be critical, see Chang (1995). There is strong criticism on these grounds in a related
case in the 1930s by Abraham Wald who discussed the impossibility of gaining a reliably measured concept where the quantitative or
statistical procedure both defines and establishes the data series for the phenomenon at the same time (see Hendry and Morgan, 1995,
Reading II:12). Note also, that the business cycle data set, constructed in this way is not a positively defined data set, but a residual one,
for it is defined as what is left over when you have taken out the other bits. Thus, there are in fact two problems: first that the data series
in which we see the cycles, are residuals and, second, that the process of getting the residual data set is also responsible for defining
the phenomenon!

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things or there is a lack of knowledge of the causes of something, but nevertheless that did not impede mea-

surement. You can measure things without necessarily making a commitment to a cause or you can make a

measuring instrument on the basis of a theory which afterwards proves to be completely wrong. Indeed, a

good example is given by Chang (2001) who tells us, in his history of the thermometer, that the theory of heat

of the time was soon proved completely incorrect. However, while a correct causal account for the phenome-

non may not be necessary for measurement, you do need conceptual resources of some sort, and these may

well come from economic theory.

Secondly, something else is needed to establish the melting point of lead, namely, a reliable measuring instru-

ment and techniques for its use.  Our parallel example implies that we can expect to measure business cycles

only if we have a good measuring instrument available to do so, and this brings us back to our problem with

business cycles - that early investigators were trying to define the cycle and produce techniques for measu-

rement at the same time.  Let me take up the importance of measuring instruments in economics first and

then return to a discussion of the role of concepts later. 

3. Strategies for Making Measuring Instruments

It seems to me helpful to consider questions of economic measurement explicitly in terms of what measuring
instruments we have available in economics, and how they are constructed (see Morgan 2001)3.   We can

understand how problems of economic measurement are resolved at three levels. We can think of there being

measurement strategies: strategies for making measuring instruments, and then using the measuring instru-

ments to take measurements.  For example, there is a general strategy for making thermometers, and any

particular type of thermometer is the measuring instrument with which we take measurements of the tempe-

rature of specific things. Historically in economics, it is not the case that economists thought of the strategies

and then made the instruments. No, chronologically, the first problem was working out how to make a mea-

suring instrument to take measurements of a particular economic entity, and then, and only with hindsight, did

economists start seeing that sometimes such an instrument was one of a more general kind, that they had a

measurement strategy which could be applied to lots of different things.

This may sound very general, so let me start by filling in what I mean by "measurement strategy". One exam-

ple  is  the  strategy  of  weighted  averages.    It  is  a  wonderful  strategy  which  allows  you  to  make  measuring

instruments for all sorts of different things in economics, namely, all those cases in which we need to add

together things which are unlike. The principle involved in this strategy, and for all measuring instruments of

this kind, is one of adding elements, weighted according to some share in the whole, into an aggregate to

represent the whole.  This basic index number strategy is something which evolved through the work of a

number of individuals like Paasche, Laspeyres, Fisher and Mitchell to become a generally useful strategy for

creating a family of related measuring instruments for economics. 

Another useful example is found in the strategy of accounting.  This strategy makes use of accounting rules
and procedures such as balancing requirements, identities, and the condition that things have to add up to
100  percent.    These  are  very  useful  principles  which  have  been  used  in  very  different  kinds  of  measuring
instruments, in economics.  We can think of both the national income accounts and input-output accounts as
being two very different measuring instruments constructed under that same accounting strategy. Both sets
of procedures depend on accounting kinds of principles, but they measure different things and the standardi-
zed quantitative rules they follow are also different. 

3 I have provided a more general treatment of the measuring instruments of economics as a result of thinking about the papers in an
edited volume on the history of economic measurement (see Klein and Morgan, 2001).  This commentary draws on that experience and
on the papers on models in relation to measurement reported in Morgan and Morrison, 1999.  

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Each of these different strategies (such as the weighted average strategy, the accounting strategy) involve

matters of principles: rules or constraints about how you construct the measuring instrument, and those typi-

cally go along with some kind of criteria. That is, accounting rules or principles provide you with criteria on

whether  or  not  you  have  made  an  adequate  measurement:  "Do  they  add  up?"  "Have  you  covered  every-

thing?" "Have you counted things twice?" So the rules and criteria tend to go along side each other in the

sense that the rules come with criteria attached so you know you have met them. Other measurement stra-

tegies for example might involve principles from statistics and these are accompanied by the whole panoply

of statistical criteria. 

It is the principles involved in these strategies which allow you to get some kind of representative power in
measurements4.   Let me express this point somewhat differently. The principles are really important becau-
se it is these which hold the elements of these measuring instruments together. They both provide the rules

and constraints of construction and are associated with the criteria to validate their workings.  This enables

us to feel confidence that our measurement devices really are measuring the thing we want to measure in the

world.  This  is  naturally  of  some  importance  for  we  want  confidence  that  the  things  we  are  measuring  are

actually the kinds of things we have in the economy.

Again, an example may helps us here.  Let us suppose we use the weighted average strategy to construct a

price index formula to measure the general level of prices.  How we are going to make sure we have really

got all the measurement rules working in our measuring instrument and that we can cover all the things we

need so that when we use it, we gain some kind of representative power over the things we are trying to mea-

sure?  More prosaically: How we are going to make sure we have got all the prices in? Have we got them
weighted according to the right amounts?5 And have we chosen the correct index formula for the question in
the first place? All these kinds of questions are dealt with by following the principles of index number cons-

truction and by taking account of the criteria that come with these principles. For instance, index numbers are

required to satisfy certain theoretical consistency criteria and at the same time some empirical criteria. (see

Boumans 2001). Those two elements, principles and constraints, and their associated criteria, are what gives

us confidence in our measuring instruments. 

Specific measuring instruments in economics are made according to a more generic measurement strategy,

and involve principles and criteria. But the successful construction and application of any measuring instru-

ment in economics involves both a set of quantitative techniques and elements of judgement or skill.  For

example, take the case of index numbers again: the raw data on prices and quantities have to be collected,

cleaned of error, translated into usable form, assembled and aggregated according to a formula and then cal-

culated to make the final index number.  This whole process of applying the measuring instrument involves

both numerous techniques and skilled judgement at many points. But, in the absence of principles or rules,

techniques and skills do not themselves provide the representative power and criteria we need for a good

measuring instrument, as we shall see in the business cycle indicator case.

4 Indeed the basic widely accepted philosophical theory about scientific measurement rests on "representational theory" (see a useful
survey with references to the fundamental work, see Finkelstein, 1982). 
5 This is perhaps rather like the syntax and semantics that Michel Armatte mentioning in his paper (see ibidem).  We might think of these
principles for making measuring instruments and the criteria associated with them as interpretable in terms of his syntax and semantics.

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4. The Problem of Interpreting Business Cycle Indicators as

Measuring Instruments 

The business cycle indicator procedures cannot be considered measurement instruments.  The A-B-C curve

techniques were measuring devices of a kind, but they did not prove good for providing measurements of the

business cycle because, I suggest, they do not have principles which hold the elements of a measuring instru-

ment together and which provide the constraints and the criteria which would link their measurements to the

world.  

The data produced from the early business cycle indicator project come from measuring techniques which

are generated by a reduced measurement strategy not from a full strategy.  As suggested above, and discussed

more fully in Morgan (2001), measurement strategies consist of three elements: principles, judgement and

techniques.  These early business cycle indicators of the A-B-C type are generated by a measurement

strategy which is dominated by judgement and techniques but in which principles are missing. As we have

seen, providing such data on the business cycle consists of collecting several sets of time-series observa-

tions, de-trending the series, smoothing them, and combining them according to some further techniques, to

create  a  business  cycle  indicator.  But  this  constitutes  a  set  of  techniques  –  not  principles  –  and  those

techniques are not generated by rules which have associated criteria which enable us to be confident we have

a good measuring instrument.  

At this point, it seems legitimate to ask: What might a rule or principle look like in this case?  Let me take as

a comparisons, the two simpler, but contrasting, cases of measuring which are by-products of this indicator

work, namely, the measurement of seasonal variations and trends.  Seasonal variations have a period fixed

by nature, a regular exogenous event outside the control of economic activity which fixes the period for mea-

surement - it is a year long period of variation, fixed you might say by the concept itself.  (A similar man-made

period  might  be  enforced  by  institutional  rules  such  as  taxation  demands.)    The  concept  thus  provides  an

immediate rule, that statistical investigations must be focussed on variations which repeat themselves within

matching 12 monthly (say) periods. We can use some kind of an averaging criteria over the period, partition

out the additional variation, and by this rule measure the seasonal element.  The concept connects closely

with a principle and criteria for realising this in a "standardized quantitative rule" for measuring the seasonal

variation in a series.  Contrast this with the problem of measuring a trend, also investigated by those econo-

mists  measuring  business  cycles  and  seasonal  variations.  We  have  a  variety  of  techniques  for  measuring

trends, but any measurements found depend critically on the period chosen for the measurement. Although

there are some simple rules here for choosing periods (e.g. peak to peak, not peak to trough), there is no

natural  period  or  concept  defining  a  trend  variation,  unlike  the  case  of  a  seasonal  variation.    The  choice

depends on judgement.  Economic historians will tend to take war years as stopping years. Statisticians have

developed packages for measuring trends and seeking out changes in trends, using statistical criteria.  But

these statistically defined measurements may have no obvious hooks onto any economic concept of a trend. 

The case of business cycles is more like that of the trend measurement than the seasonal variation measu-

rement.  There is no concept of a "natural period" for business cycles, so the seasonal adjustment route to

principles is not available. If we had a widely accepted economic concept of the business cycle as a regular

periodic cycle, as Jevons or Moore had in those early years (see Morgan, 1990, chapter 1), we could, like
them, use this to define the cycle and provide a principle for measuring both the periodicity, and certain other

characteristics of it, all with associated criteria. But modern economists don't really believe in periodic cycles

– it goes against our experience of the business cycle, just as it went against the beliefs of most other eco-

nomists working in the early 20th century. This lack of any concept-related principle is one reason why these

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A-B-C indicator measurements were so flexible to varying national experiences, but that same lack of princi-

ple is also indicative of the lack of constraints or rules and criteria which may continue to bedevil business

cycle measurement.  Business cycle measurement in the early 20th century remained in the same condition

as trend measurement - business cycles were determined by judgement on an individual case and by a series

of quantitative techniques hardly related to economic concepts. 

There are however other sources of principles for measuring instruments besides exogenously or institutio-

nally fixed time periods of economic activity.  This is where we return to the role of concepts.  Recall my claim

earlier that we don't necessarily need the causal theories of the cycle but we do need economic concepts of

the cycle.  The reasons we need concepts is that they provide a rich source of possible principles for measu-

rement instruments.  Where do we find such concepts?  One place is in analogies and we have two very good
examples in this book this morning6.   Michel Armatte's paper  presents some medical analogies of seeing
the economy in terms of a healthy or unhealthy body and its symptoms, symptoms being the things with which

we could track the health of the economy. There is a long tradition of understanding the economy in terms of

bodily health, which provides us with quite a lot of concepts, and these gave some grip into the measurement

structure for those who wanted to provide data for the business cycle.  Marcel Boumans (see ibidem) pre-

sents some  physical analogies and again thinking of the economy as a mechanism is a long standing ana-

logy  which  has  provided  us  with  concepts  which  relate  to  various  measurements  structures  in  economics

including those for business cycle analysis. 

But analogies and non-analogical economic theories theory rarely tell us directly how to take measurements.

Nor do they usually give us enough resources to make measuring instruments. A parallel example may help

again. Theories of heat do not tell you how to make a thermometer. The concepts of such theories may be

suggestive about principles, but you also need to know an awful lot of things about the behaviour of various

materials such as, for example, glass, alcohol and mercury. In addition, the principles require that you think

about what you want your thermometer to do, namely to be reliable under various different circumstances of

time and place and that in turns brings you to the development of measurement principles and criteria some

of which may well be far removed from the theory of heat (see Chang, 2001).

We had a good example of the concepts in economic theory providing possible principles for measurement

instruments  when  Jacky  Fayolle  (see  ibidem)  talks  about  Wicksell  and  his  cumulative  process  analysis.

Wicksell's  cumulative  process  idea  is  a  good  conceptual  tool  that  relates  to  his  theory  and  has  provided

resources for business cycle model building.  It is well known that one can understand the propagation part

of Frisch's structural model in Wicksellian terms, and one can also understand Tinbergen's model as a cumu-

lative  process  model  from  looking  at  the  mathematical  moulding  that  Marcel  Boumans  was  referring  to.

Clearly there are theoretical resources in Wicksell's idea which can be used to provide concepts for business
cycle causal analysis, but these are not necessarily going to be directly the ones we need for measurement
of the cycle itself.  Neither Wicksell's theory nor the concept tell us how to go out and make measurements

which will be relevant for business cycle study.  If we were to use Wicksell's concepts and theory, we might

find a principle for a measuring instrument for the business cycle by looking at the difference between the

bank rate of interest and the real rate of return on capital.  This sounds straightforward, but to provide the

6 At this point, the reader may suggest, that once you use analogies, you are using theories, and so, of course, theory does matter after
all. Well, yes, it can matter, but we have to look more carefully at how and where it matters.  Traditional philosophy of science pictures
a hierarchy with theory at the top and data at the bottom. Theory may be at the top for theory justification purposes (though I think in
Marcel Boumans' diagram of model construction - see ibidem - it was somewhere to the top-left), but this does not mean it has priority
for thinking about measurement problems.  So the basic message that I propose here is that we need to rethink exactly where theory
comes in, and exactly how far theory was helpful in the measurement strategies that we saw in both the business cycle indicators and
business cycle models. 

185

techniques to measure the latter notion immediately gets us into huge conceptual difficulties and aggregation

problems, and it is unclear how this instrument provides a measuring tool to get at the multi-dimensionality of

the cycle (as seen in the A-B-C curves).  

In practice, Wicksell's theory does not even provide enough to create a model to represent the cycle in ways

which relate to observations.  Thus if we look at Frisch's work, we saw that he had to add on another part -

the stochastic or Slutsky effect.  If we look at Tinbergen's work, we see that he had to add a whole lot of varia-

bles  and  define  their  time  relations  to  get  models  which  could  be  used  in  a  measurement  project.  Marcel

Boumans (1999b), has pointed to the fact that whereas theories may not give you the measurement instruc-

tions directly, it is sometimes the case that, when you move from a theory to a model which incorporates the

theory, there may be part of the model which links on to a measurement process. So models may include par-

ticular  instructions  or  formulae  for  making  a  measurement  instrument,  even  when  the  theories  which  they

embed do not.

Another example shows where economic theory has been more helpful in providing concepts. Keynes' theo-

ry of the aggregate economy does provide the conceptual resources for thinking about measuring GNP. This

is one of the few cases where not only does theory provide conceptual resources but it provides them direct-

ly in the form of the basic categories and in the principles (the accounting principle) that you need.  So there

is a rather closer link between theory and measuring principles in this case than is usual in economics and

perhaps this is why this is the standard example that is given in economics for a strong theory-measurement

link.  The  Keynesian  concepts  of  deficient  and  excess  demand  might  provide  a  principle  for  a  measuring

instrument for the business cycle, but once again it lacks the possibility to access the multi-dimensionality

associated with the business cycle.  

Though there may be many conceptual resources available within economic theory for thinking about mea-

suring business cycles, choosing one which provides suitable principles for a measuring instrument for the

cycle may be a very difficult task. As in the case of thermometers, the principle has to be adequate to certain

characteristics of the phenomena but must also be workable given the technical applications in mind.

5. Establishing New Things with "Standardized Quantitative Rules"

Let me return now to Porter's views about the power of quantification in the social sciences. Porter's "stan-

dardized quantitative rules", or, in my terms, "measuring instruments", contribute to the making of new things

in the world, in the sense that if we start to make good measurements of things then we may well come to

believe in those things. If we construct a Euro-zone business cycle indicator we will have a Euro-zone busi-

ness cycle.  Of course this perception of the "reality" of such new things does not come immediately. But once

you have created a standard measurement, and used it to such an extent that it comes to fit onto the world,

then  you  have  created  what  some  people  call  new  "ontic  furniture".  In  other  words,  those  elements  which

have first been "created" via a quantification regime become things which we take for granted in the world. 

Adam Smith wrote about the wealth of nations in 1776 and conceptualized it as some kind of economic rich-

ness in the national economy, but it was only after 1870 that we get real attempts to measure something like

national wealth, only in the 1930s that we get concepts of something like GNP (or GDP), and only in the 1940s

that the concept was associated with a good measuring instrument to establish it as "fact".  Thereafter in the

1950s, GNP moved from a category of analysis for economists in government to a standardized international

measurement (to be measured according to a set of Porter's "standardized quantitative rules" and associa-

ted criteria, see Comim, 2001) and soon became an everyday number which governments use and business-

men expect to find printed in the national newspapers: literally we find ourselves accepting a new economic

entity in the world.  

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We might also note here that the concept of measured GNP started off being tied to some particular macro-

economic notions, but has since cut loose from those theoretical backgrounds and has become a theory neu-

tral if not a value neutral measurement (an important distinction) of the economy's progress and health. It is

also worth reminding ourselves that just as there is no one theory bound to this concept, there is no one right

set of rules for constructing GNP measurements which fit automatically and absolutely onto each country for

all time.  Nevertheless, all GNP figures are constructed according to a set of internationally established prin-

ciples and criteria which come from its basic accounting framework.  Thus GNP figures are constructed accor-

ding to principles and criteria for measurement, and the application of this measuring instrument to individual

cases and countries, and for particular purposes, relies on a set of techniques applied with judgement. 

The GNP measurement instruments evolved over a period of time and the measures they have made come

to seem to fit on to the world even though they do not of course fit very well to the world (as, I think, someo-

ne reminded us – in the discussion) The measured GNP has come to seem a natural kind of thing in the eco-

nomy.  My analogy here is: if you have to do your own tax accounts you are presented with a form from the

tax  office  which  essentially  says:  "divide  your  economic  activity  into  these  categories".  Your  own  activities

never quite fit the taxman's categories, but you learn how to make your life fit into his categories so you can

report yourself in the right way and then you begin to think in those categories when you are keeping your

accounts and doing your filing system.

A similar example can be found in the CPI, the consumer price index.  This is a measurement which people

regularly look at, regularly use in wage negotiations, regularly use as an instrument for policy action, and take

for granted as much as the daily temperature. We probably do not consult the CPI figure everyday, but whe-

reas we might need to know the daily temperature before we set out in the morning for work, there are lots

of times when people will want to know what the CPI change is in order to make all sorts of decisions at lots

of different levels. But of course the CPI, like the GNP, did not exist a hundred years ago, though now we treat

them both as real things in our world. Those two new things are the result of the development of measure-

ment strategies by economists and statisticians over quite a long period and the struggles they had to make

those pieces of economic furniture are long since forgotten. 

The now standardized quantitative rules and procedures are measuring instruments with which we construct

the GNP figures or the CPI figures.  They are the thermometers of economics: we use them to measure the

GNP and to measure the CPI and tell us what is happening to our economies.  Like thermometers, they pro-

vide the popular indicators of what is going on in our economic life.  We become so used to them that we

come to take them for granted.  We do not worry about what causes the mercury in our thermometer to rise,

all we need to know is how to use the instrument. Similarly there is a commitment in the GNP or CPI user

group not to worry about what causes any changes, and economists can hold totally different theories about

this, and yet they will all use the same set of measurements, coming from the same measuring instruments.  

If you think about Porter's claims in the context of our discussions about business cycles, you can realize how

really surprising the situation is.  People have believed in the reality of something called "business cycles" for

about 100 years. Everybody in the streets of the Euro-zone believes in business cycles: it is a common pro-

perty concept but it is not one attached to any good common property measurement unlike those for the CPI

and the GNP, despite the fact that the common usage of the concept of the GNP is very much younger. This

lack of accepted common property measurement may have little to do with whether the Euro-zone has one

converged cycle or still a series of national cycles.  It may rather be related to the fact that regardless of facts

about the European economic and monetary union, there is no agreed principled measurement of a cycle

which has become generally accepted and widely used; there is no accepted measuring instrument or stan-

dardized quantitative rule.  The challenge for Eurostat is to make a business cycle measurement instrument

187

which generates measurement of the business cycle that gain the same kind of economy wide status as a

CPI or GNP measure, and thus places numbers on our already well-accepted economic furniture.  There are

however dangers to be avoided.

6. The Dangers of Standardized Quantitative Rules and Unprincipled

Measuring Instruments

We can use the history of this earlier period, and the analysis of today, to suggest two possible dangers that

stem from standardization and the lack of principles and associated lack of constraints, rules and criteria, in

measuring business cycles.  

Representation without standardization constitutes the first danger for a business cycle measurement pro-

ject.  Business cycle indicators of the early period did provide some kind of local representative power, that

is they did fit the economy of the time and place because that is exactly what they were designed to do.  But

the techniques those economists developed did not constitute a measuring instrument which had a strong

enough representative power to travel. Their techniques did not necessarily travel over time because the eco-

nomy changes and comparisons were compromised.  The techniques did not necessarily travel over space

since each national institute founded their own indicators and this meant a lack of standardization and so lack

of comparability.  

The local nature of these representations had further implications. It seems to me that those economists who

spent so much time working on those wonderful business cycle indicator charts were looking for a bigger pay-
off than they gained7.   They believed that their complicated A-B-C curves would provide the kind of access
which would allow them to understand and explain the business cycle and to analyse its causes. That is, eco-

nomists hoped the A-B-C curves could be used not just for information but to provide some analytical grip on

the economy. I think on the whole this promise was not fulfilled due to the lack of principles, the lack of real

concepts, involved in their construction and the associated extreme localness of their representative power.

Standardisation without representation is the second danger.  We can easily imagine standardising busi-

ness cycle measurements across national borders using some basic widely accepted standardized quantita-
tive techniques (and perhaps this has already occurred8) but if those techniques were not based on any prin-
ciples of construction and lacked associated criteria, we would lack confidence that they represent what has

happened in the economy.

This goes back to my earlier point about business cycle measurement not being linked to a clear concept. We

expect to find the principles of the measuring strategy linked to a concept, so in business cycle measurement,

we are, in some sense, lacking all the way down the line a very well defined concept that gives us these prin-

ciples. For example, in macroeconomic measurement, the concept which underlies the aggregate economy

measures of national income accounts is that of an economy as an household or business accounting unit.

This concept leads us to accounting principles which gives us the criteria whether or not we have made a

good measurement of GNP, though "good" here of course is subject to lots of different interpretations. In busi-

ness cycles on the other hand, we lack a real principle, a real concept either from theory or by analogy. We

might standardise across the Euro-zone with techniques, but if we want our Euro-zone indicators to do more

7 One reason that Frisch and Tinbergen moved to models of the business cycle is because they were looking for something which was
not just a local measurement structure, but also provide the information for an instrument of analysis.
8 Information available at the Eurostat history meeting from the project "BUSY" suggests that this standardization has not yet occurred,
although the objective of the project refers to the development of tools for a "standard business cycle analysis". 

188

than create a temporary Euro-zone economic psyche, if we want them actually to deliver us some measure-

ments which matches the economic experience of Euro-zone people (for example when they are unemployed

or employed, or are subject to big price inflation or even deflation) as the cycle moves on, we need to have

measures which match experience, that is, which provide representative power. 

This representative power matters precisely because of the point that Porter makes – we come to believe

these measurements are indicative of something real in the economy. And, if our economic experience is out

of joint with the measurements, we are more likely to distrust the measurements than the experience. There

are many examples of governments rejecting official or standardized measures of things on the grounds that

they no longer measure what is going on in the economy.  This maybe because the numbers are politically

difficult  (which  itself  speaks  to  the  power  of  those  standardized  numbers),  but  it  maybe  because  standard

rules sometimes get out of joint with the changes in the economy (as in recent discussions about how the

"new economy" is reflected in macro-measurements). We equally have examples of other economic groups

reacting in the same way when their experiences leads them to distrust the numbers – for example, during

WWII in the USA, unions rejected the CPI figures as accurate measures of the changes in the cost of living

(see Banzhaf, 2001).  

Business cycle measurements need to have representative power to be taken seriously and simple standar-

dization of quantitative techniques may well be insufficient.  If Porter's "standardized quantitative rules" are

interpreted as measuring instruments: techniques built on concepts and principles with associated  criteria,

they  offer  a  better  chance  of  gaining  acceptance  and  success  in  providing  meaningful  measurements.

Standardization without representation is therefore a potential problem with wider impact than representation

without standardization.

7. Bibliographical references

BANZHAF, Spencer (2001) "Quantifying the qualitative: Quality-adjusted price indexes" in Klein and Morgan

(2001) pp 345-370.

BOGEN, James and James WOODWARD (1988) "Saving the phenomena" Philosophical Review 97:3, 303-52. 

BOUMANS, Marcel (1999a) "Built-in justification" in Morgan and Morrison (1999) pp 66-96.

BOUMANS,  Marcel  (1999b)  "Representation  and  stability  in  testing  and  measuring  rational  expectations"

Journal of Economic Methodology, 6: 381-401

BOUMANS, Marcel (2001) "Fisher's instrumental approach to index numbers" in Klein and Morgan (2001),

pp 313-344.

BURNS, Arthur F. and Wesley C. Mitchell (1946) Measuring Business Cycles National Bureau of Economic
Research.

CHANG, Hasok (1995) "Circularity and reliability in measurement" Perspectives on Science, 3:2, 153-72

CHANG, Hasok (2001) "Spirit, air and quicksilver: the search for the "real" scale of temperature" Historical
Studies in the Physical and Biological Sciences 31:2, 249-84.

COMIM, Flavio (2001) "Richard Stone and measurement criteria for national accounts" in Klein and Morgan
(2001) pp 213-234

EPSTEIN, Philip (1999) "Wesley Mitchell's grand design and its critics: The theory and measurement of busi-

ness cycles" Journal of Economic Issues 33:3, 525-553.

189

FINKELSTEIN, L.  (1982)  "Theory  and  philosophy  of  measurement"  in  P.H.  Sydenham  (ed)  Handbook  of

Measurement Science, Wiley.

FRISCH, Ragnar (1933) "Propagation problems and impulse problems in dynamic economics" in Economic

Essays in Honour of Gustav Cassel, Allen and Unwin.

HENDRY,  David  F.  and  Mary  S.  Morgan  (1995)  The  Foundations  of  Econometric  Analysis,  Cambridge

University Press. 

JOVANOVIC, Franck and Philippe Le Gall (2001) "March to numbers: The statistical style of Lucien March"

in Klein and Morgan (2001), pp 86-100.

KLEIN, Judy L. and Mary S. MORGAN (2001) (eds) The Age of Economic Measurement, Annual Supplement

to Volume 23, History of Political Economy (Duke University Press).

MORGAN, Mary S. (1990) The History of Econometric Ideas, Cambridge University Press.

MORGAN, Mary S. (2001) "Making measuring instruments" in Klein and Morgan (2001), pp 235-251.

MORGAN, Mary S. and Margaret Morrison (1999) (eds) Models as Mediators, Cambridge University Press.

PORTER, Theodore M. (1994) "Making things quantitative" in Power (1996), pp 36-56.

POWER,  M  (1996)  (ed)  Accounting  and  Science:  Natural  Inquiry  and  Commercial  Reason,  Cambridge

University Press. 

TEIXEIRA,  Pedro  (2002)  "Persuasion,  illusion,  and  possibility"  Paper  presented  to  the  ECHE  conference

Visual Representation and the History of Economics, Montreal, March, 2002.

TINBERGEN, Jan (1939) Statistical Testing of Business-Cycle Theories, Vol I: A Method and its Application

to Investment Activity, League of Nations.

190

EUROSTAT COLLOQUIUM

HISTORY OF BUSINESS CYCLE ANALYSIS

Luxembourg, 12 November 2001

MACROECONOMICS DENIED:

GERMAN BUSINESS-CYCLE RESEARCH 1925-1945

J. Adam Tooze
University of Cambridge & Jesus College
E-mail: jat27@cus.cam.ac.uk

191

TABLE OF CONTENTS

1.  The Development of the IfK's Barometer System

2. Ernst Wagemann's Macroeconomics

3.

Indicators and National Accounts

4. From Observation to Control

5. Conclusion

195

199

205

209

212

192

The  fashion  for  business-cycle  indicators,  which  swept  the  world  in  the  1920s,  left  a  particularly  important

legacy  in  Germany,  in  the  form  of  the  Berlin  Institut  for  Business-Cycle  Research  (Institut  fuer

Konjunkturforschung,  IfK)1.    The  Institute  was  founded  in  1925,  by  the  entrepreneurial  head  of  Reich's

Statistical  Office  (Statistisches  Reichsamt,  SRA),  Ernst  Wagemann,  to  complement  official  data  gathering

with adventurous economic analysis2.  By the 1930s, the Institute had grown into the largest and the most

prominent institution of economic research in continental Europe. In 1933, during the Nazi seizure of power,

Wagemann was forced to resign as President of the Statistical Office and to concentrate his attentions on the

Institute. This has sometimes given rise to the impression that Konjunkturforschung fell under a political cloud.

Added to this the intellectual programme of business-cycle research was buffeted in Germany, as elsewhere,

by the experience of the Great Depression. In fact, Wagemann's removal from the Statistical Office was the

work not of the Nazis, but of Hitler's coalition partners in 1933, Hugenberg's German Nationalists. Once the

National Socialists had consolidated their monopoly of power, Wagemann and his Institute became favoured

collaborators of the regime. Konjunkturforschung also survived the 1930s as an intellectual project. In fact,

during the war it was to experience its moment of greatest influence. In the wake of Hitler's armies, the IfK took

charge of  the  existing research establishments in Vienna, Paris, Prague and Amsterdam. Renamed in the

triumphant summer of 1941 as the Deutsches Institut fuer Wirtschaftsforschung, the business-cycle research

Institute  of  the  Weimar  Republic  became  the  nerve  centre  of  the  improvised  system  of  central  planning

through which Albert Speer struggled to save the Third Reich. There was a real intellectual continuity, which

connected the models of central planning experimented with during the war, to the business-cycle research

of the 1920s. Indeed, the legacy of the 1920s survived even 1945. The descendants of Weimar's Institut fuer

Konjunkturforschung,  the  DIW  in  Berlin,  the  Rheinisch-Westfaelisches  Institut  fuer  Wirtschaftsforschung  in

Essen and the ifo in Munich have continued to play a key role in German economic policy discussion. Alumni

of the Institute have occupied a variety of prominent positions in both German and European public affairs.

Perhaps most notable in the present context, is Rolf Wagenfuehr, who serving as chief statistician to Albert

Speer's  Ministry,  became  in  the  1950s  the  founding  head  of  the  statistical  division  of  the  European  High

Authority and, ultimately, Eurostat. 

In his paper in this volume, Alain Desrosieres has proposed an admirably capacious framework for a compa-

rative history of modern macroeconomic modelling. Let us start by situating the history of the IfK and the asso-

ciated  work  of  the  Statistisches  Reichsamt  in  his  terms.  According  to  Desrosieres,  the  emergence  of  the

modern complex of macroeconomic modelling was a multi-faceted process, embracing the development of

no less than eight different aspects of economic research and analysis. For sake of brevity I shall label these

Desorieres Approaches 1-8 (DA 1.-8.). Not surprisingly, the IfK in its work before 1945 did not achieve a com-

plete synthesis of all eight elements. Even the precocious Dutch did not come close until the 1950s. By com-

parison with Tinbergen and his team, or the Norwegians under Frisch, the chief deficit of Wagemann's esta-

blishment was its lack of mathematical sophistication. The IfK did sponsor and publish one of Europe's first

exercises  in  modern  econometrics  in  the  1920s  (DA  6).  But,  this  remained  a  one-off.  In  technical  terms,

Wagemann's Institute was limited to conventional exercises in index number construction and analysis. Not

surprisingly,  therefore,  a  properly  probabilistic  understanding  of  economic  models  (DA  7)  was  also  out  of

reach for German economic research until after World War II. But, the range of the IfK's activities and the degree

of institutionalization, which Wagemann was able to achieve, were remarkable, especially when one consi-

ders the turbulence of German politics in the interwar period. 

1 R. Krengel, Das Deutsche Institut fuer Wirtschaftsforschung (IfK) 1925 bis 1979 (Berlin, 1985).
2 A. Wissler, Ernst Wagemann: Begruender der empirischen Konjunkturforschung in Deutschland (Berlin, 1954).

193

The economic research of the Weimar Republic could, of course, draw on a long German tradition of quanti-

fication and large scale statistical enquiry inherited from the 19th century (DA 1). Around the turn of the cen-

tury, German University economists also became increasingly interested in holistic analytical models of the

economy. Unlike in France, this did not take the form of a preoccupation with general equilibrium analysis.

Instead, it was early monetary macroeconomics and Marxian reproduction schemes, which provided the basis

for an understanding of the economy as a systematic and integrated system  (DA 2). Germany and Austria

also shared in the general upsurge in interest in cyclical phenomena in the late 19th century (DA 3). In fact,

in an age before English became the dominant academic medium, German was one of the main languages

for the Europe-wide debate about the business-cycle. Until World War I, however, this intellectual exchange

was confined to the academic sphere. The apparatus of official statistics in Imperial Germany remained limited

to the social and  demographic repertoire  defined in the  19th century. The Kaiserliches Statistisches Amt

produced hardly any economic statistics in the modern sense of the word. 

It  was  World  War I that  shook  up the German state  apparatus and  brought  into  government a  new

generation  of  University  trained  economists.  Amongst  these  was  Ernst  Wagemann,  a  specialist  in  colonial

economics with a monetary flavour. During the 1920s, Wagemann exploited the state-building tendencies of

the Weimar Republic to create in the Reich's Statistical Office and the IfK a new national hub for both economic
data-gathering  and  economic  research  (DA  8)3.  Wagemann's  ambition  was  to  install  empirical  economic
research at the heart of the newly emerging apparatus of national economic policy. The hopes of achieving

this during the Weimar Republic were dashed by the unanticipated shock of the Great Depression. However,

there can be no doubt that the unprecedented output of statistics and quasi-official economic commentary by

the Statistical Office and the Institute were the main forces in transforming public debate about the economy.

And,  during  World  War  II,  the  Institute  was  to  gain  a  direct  channel  to  the  highest  level  of  government.

However, only at the expense of allying itself with Hans Kehrl, Speer's chief of planning and one of the most

radical Nazi technocrats. 

Funded generously by the German state, business associations and the labour movement, the Berlin Institute

was the best-equipped laboratory of empirical economics Europe. Wagemann's staff made a heavy invest-

ment in the techniques of time series analysis, which were the common stuff of barometer research in the

1920s (DA 4). In the form of Hanau's work on the hog-cycle, the Institute also sponsored and publicized one

of Europe's first exercises in econometrics (DA 6). However, the title of Wagemann's Institute for Business-

Cycle  Research  was in  many  ways  misleading. The dominant preoccupation of Wagemann's research

establishment  was  neither  Harvard-style  cyclical  analysis,  nor  econometrics.  What  gave  coherence  to  the

Institute's work, was  the effort to  construct a  fully comprehensive system of national accounts, including

estimates    for  all    three  components  of  the  economic  circular  flow  or  'Kreislauf':  income,  production  and

expenditure (DA 5 a., b. and c.). The trinity of estimates for income, expenditure and production was completed

in 1936, with Germany's first census of industrial production. This, in turn, provided Rolf Wagenfuehr and the

Institute  with  the statistical  tools  necessary to bring some semblance of order to the wartime economic

planning of the Third Reich. 

The IfK-SRA nexus thus embodied at least six, arguably seven of Desrosieres eight facets of modern macro-
economic  analysis. It is, therefore, a highly complex object. As Desrosieres has pointed out, this multi-face-
tedness means that modern economic knowledge has multiple histories, each emphasizing one or more of
the eight aspects. To make my subject manageable, I will  focus in  this article on just a few elements: the
relationship between the cyclical analysis of the Institut fuer Konjunkturforschung, the barometer system it

devised, and the underlying macroeconomic conception that informed its work.

3 J.A. Tooze, Statistics and the German State, 1900-1945. The Making of Modern Economic Knowledge (Cambridge, 2001).

194

1. The Development of the IfK's Barometer System

The IfK and its barometer system were born directly out of the crisis of the German state in the wake of World

War  I.  In  the  midst  of  revolutionary  turmoil  in  the  winter  of  1918-1919,  the  first  President  of  the  German

Republic, Friedrich Ebert, ordered a monthly report on the state of the national economy to be submitted to

him by the Reich's Ministry of Economic Affairs (RWM)4.  Responsibility for these reports fell to the statistical

section of the RWM's economic policy department, which was headed after 1920 by Ernst Wagemann. The

reports themselves seem to have been written by Adolph Loewe, who was later to make a name for himself

as  a  University  economist.  Initially,  the  reports  made  an  unpromising  start.  The  early  reports  of  the  RWM

consisted of a summary of administrative actions taken by various branches of the Ministry. Only in 1920, did

they begin to develop into an overview of the state of German industry and commerce. Initially, this amoun-

ted to little more than an unstructured list of unanalysed data. It was not until 1921 that the reports began to

generalise about economic conditions and to employ the buzz-word, Konjunktur (business-cycle), to summa-

rize the upward or downward movement of the economy5.  In 1924, Wagemann was appointed as the new

President of the Reich's Statistical Office. Adolph Loewe moved with him to take charge of a new section for

business-cycle observation6.   The result was a dramatic intensification in reporting. In the autumn of 1924,

the  Statistical  Office  published  its  first  business-cycle  indicators,  styled  after  the  barometer  system  of  the

Harvard Committee of Economic Research7.  The figures were published in the form of a weekly bulletin entitled
Deutsche  Wirtschaftszahlen.  And  they  certainly  seem  to  have  found  an  appreciative  audience.  The

Reichschancellory ordered three copies for its internal use.

In Germany, as elsewhere in Europe, the Harvard barometer was the most well-known system of short-run

economic prediction in the early 1920s, frequently reproduced in the business press. It owed its popularity, at
least in part, to its endorsement by John Maynard Keynes8.  At the time, Keynes was convinced that the baro-
meters provided a valuable tool for stock market speculation. Unselfishly, he published a description of the

Harvard  Committee's  techniques  in  the  Reconstruction  Supplement  of  the  Manchester  Guardian.  In  the

straightened circumstances of the postwar period, when library budgets were under severe pressure, this was

one of the few foreign publications that was widely accessible in the German-speaking world. From the start,

however, Wagemann and his staff did not apply the Harvard barometer uncritically to German circumstances.

Whilst  appreciating  the  American  statistical  techniques,  Wagemann  and  Löwe  were  suspicious  of  the

Committee's simplistic empiricist methodology9.  Pearson the chair of the Harvard Committee claimed that

the  statistical  series  included  in  the  Harvard  barometer  were  selected  without  regard  to  any  preconceived

theory. However, to German eyes the system appeared to be based on rather parochial assumptions. In par-

ticular, the Harvard system relied entirely on market variables and prices. In the US context, this might make

sense. By contrast, in Germany, cartellization was too far advanced for prices alone to serve as reliable indi-

cators of economic conditions. Furthermore, in the early 1920s, monetary conditions were too disturbed. An

adequate analysis of the German business-cycle had, therefore, to take into account "real" variables, such as

production and employment.

4 For the background to these reports see P.C. Witt, 'Bemerkungen zur Wirtschaftspolitik in der "Uebergangswirtschaft" 1918/1919' pp.
79-96 in D. Stegmann, B.J. Wendt and P.C. Witt eds. Industrielle Gesellschaft und politisches System (Bonn, 1978).
5 The term first appeared in the report for July 1921, see Bundesarchiv Koblenz R 43 I/1147 No. 548 ff.
6 U.  Roeske,  "Die  amtliche  Statistik  des  Deutschen  Reichs  1872  bis  1939.  Historische  Entwicklung,  Organisationsstruktur,
Veröffentlichungen", Jahrbuch für Wirtschaftsgeschichte 1978, IV, pp. 85-107.
7 BAP Reichskanzlei 07.01 Film 19065N/2110 No. 3 Präs. SRA to Reichskanzlei 3.10.1924 and No. 8 Reichskanzlei to SRA 8.10.1924.
8 J.M. Keynes, The Economist as Saviour 1920-1937 (London, 1992), pp. 102-6
9 Vierteljahrshefte zur Konjunkturforschung 1 (1926), 1, pp. 4-5.

195

In 1925, Wagemann's ambition took on institutional form. In July, in the conference hall of the Statistical Office

he  called  into  existence  the  Institute  for    Business-Cycle  Research10.    Representatives    of    all    levels  of

government, German business and trade union organisations attended the meeting. Over the following years,

the  Statistical  Office  and  the  Institute  were  to  elaborate  an  entirely  new  apparatus  of  short-term  economic

observation. A dense network of surveys was established to monitor short-term fluctuations in unprecedented

detail and breadth. A helpful summary of the system was provided in the Konjunkturlehre, a textbook of business-

cycle  economics,  which  Wagemann  completed  in  September  1928.  The  Harvard  Committee's  three  curve

barometer was still part of the Institute's diagnostic system. However, it was now contextualized in a far more

elaborate network of indicators. Out of this system of indicators, the Institute distilled the stylized image of the

cycle shown in Figure 111. 

10 Geheimes Staatsarchiv Dahlem I Rep. 120 C VIII 2a Nr. 33 Bd. 1 Bl. 2 Protokoll über die am 16.7.1925 stattgehabte Sitzung zwecks
Gründung eines Instituts für Konjunkturforschung.
11 E. Wagemann, Konjunkturlehre (Berlin, 1928), p. 141. Fayolle in his paper in this volume reproduces a French translation of the IfK's
barometer system (excluding the thermometers) taken from E. Wagemann, Einfuehrung in die Konjunkturlehre (Leipzig, 1929).

196

Figure 1: The IfK's Stylized Image of the Business Cycle

197

In  this array, Wagemann reinterpreted the Harvard barometer (II.c.) as one of four so-called thermometers

(I. & II.a, b, c), describing the state of the economy over the course of the cycle (Konjunkturlage)12.  These

thermometers he contrasted to business-cycle barometers, which registered what he referred to as 'cyclical

tension' (Konjunkturspannung), the 'incongruencies, disturbed relations and tensions', which determined the

dynamic of the economy. The 'Three Market Thermometer' described the sequential movement of prices in

three key markets: the market for shares, the market for commodities and the money market. This, however,

was just one was of summarizing the state of economic activity. The Institute gave three other thermometers

equal priority. The 'real economy', the sphere of production, was represented by a thermometer consisting of

four series (I), which also moved in sequence: an index registering the flow of new orders recorded by the

trade associations; followed by a series reporting the import to Germany of raw materials necessary to feed

an increase in production; an index of production compiled by the Institute; and finally an index of the level of

employment, based on trade union reports. According to the Institute, the index of new orders was an even

more sensitive indicator of the cyclical upswing, than the A-curve for shares in the Harvard barometer. The

thermometer  of  payments  activity  (II.a)  traced  the  sequential  movement  of  three  monetary  indicators:  the

volume of cheque clearances, the volume of postal cheques and the volume of cash in circulation. Finally,

what    was  probably    the  most  important    thermometer,    (II.b),    summarized    fluctuations    in    income    and

expenditure.  It    contrasted    the    movement    of    profits    and  wage  income  and  related  these  to  the  flow  of

expenditure on elastic and inelastic consumption.

Driving the fluctuations of these thermometers were a swarm of business-cycle barometers displayed on the

right-hand side of the diagram. These too were divided into barometers monitoring the development of the

real    economy  (I  a,  b),  those    which    referred  to  the  'money  side'  (III  a,  b)  and  those  which  combined  the

'monetary sphere' and the 'real economy' (II a, b, c). The dynamics of production showed up in two barometers.

The first of  these (I.a.)  counterposed the forces contributing to stock-building – represented by indices for

production, imports of raw materials, employment and bank overdrafts – to the forces tending to reduce the

level of stocks held by German business – represented by indices for retail turnover, exports and the circulation

of cash. According to the Institute, the interaction of these two elements meant that the level of stocks lagged

the cycle, thus contributing powerfully to the dynamic both of the upswing and the downswing. In a workshop

economy  like  Germany,  a  second  set  of  forces  driving  economic  fluctuations  related  to  the  trade  account.

Barometer I.b., therefore, compared the trade surplus in manufactured goods with the deficit in raw material

and semi-finished products. During the upswing, the overall balance of trade would tend to become unfavou-

rable, as imports increased and the exports decreased. During the phase of depression, the reverse effect

occurred. Overall, therefore, the Institute attributed a dampening effect to Germany's foreign trade account. 

The 'money side of the economy' was represented by four barometers. Three of these related to the credit

market. One monitored the relationship between bills of exchange issued by the private banks and credits

provided to them by the Reichsbank. This exhibited a characteristically jagged pattern at the upper turning

point as credit conditions tightened and pressure on the central bank rose to a maximum. A second barometer

counterposed new overdrafts granted and new deposits received by the ten largest German banks. This was

designed to reveal the liquidity building up in the banking system during the depression phase of the cycle,

which supported the rise in borrowing in the upswing. A third credit barometer compared the relative move-

ment of bond and new  share  issues, with bond  issues peaking early in the upswing and  new  issues of

shares  reaching  their  peak  close  to  the  upper  turning-point.  The  last  of  the  monetary  indicators,  (III.b.),

contrasted the relative movement of prices for goods. An index of reactive prices was chosen to reflect those

12 E. Wagemann, Konjunkturlehre, p. 140.

198

prices that were free of cartel restrictions and highly responsive to the business cycle. This led a revised ver-

sion of the official index of wholesale prices. The official index of the cost of living trailed along behind. 

To combine the "money side of the economy" with the "goods side", the Institute proposed three further baro-

meters, which completed its diagnostic system by combining price and quantity indices. The first of these,

(II.a),  counterposed  the  volume  of  turnover  with  the  level  of  retail  prices.  According  to  the  Institute,  it  was

movements in the volume of sales that drove adjustment in the price level. The second 'combined barome-

ter', (II.b), compared the value of long term loans issued to German business with the level of employment.

In this case, it was new loans that preceded the upturn in employment. Finally, barometer II.c contrasted the

value of long-term loans with an index of the output of so-called production goods. The last two barometers

were  significant  because  they  recapitulated  the  attempt  by  the  well-known  university  economist  Arthur

Spiethoff  to construct a barometer based on the relationship between the production of iron and steel and

the new issue of shares. Like the Harvard barometer,  Spiethoff's  chart was able to capture an interesting

relationship,  between  capital  investment  and  heavy  industrial  production.  But  as  experience  had  showed,

such limited barometers provided an unsafe basis for prediction. The aim of the Institute was to achieve a

more comprehensive insight  into  the dynamics of the macroeconomy, by placing a variety of such partial

indicators in relation to one another.

For the short period between 1926 and 1929, the barometer system did indeed seem to provide a good guide.

In  May  1926,  the  flow  of  new  orders  reported  by  trade  associations  allowed  the  Institute  to  anticipate  the

trough of Weimar's first recession. And the barometer system also anticipated the pronounced slowdown in

the recovery at the end of 1927. Based on this experience, Wagemann was emboldened to claim that the
Institute could make forecasts of overall economic activity for at least three months ahead13. 

2. Ernst Wagemann's Macroeconomics

Clearly, the IfK's index was a substantial modification of the Harvard barometer. But was there a logic driving

this proliferation of tables and indices? Many contemporaries were sceptical. They regarded the expansion

of the Reich's statistical system as mere ad hocery, driven as much by administrative empire-building as by

any clear-cut intellectual agenda14.  Academic critics, including Adolph Loewe, who had left the Institute in

1926 to accept a Professorship at the Kiel Institute of International Economics, jumped to their guns, accu-

sing Wagemann and his economists of an outright rejection of economic theory15.  The Institute was tarred

with the brush of "American empiricism". Those who preferred to find their enemies at home cast Wagemann

as the naive historical economist in a rerun of the Methodenstreit16.  And subsequent commentators have lar-

gely echoed these views. Those few who have spent time on the history of the Institute have tended to treat
it as little more than a German variant of the Harvard Committee17.  

However,  these assessments  rest on  a serious  misreading. To focus on the intricacies of the barometer

system is to miss the point. What  made  the Statistical  Office  and the Institute truly distinctive was their

determination to abstract from individual markets and price movements, so as to be able to study the economic

13 E. Wagemann, Einfuehrung, p. 133-136.
14 H. Kuschmann, Die Untersuchungen des Berliner Instituts fuer Konjunkturforschung. Darstellung und Kritik (Jena, 1933).
15 A. Loewe, 'Wie ist Konjunkturtheorie ueberhaupt moeglich?', Weltwirtschaftliches Archiv, 24 (1936), pp. 165-196.
16 See  the  critical  views  of  Diehl  expressed  in  K.  Diehl  (ed.),  Beiträge  zur  Wirtschaftstheorie.  Erster  Teil:  Volkseinkommen  und
Volksvermögen. Begriffskritische Untersuchungen. Schriften des Vereins für Sozialpolitik (SVS) 173 I (Munich, 1926) and Zweiter Teil:
Konjunkturforschung und Konjunkturtheorie 173 II (Munich, 1928).
17 E. Coenen, La 'Konjunkturforschung' en Allemagne et Autriche 1925-1933 (Paris, 1964) and  B. Kulla, Die Anfänge der empirischen
Konjunkturforschung in Deutschland 1925-1933 (Berlin, 1996).

199

process in the aggregate. The basic abstraction was to view the national economy, not as a collection of firms,

or a collection of unconnected markets, but as an organic, interconnected, Kreislauf (circular flow) of money

and goods. The driving force behind this research programme was Ernst Wagemann. This too needs to be

emphasized. Wagemann has not hitherto been taken seriously as an economist18. Certainly, Wagemann was

no Keynes. He was not brilliantly original. Nor was he a rigorous theoretician. He did not handle mathematical

abstraction with confidence. He is easily overshadowed by more illustrious and original contemporaries in the

German-speaking world, men such as Schumpeter or Hayek. However, early on in his intellectual develop-

ment Wagemann seized upon one big and powerful idea. He realized the possibilities inherent in basing both

economic theory and empirical economic research on a holistic, aggregative understanding of the economy.

And,  unlike many of his more brilliant colleagues, Wagemann did not suffer frustration, marginalisation or

emigration.  After 1924, he was able to put his idea to work as the  basis for  German official  economic

statistics. 

The seminal statement of Wagemann's economics is to be found in his little-regarded Treatise on Money19.
The first and only published volume of this work was completed in May 1923. The purpose of the Treatise

was  to  affect  reconciliation  between  the  most  influential  strands  of  monetary  thought  in  the  German  and

English-speaking worlds: the nominalism of Knapp on the one hand and the Quantity Theory as reformulated

by Irving Fischer. Wagemann's  reformulation of  nominalism  need not  detain us here, for the core of his

economic argument was addressed to the Quantity Theory. By espousing the Quantity Theory, Wagemann

believed that he was rejecting an atomistic approach to the study of economics. According to Wagemann, the

analysis of monetary exchange could not start with abstract individuals and their interactions in the market

place, as proposed by the marginalists. What the Quantity Theory of Money provided was a rudimentary theory

of the economy in the aggregate. The value of  the unit of money was determined  with  reference  to  the

entirety  of  all transactions. Individual preferences and the actions that supposedly followed from them were

submerged in a simple piece of algebra.

MV = PT

The stock of money (M)  multiplied by the "velocity" (V)  of its circulation was equal to the total number of

transaction (T) times the average price level (P). The problem was how to quantify abstract concepts like the

velocity  of  circulation?  How  could  one  count  the  total  stock  of  money  or  the  total  volume  of  transactions?

These were important questions for Wagemann. He was highly critical of  theorizing that was incapable of

factual substantiation. Characteristically, Wagemann championed the work of Irving Fischer, a choice that put

him at odds with most of his German contemporaries. Fischer had made the first serious effort to put empirical
flesh  on  the  bones  of  the  Quantity  Theory  using  a  variety  of  price  indices  and  other  proxy  variables20.
Wagemann's own  ambition for  Volume Two of his Treatise on Money was to complete a similar empirical

analysis for the German economy. 

However, despite his enthusiasm for Fischer's work, Wagemann was sceptical about the basic equation of

the Quantity Theory. The variables contained in the equation of exchange were hard to operationalize and

historically  contingent  on  the  development  of  the  financial  system.  In  his  Treatise,  Wagemann  set  out  to

demonstrate how a new equation of exchange could be built on 'categories, which have a more comprehensive

18  See  the  dismissive  judgements  in  B.  Kulla,  Die  Anfänge,  pp.  43-48  and  R.  Vilk,  Von  der  Konjunkturtheorie  zur  Theorie  der
Konjunkturpolitik. Ein historischer Abriß 1930-1945 (Wiesbaden, 1992), p. 186.
19 E. Wagemann, Allgemeine Geldlehre (Berlin, 1923). For an extensive and laudatory review see see H.S. Ellis, German Monetary
Theory 1905-1933 (Cambridge, 1937).
20 I. Fisher, The Purchasing Power of Money (1911).

200

economic content'21.  In making this move, he followed a small band of German-speaking economists who

sought  to  modify  the  Quantity  Theory  by  replacing  its  elusive  variables  with  more  meaningful  and  easily
grasped  concepts.  At  the  centre  of  economic  analysis,  they  proposed  to  place  the  concept  of  income22.
Ultimately,  it  was  income,  expressed  as  purchasing  power  that  determined  the  aggregate  price  level.

Wagemann's immediate inspiration was Schumpeter's article, 'Das Sozialprodukt und die Rechenpfennige'23.

Schumpeter proposed to transform the Quantity Theory by replacing the elusive monetary variables on the

left hand side of the equation of exchange, by national income. Wagemann's Treatise developed this rather

slippery idea into a comprehensive accounting framework, which spelled out the connections between prices,

output, income and expenditure. Wagemann's so-called 'national economic accounts' ran as follows24:  

(1) price * net output =

(2) production costs (material & personal) & profit =

(3) income =

(4) consumption + saving = 

(5) (consumed and capitalized output) * price

With these five lines, Wagemann attempted to capture the basic circularity of economic activity. Starting at
the top, line 1 registered the value of production. The original German refers to prices multiplied by a quantity

of "utility effects" (Nutzeffekten). From the subsequent elaboration it is clear that what is meant is a measure

of net output i.e. goods and services that were "directed" via the market towards consumption or net invest-

ment i.e. new stock-building or capital equipment. Line 2 recorded  the way in  which  this  value could be

attributed to the "factors of production" as wages and profits. Wagemann distinguished production costs into

personal costs  (Persönliche  Gestehungskosten),  including  wages,  interest,  entrepreneurial  profit,  rent,  and

material costs (Sachliche Gestehungskosten), i.e. raw materials etc. The importance of this distinction is that

it introduced a division between households with which personal costs were incurred and firms with which

material costs were incurred. On line 3, the total payments to factors of production were summarised as income.

From the text, it is clear that Wagemann presumed all income ultimately to be distributed to households. The

material costs of one firm became the "personal costs" of their suppliers, and so on. As line 4 stated, the total

of income was either consumed or saved. The original text referred, somewhat misleadingly, to "Ausgaben"

and  "Ersparnis"  i.e.  expenditure  and  saving.  However,  from  the  accompanying  text,  it  was  clear  that

Wagemann actually had in  mind the  expenditure  decisions of  households (the  ultimate  recipient  of all

income).  His  explanation  of  the  term  "expenditure"  made  it  clear  that  he  was  actually  referring  to  final

consumption of goods and services. Consumption and saving in turn had to be equal to the value of all goods

produced either for consumption or net investment. There was no line recording total expenditure, as the sum

of household consumption and investment by firms. However, Wagemann did not fail to draw the conclusion

that there should be a "parallel" between saving in its various forms, including savings accounts, stocks and

shares, mortgages etc., and new investment (Neubildung von Produktivgütern). He pointed out, however, that

this identity has never been demonstrated empirically. 

21 E. Wagemann, Allgemeine Geldlehre, p. 146.
22 See the discussion in H. Janssen, Nationaloekonomie und Nationalsozialismus. Die deutsche Volkswirtschaftslehre in den dreissiger
Jahren (Marburg, 1998), pp. 274-306.
23 J. Schumpeter, `Das Sozialprodukt und die Rechenpfennige', Archiv für Sozialwissenschaft und Sozialpolitik 44 (1918), pp. 627-715.
24 E. Wagemann, Allgemeine Geldlehre, p. 150.

201

The elaboration of this set of equations concluded the theoretical section of the first volume of the Treatise.

Wagemann's intention for Volume 2 was to apply this framework to an analysis of economic fluctuations over

time. His appointment as President of the Statistical Office in the spring of 1924 deprived him of the opportu-

nity to complete this work. According to Joseph Schumpeter, who knew Wagemann well, Wagemann found

a substitute  for his unfinished second volume in the output of the IfK and the SRA25.  The early efforts at

adapting  the Harvard  Committee's  barometer  system  to  Germany were no more than a stop-gap. The

intellectual blueprint for the research of Germany's statistical establishment was laid down in the Treatise. The

Konjunkturlehre, which appeared in 1928 as a summary of the Institute's work to-date, contained a striking

graphical rendition of lines four and five of the accounting scheme in the Treatise26.  Figure 2 shows what

Wagemann referred to as the 'physical circuit of production' for the German economy in 1913, with statistical

estimates for the major items of consumption and investment and the equivalent categories of production.

25 J. Schumpeter, History of Economic Analysis (New York, 1954), p. 1166.
26 E.  Wagemann, Konjunkturlehre, p. 26.

202

Figure 2: The Physical Circuit of Production, Germany 1913, bn RM

203

Lines one through four of the national accounting scheme in which the value of output is connected to flows

of income and expenditure were represented in the rather more abstract diagram reproduced as Figure 3.

This was based on  the circulation of  money,  rather  than the physical circuit of production and linked the

circulation of money between producers and consumers (on the left-hand side of the diagram) to the expanded

circuit of money capital (on the right). 

Figure 3: Wagemann's Circuit of Payments:

The aim here is not to argue that Wagemann invented the concept of the circular flow, or was the first to repre-
sent it in the form now so familiar from economics textbooks. In 1920s Germany, Wagemann was just one of
a number of economists whose thinking revolved around the metaphor of the Kreislauf28.  And as Wagemann,
Leontief, Plenge, Lederer, Schumpeter and others were only too well aware, this conception of the economy
could be traced back, via Marx, to 18th century precursors, above all Quesnay29.  What is important in the
present context is simply to establish that it was this holistic, macroeconomic conception that underpinned the
work of  the Institute and the Reich's Statistical Office in the mid-1920s. The Weimar Republic can thus be
reckoned, alongside the USA and the Soviet Union, as one of the states to have pioneered modern macro-
economic statistics.

27 E. Wagemann, Konjunkturlehre, p. 41.
28 E. Lederer, `Der Zirkulationsprozess als zentrales Problem der ökonomischen Theorie', Archiv für Sozialwissenschaft und Sozialpolitik
56 (1926), pp. 1-25.
29 J. Plenge, `Zum 'Tableau Économique'', Weltwirtschaftliches Archiv 24 (1926), pp. 109-129.

204

3.

Indicators and National Accounts 

With this macroeconomic image of the economy in mind, the baroque indicator system of the Institute gains

a  new  coherence.  Amongst  the  thermometers  that  registered  the  state  of  the  economy,  the  Institute  gave

pride of place to a set of figures, recording the fluctuation of incomes and expenditure over the cycles. Wage

income and profits, in turn, were 'functionally related' to the level of real economic activity on the 'goods side',

i.e. production and employment. The purpose of the various barometers, both for the 'real economy' and the

'money side', was to explain the fluctuations in production, income and expenditure. Following the accounting

scheme of the Treatise, Wagemann and the Institute defined the business-cycle not as the fluctuation of pri-

ces, but as the fluctuation of aggregate economic activity. According to the Konjunkturlehre, 'fluctuations in

national  economic  turnover'  were  'the  most  comprehensive  expression  for  the  movement  of  the  business-

cycle'30.  Since they were not susceptible to direct measurement, in the absence of short-run national income

statistics, the Institute instead focussed its attention on employment and wage income. Diagnosing and pre-

dicting the level of aggregate economic activity, as represented by the state of employment, was the central

purpose of the Institute's indicator system.

To our eyes, the choice of employment as the key variable of analysis may seem obvious. The state of the

labour  market  was  after  all  an  issue  of  key  political  significance  to  the  Weimar  Republic.  With  the  birth  of

Keynesian analysis, unemployment was to become, for almost half a century, the central preoccupation of

macroeconomics.  However,  the  labour  market  did  not  form  the  first  object  for  business-cycle  analysis.  In

1900, the administrative infrastructure necessary to register unemployment had, in most countries, still to be

created. Furthermore, the straight-jacket of equilibrium theory made unemployment a variable with dubious

theoretical connotations. The very idea of involuntary unemployment opened the door to subversive theories

of underconsumption. The very first analyses of the business-cycle focussed not on "real variables" such as

employment or even production, but on prices. Around the turn of the century, when more comprehensive

accounts of the cycle did begin to emerge, it was the dramatic fluctuations in the production of commodities

such as steel, which caught the eye. Arthur Spiethoff chose to build his widely-read historical account of the

German business-cycle around the correlation between fluctuations in stock prices and the production of iron
and steel31.  In rejecting a description of the cycle either in terms of prices or in terms of a particular product
market, Wagemann's Institute was marking a break with the mainstream. The cycle was an aggregate phe-

nomenon  and  had  to  be  described  in  aggregate  terms.  Faute  de  mieux,  labour  provided  a  basic  common

denominator of all economic activity.

The  labour  market  also  provided  a  metric  for  the  business-cycle.  It  allowed  the  Institute  to  move  from  an

impressionistic qualitative assessment of the pattern of economic development and the functional relations
between different variables, to a basic quantitative approach32.  Fluctuations in unemployment gave at least
some idea of the true amplitude of fluctuations in aggregate economic activity. In the pre-war period, the rate

of unemployment amongst unionized workers in German industry had risen to between 4 and 5 percent in the

worst months of 1908 and 1913. These figures, of course, included a large numbers of seasonal workers.

Furthermore, unemployment amongst unionized workers exceeded that in other sectors. Wagemann therefore

reckoned    that  the    pre-war  cycle    could  have  accounted  for  a  fluctuation  of  at  most  2-3  percent  in  total

employment33.    In  1926,  the  worst  postwar  year,  Wagemann  estimated  that  cyclical  unemployment  might

30 E. Wagemann, Konjunkturlehre, p. 196.
31 A. Spiethoff, 'Krisen' in Handbuch der Staatswissenschaften (4th ed., 1925), Vol. 6, pp. 8-91.
32 The shift from qualitative to quantitative analysis is made explicit in E. Wagemann, Einfuehrung, p. 108.
33 E. Wagemann, Konjunkturlehre, p. 195-196.

205

have reached 10 percent of the total workforce. The significance of this basic measurement of the amplitude

of the cycle is evident when we compare fluctuations in employment to fluctuations in the production of heavy

industry, which was Spiethoff's chosen index. During 1908, the production of raw iron plunged by over 20 percent

and  it  fell  by  an  even  larger  percentage  during  the  1925-1926  recession.  Iron  was  a  sensitive  measure  of

cyclical fluctuations. The Institute was happy to incorporate it into its predictive barometers. But it gave a mis-

leading impression of the scale of cyclical fluctuations in the aggregate. 

What determined the level of employment? Assuming that wages, the productivity of labour and the structure

of production were given in the short-run, the basic determinant of employment was the volume of produc-

tion, which in turn was functionally linked to demand. Employment was thus linked directly to Wagemann's

national accounting scheme. In principle, fluctuations in employment should therefore be related to fluctua-

tions in aggregate production, expenditure and income. In its first quarterly report, the Institute provided an

analysis of the violent cyclical downturn of 1925-1926 in precisely these terms. In 1925, the Institute estimated
a lower bound for German national income of 50 bn RM34.  Of this, 25 bn RM was relatively inelastic expen-
diture on food. A further 5 bn went on housing and rent. The variable items, therefore, included 5 bn RM public

spending, savings of 5 bn RM which provided the funds for investment and 10 bn RM spent on consumer

durables  such  as  clothing  and  household  equipment.  Over  the  course  of  the  cycle,  the  IfK  estimated  that

government spending had fallen by 1 bn Rm. Saving had been reduced by 2 bn RM and expenditure on clothes
and  household  goods  had  fallen  by  2  bn  RM35.    The  result  was  an  extremely  uneven  cyclical  downturn.
Consumer durable purchases were reduced from 10 to 8 bn RM. Investment had fallen from 5 bn RM to 3 bn

RM.  The  sectors  supplying  capital  goods  and  consumer  durables,  therefore,  suffered  a  savage  cyclical

contraction, whereas the rest of the economy was relatively little affected. 

The national income figures that the Institute used for 1925 were no more than rough estimates. Work on
more precise statistics began in earnest in the autumn of 192636.  Initially, the statisticians concentrated on
1913, preparing a revised estimate of Karl Helfferich's figures on the basis of Prussian and Saxon income tax

figures. By the autumn of 1928, when he completed the text of his Konjunkturlehre, Wagemann was able to

present a comprehensive national account for 1913. Income was divided into different classes of earnings.

What is more, the Konjunkturlehre also contained estimates for production, decomposed into the main sources

of value added. Expenditure was also clearly classified. And the interrelation between the different element

was summarized in the diagram of circular flow reproduced above. By 1932, the Reich's Statistical Office felt

sufficiently confident to publish the first official figures for national income to appear for any major Western

European  country37.    The  history  of  the  pre-war  business-cycle  was  rewritten  in  macroeconomic  terms.

National income figures were adjusted for year on year inflation. Given the sustained growth of the German

economy after 1890, the Institute had to contend with the familiar problem of growth cycles. Between 1890

and 1914, there was no year in which national income had actually fallen. The cycle thus expressed itself in

fluctuations in the growth rate of real income around the trend of 1.8 percent per annum38.  The amplitude of
these fluctuations was 2-3 percent at most, far smaller than the fluctuation in the level of wholesale prices.

34 VzK Vol. 1 (1926) Heft 2, p. 21.
35 The Institute left unspoken the fact that a reduction in saving was assumed to imply an equivalent reduction in investment. A worked-
out theory of the multiplier was absent from the work of the Institute in the 1920s.
36 J.A., Tooze, Statistics, p. 122-128.
37 SRA, Das deutsche Volkseinkommen vor und nach dem Kriege (Berlin, 1932).
38 SRA, Das deutsche Volkseinkommen, pp. 67-69.

206

Figure 4: The Cyclical Fluctuations of Pre-war National Income and Prices

12

10

8

6

4

2

0

-2

-4

-6

-8

-10

1
8
9
2

1
8
9
3

1
8
9
4

1
8
9
5

1
8
9
6

1
8
9
7

1
8
9
8

1
8
9
9

1
9
0
0

1
9
0
1

1
9
0
2

1
9
0
3

1
9
0
4

1
9
0
5

1
9
0
6

1
9
0
7

1
9
0
8

1
9
0
9

1
9
1
0

1
9
1
1

1
9
1
2

1
9
1
3

Percentage deviation of wholesale prices
around trend
Percentage deviation of national income around
trend

After: SRA,  Das deutsche 
Volkseinkommen vor und 
nach dem Kriege. 
Einzelschriften zur Statistik 
des Deutschen Reichs  Nr. 
24 (Berlin, 1932), fig. 6, p. 
69.

The  expenditure  side  of  the  national  accounts  could  not  be  approached  in  the  same  direct  fashion.

Investment,  public  expenditure  and  consumption  each  required  separate  methodologies.  An  analysis  of

investment was begun in the late 1920s and published in 1931 under the auspices of the IfK39. Keiser and

Benning's study was driven in part by structural questions about the reconstruction of German capital after

war and hyperinflation. And it was these issues, which aroused the public controversy that surrounded the

report. However, Keiser and Benning's figures also clearly showed the role of industrial investment and stock

building  in  cyclical  fluctuations.  Both  elements  of  capital  formation  had  plunged  in  1926  before  recovering

sharply in 1927 and 1928. Organizing the public accounts to suit the needs of economic analysis involved a

mixture of political finesse, accounting skill and conceptual development. The task fell to Dr Gerhard Colm,

who was also responsible for the national income estimates. The elaborate treatment of the public sector in

the national income accounts was to be one of the distinctive achievements of German official statistics in the

interwar period40.  Consumption remained the component of expenditure that was least well understood. A

study of working class household budgets was conducted over the course of 1927. But, this captured only a

fraction of total household expenditure. To remedy the defect, regular surveys were taken of the turnover of

all branches of retailing. 

By  the late 1920s, the  lack  of comprehensive data on production was the only glaring gap in the Reich's

statistical repertoire. Since the turn of the century Anglo-American statisticians had pioneered the techniques

of the industrial census. Their starting point was the concept of National Dividend as defined in the last quarter

of the 19th century, by Alfred Marshall. In his classic textbook, the Principles of Economics, Marshall provided

both a definition of National Dividend, a methodology for calculating it and the demonstration in theory that
net production should be identical to the value of national income41.  All-encompassing censuses of produc-
tion along these lines had been carried out in the US since the mid-19th century, the British Dominions since

39 G. Keiser and B. Benning, Kapitalbildung und Investitionen in der deutschen Volkswirtschaft 1924 bis 1928 IfK Sonderheft 22 (Berlin,
1931).
40 G. Colm, Volkswirtschaftliche Theorie der Staatsausgaben (Tuebingen, 1927).
41 A. Marshall, Principles of Economics, (8th edition, London, 1938), 79-8, 523-4, 827. Significantly, Schumpeter, who made use of the
concept of National Dividend in his own work, credited Marshall not only as the great formalizer of the marginalist engine of analysis, but
also as a pioneer of 'aggregative analysis', s. J.A. Schumpeter, Ten Great Economists from Marx to Keynes (London, 1952), p. 106.

207

the 1890s, and in Great Britain since 1907. And there was no doubt that the basic procedure was sound. As

the NBER was able to show for the United States in the early 1920s, estimates of national production prepared

on  the  basis  of  the  production  census  agreed  with  independently  estimated  figures  for  national  income  to

within a very small margin of error42.  

Clearly, estimating the value of German industrial production had to be an integral part of the programme of

Konjunkturforschung. Unfortunately, Wagemann's staff had little to work with. Germany statistics of industrial

production were scrappy. Their scope was defined largely by administrative convenience, business resistance

and the narrow concerns of trade policy. Similar considerations dictated the range of questions. In total they

covered no more than a small fraction of German industry. By 1927, this no longer satisfied the ambitions of

the IfK. To verify Wagemann's equations and to complete the national accounting scheme, the Institute needed

a figure for value added. Without it, the entire edifice of production indicators was based on little more than

rough  estimates  and  proxies.  Furthermore,  deciphering  the  connections  between  the  branches  of  German

industry  was  vital  to  understanding  the  propagation  mechanism  of  the  cycle.  How  did  shocks  spread  from

agriculture to industry, from exporting sectors to the rest of the economy, and from investment goods indus-

tries to the producers of consumer goods? By the late 1920s, the Institute was already piecing together a

rough picture of these interconnections from cost accounts. In 1927, Wagemann ordered his staff to prepare

plans for Germany's first census of industrial production, which would reveal the entirety of these input-out-
put relationships43. The first count was to cover the year 1930.

The Great Depression intervened to frustrate the completion of Weimar's national accounting scheme. As part

of Chancellor Bruening's effort to balance the budget, all new statistical work, including the census of produc-

tion for 1930 was cancelled. In 1933, however, just before Hitler's seizure of power, the census was put back

on the agenda and funds were allocated for the work to be completed in 1934. By this time Wagemann had

been removed as President of the Statistical Office and the Institute had been separated from the main body

of official statistics. However, the macroeconomic conception of official statistics lived on within the Reich's

Statistical Office. The production census of 1933 was carried out as a trial run for a more comprehensive eva-
luation that was taken in 1936 and published as the much-quoted volume, Die Deutsche Industrie44.  This pre-
sented the first comprehensive evaluation of German industry. For the first time, it revealed the crucial ratios

between turnover and value added, that allowed estimates of German industrial production to be incorporated

into the national accounting scheme and placed the monthly and quarterly indices of production on a sound

basis.  Meanwhile,  estimates  of  German  national  income,  continued  to  be  published  regularly  until  193845.

During the 1930s, the SRA also began to experiment with short-run estimates of national income, including

quarterly data for the wage bill and corporate earnings46. These were published by the SRA, even though the

gap between rising employment and the wage bill revealed the artificiality of the first phase of Hitler's recovery. 

The  IfK for  its  part, though it was cut off from the main source of official information, did not lie idle47.  It
continued to publish its quarterly analyses of the German economy. At least until 1936, these continued to be

42 G. Alchon, The Invisible Hand of Planning. Capitalism, Social Science and the State in the 1920s (Princeton, 1985), p. 59-63.
43 The plans were prepared by Dr Wilhelm Leisse and his junior colleague Herr Dorn between 1927 and 1928. See BAP 31.02 6181
"Die industrielle Produktionsstatistik im In- und Ausland" (ORR Leiße, Ref. Dorth) (1927/8).
44 Reichsamt fuer Wehrwirschaftliche Planung,  Die deutsche Industrie. Gesamtergebnisse der amtlichen Produktionsstatistik (Berlin,
1939).
45 For a graphical presentation of the cyclical fluctuations in national income between 1925 and 1937 see Wirtschaft und Statistik 18
(1938), pp. 802-805.
46 Vierteljahrshefte  zur  Statistik  des  Deutschen  Reiches 42  (1933),  pp.  112-120  and  Vierteljahrshefte  zur  Statistik  des  Deutschen
Reiches 43 (1934), pp. 69-77.
47 J.A. Tooze, Statistics, p. 177-183.

208

phrased in the language of the business-cycle. A variety of short-term monthly and quarterly indicators were

used  to  track  the  course  of  economic  development.  However,  these  were  no  longer  formally  grouped  into

barometers. Instead, the basic idea of a circuit of income, expenditure and production was brought every more

clearly into the forefront. Ideological constrains were minimal. In 1936, the Institute ran into zealous opposi-

tion from a number of subordinate Nazi agencies for speculating about the likely prospects for an economic

downturn. On the basis of a normal cyclical periodicity, there was every reason to expect a slowdown in the

recovery in 1936. However, in light of the intensification of economic controls in the form of Goering Four Year

Plan 'business-cycle pessimism' was politically unacceptable. Wagemann's Institute was forced into a tactical

retreat, but was never really endangered by these attacks. It was too useful to a variety of institutions in the

regime and its reports remained the standard source of information for both internal and external observers

of the German economy right up to 1939.

4. From Observation to Control

There was no doubting, however, that the Nazi regime's increasingly comprehensive controls of the German

economy were changing the terms of the debate. What role was there for Konjunkturforschung under these

new conditions? Observation of the economy as an independent object governed by its own logic of develop-

ment was clearly no longer an attractive strategy, either rhetorically or in practice. To survive the Institute was

forced  to  supplement  general  economic  observation  with  contract  research  for  institutions  such  as  the

German post office. By contrast, the staff recruited by Wagemann into the Reich's Statistical Office sensed

more exciting opportunities. For a number of entrepreneurial members of the Statistical Office it seemed that

the tools of macroeconomic Konjunkturforschung could now be refashioned as means of economic control48.

And the censuses of industrial production, originally designed as tools of cyclical economic analysis provided

the obvious launching pad.

Despite their roots in Konjunkturforschung, the  production census of 1933 and its successor in 1936 were

justified  to the political  authorities not  as  exercises in national accounting but as contributions to Germany's

military-economic planning (Wehrwirtschaft). The censuses, after all, provided an unprecedented volume of

information on the physical input-output relationships of the economy. For the statistician chiefly in charge of

the survey, Dr Wilhelm Leisse, the censuses became the launching pad for a career, which by 1938 was to

put  him  in  charge  of  his  own  rival  to  the  Reich's  Statistical  Office,  the  Reich's  Office  for  Military-Economic

Planning  (Reichsamt  fuer  wehrwirtschaftliche  Planung,  RwP). In 1938, this office was charged with the

mission of preparing mobilization plans for German industry. For all key raw materials, the RwP was to prepare

balances matching the quantities demanded by German industry against the available supply. The result was

a  staggering  array  of  physical  input-output  ratios,  graphically  depicted  in  so-called  'family  tree  diagrams'.

However, Leisse's efforts  also  revealed  the  inherent  limitations of  a physical accounting system. It was

virtually impossible to compile effective raw material balances for the manufacturing sector, which depended

on an overwhelming variety of inputs, that could not be aggregated in physical terms.

However,  physical  accounting  was  not  the  only  possible  interpretation  of  Germany's  industrial  censuses.
Under  Dr.  Paul  Bramstedt,  one  of  Wagemann's  chief  collaborators  in  the  1920s,  the  economic  statistics
department of the Statistical Office proposed a different interpretation. Relying on prices to allow aggregation,
Bramstedt proposed that the production census should be used to produce a comprehensive Input-Output
table  for  German  industry49.    This  proposal  coincided  with  the  publication  in  the  United  States  of  Wassily

48 The following section summarizes J.A. Tooze, Statistics, chapters 5-7.
49 The  only  hint  of  this  work  to  reach  the  public  came  in  P.  Bramstedt,  'Gefuege  und  Entwicklung  der  Volkswirtschaft',  Allgemeines
Statistisches Archiv, 25 (1936/1937), pp. 377-404. Professor Fremdling at Groeningen University is currently attempting to reconstruct
an Input-Output scheme for German industry in 1936, using the census results.

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Leontief's famous first experiments in Input-Output accounting50.  And this was no coincidence. On his way

from Russia to the United States, Leontief had spent a number of years in the Weimar Republic. During his

time in Berlin and Kiel he had reviewed the early Soviet work in national accounting and experimental input-
output tables51.  These activities were also eagerly followed by researchers in Wagemann's Institute including
both Paul Bramstedt and the young Rolf Wagenfuehr52.  Like Leontief, Bramstedt presented his proposal for

an  Input-Output  scheme  as  a  logical  extension  both  of  business-cycle  research  and  the  parallel  efforts  to

compile a system of net accounts for national income, production and expenditure. The net estimates of pro-

duction and income could be continuously checked by the complete breakdown of gross industrial turnover

and its interconnections. Meanwhile, the production of regularly updated Input-Output tables would allow the

process of fluctuation to be traced back to its sectoral routes. For the inheritors of 1920s Konjunkturforschung,

the  transition    from  barometer  systems  to  the  most  comprehensive  national  accounting  was  seamless.  In

practice,  however,  Bramstedt's  Input-Output  table  ran  into  problems.  Secrecy  restrictions  and  bureaucratic

rivalry with Leisse's RwP inhibited the necessary exchange of information. As far as I am able to establish

from the archival record, the only concrete result was a rough table based on the 1933 census, of which only

a sectoral account for the motor vehicle industry has survived. In technical terms, Bramstedt's Input-Output

proposal was clearly to be preferred to the naïve model of physical planning expounded by Leisse and his

RwP. However, unlike Leisse,  who could count on the support both of Goering and the military, Bramstedt

lacked allies. 

In the late 1930s, the German statistical apparatus entered a period of infighting and self-destruction. Not only

was the scheme for an Input-Output table stifled, but the production census planned by Leisse for 1939 was

cancelled as well. Despite more than a decade of effort and numerous extremely promising proposals, Nazi

Germany  entered  the  war  without  a  functioning  economic  information  system.  But,  the  exponents  of

Konjunkturforschung were still not dead. Ironically, the separation of Wagemann's Institute from the Reich's

Statistical Office in 1933 preserved it from the bitter infighting, which afflicted the apparatus of official statistics

in the late 1930s. The Institute stood ready, therefore, to re-enter the fray during the war. 

The key sector in need of urgent reorganization was the coal industry. Coal supplied over eighty percent of

Germany's  energy  needs,  not  to  mention  the  raw  material  for  the  synthetic  fuel  program.  Wagemann's

Institute  was  contracted  in  1941  to  create  a  new  statistical  control  system  for  this  vital  sector.

Characteristically,  the  Institute  treated  the  problem  of  coal  supply  as  more  than  merely  an  administrative

issue. For Wagenfuehr, energy input was a common denominator of industrial production. Whilst the pre-war

systems used for recording output were rendered useless by the wholesale conversion to wartime produc-

tion, an index of energy consumption provided a useful proxy to monitor the short-term movements of both
civilian and military production53.  Success in dealing with coal brought Wagenfuehr and his team to the atten-
tion of one of the leading personalities in the Reich's Ministry of Economic Affairs, Hans Kehrl. Kehrl had been

an enthusiast for the rationalization movement since the 1920s. He had visited the USA to witness the miracle

of modern mass production at first hand. He was also an avid reader of the Institute's quarterly barometers

50 W. Leontief, 'Quantitative Input and Output Relations in the economic System of the United States', Review of Economic Statistics,
18  (1936),  pp.  105-125.  A  bibliographical  reference  to  this  article  was  kept  on  file  by  Bramstedt's  department,  see  Bundesarchiv
Lichterfelde 31.02 SRA 2705 no. 56.
51 W.  Leontief,  'Vom  Staatsbudget  zum  einheitlichen  Finanzplan.  Sowjetrussiche  Finanzprobleme',  Weltwirtschaftliches  Archiv,  33
(1931), pp. 231-260 and IfK, Russische Arbeiten zur Wirtschaftsforschung Sonderheft 12 (Berlin, 1929).
52 R. Wagenfuehr, Die Konjunkturtheorie in Russland (Jena, 1929), pp. 125-130.
53 Bundesarchiv  Lichterfelde  25.01  Reichsbank  6593  No.  124  DIW,  'Die  Deutsche  Industrieproduktion  im  Kriege  und  ihre  Messung'
(June 1942).

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and an enthusiast for modern methods of graphical presentation. In one case, at least, Kehrl's commitment

to the Institute's barometer system had cost him dearly in business terms54.  Nevertheless, Kehrl remained an

enthusiast for economic statistics and indicators. More importantly, Kehrl was also a fanatical loyalist of the

Nazi party and during the 1940s, he was to emerge as one of the key organizers of the German war econo-

my. Indeed,  recent  research  credits  Kehrl,  rather  than  Speer, as the organizing spirit behind the ratio-

nalization of Germany's wartime planning55.  Kehrl, in turn, referred to the DIW and Wagenfuehr's team as his

'secret weapon'56.  

The  most  well-known  product  of  this  alliance  between  Konjunkturforschung  and  wartime  planning  was  an

index  summarizing  the  output  of  armaments  by  German  industry.  This  was  a  classic  exercise  in  the  art  of

index  number  construction.  The  aim  was  to  weigh  up  the  various  elements  of  the  war  effort  to  gain  some

general idea of the expansion of armaments production as a whole. In political terms, the aim was to celebrate

the  achievements  of  the  Speer  Ministry  and  to  help  to  bolster  domestic  morale.  Technically  speaking,

Wagenfuehr's problem was to find a common denominator for the hundreds of different weapons systems and

to take account of the constantly shifting program of armaments production. The result is one of the icon's of

German economic history, with its dramatic upturn after the crisis winter of 1941-1942 exaggerated by the

deliberate choice of base period. If one reflects on the mood of optimism and internationalism, in which the

technique of index numbers first flourished in the late 19th century, Wagenfuehr's sophisticated measure of

the aggregate destructive power of the Nazi regime, also stands as a sad testament to the perversity of the

20th century. 

Figure 5: Wagenfuehr's Armaments Index and Components (Jan-Feb 1942=100)

600

500

400

300

200

100

0

All arms
Weapons
Tanks
Vehicles
Aircraft
Ammunition
Powder
Explosives

1938

1939

1940

1941

1942

1943

1944

54 DIW (IfK), Das Deutsche Institut fuer Wirtschaftsforschung (IfK) 1925-1945 in der Erinnerung frueherer Mitarbeiter (Berlin, 1966), p 111.
55 R.D. Mueller, Der Manager der Kriegswirtschaft. Hans Kehrl (Essen, 1999).
56 H. Kehrl, Krisenmanager im Dritten Reich (Duesseldorf, 1973), p. 319.

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But index numbers were not the only contribution made by Konjunkturforschung to the Nazi war effort. The

ultimate goal of the Planning Staff was to present Speer's Central Planning Board with a comprehensive over-

view of the relationship between the output of weapons and the inputs of about a dozen key inputs: labour,

energy, transport capacity, steel, and scarce raw materials. This co-called Gesamtplan would give Kehrl the

power he craved: to define the parameters of all military-economic decisions. It would also realize a long-held

dream of Wagemann's Institute, as indicated by the following valedictory passage from a speech given by

Wagemann in the Stalingrad-autumn of 1942:

'Once  we  have  assembled  a  substantial  collection  of  balances  for  raw  materials  and  manufactures,

then  we  will  have  made  an  important  step  towards  a  better  understanding  of  the  total  circular  flow

(Gesamtkreislauf) of the German economy in its concrete form. The most important principle of economic

research, as practised by my Institute, has always been that the economy is a total process and that it

is therefore of fundamental importance to understand the interrelationship of individual phenomena. In

the midst of the war, we are approaching this goal with giant strides. More than ever we are working to

compile  a  total  account  of  the  national  economy  (Gesamtbilanz  der  Volkswirtschaft).  Only  then  can

planning of the economy - whether it be the control of the labour force, or raw material consumption,

or stock movements, investment, consumption or trade - really begin.'57

The Gesamtplan came too late to have much effect on the practical work of Speer's Ministry. After the war,

however,  Wagenfuehr  did  not  hesitate  to  place  Kehrl's  concept  in  the  context  of  pre-war  experiments  in

macroeconomic accounting58.  In particular, he cited: Leontief's Input-Output scheme; the little known macro-

economic model prepared by the German engineer-economist Ferdinand Gruenig on the basis of IfK data59;

and the Soviet efforts in national accounting, which Wagenfuehr and Leontief had both reviewed in the 1920s.

The macroeconomics, which had underpinned the work of Konjunkturforschung since the 1920s, thus found

an intellectual extension in the most advanced attempts to control the Nazi war economy.

5. Conclusion

As has been argued elsewhere in this collection, the barometer program of the interwar period derived a large

part of  their legitimacy  from the  importation into economics of mathematical techniques developed in the

biometric sciences. Certainly, the Berlin Institute participated in this fashion. However, another way of giving

solidity to business-cycle indicators was to root them in an aggregative, macroeconomic accounting frame-

work. In Britain and France, this was not to occur until after World War II, and even then, relations between

the two approaches remained tense. The central aim of this article has been to show how, in Germany, the

development  of    the  program  of    business-cycle    indicators  went  hand  in  hand  with  the  elaboration  of  an

aggregative  conception  of  the  economy.  In  Germany,  the  two  processes  should  be  thought  of  as  mutually

reinforcing  and  originating  at  an  early  date  in  the  1920s.  It  was  this  intellectual  synthesis  that  gave

Konjunkturforschung its unusual longevity. The shock of the Great Depression did not call into question the

value  of  the  macroeconomic  framework  of  analysis  that  had  begun  to  be  elaborated  in  the  1920s.  In  this

sense,  the  history  of  the  Berlin  Institute  resembles  the  development  of  the  NBER  rather  more  than  the

Harvard  Committee.  This  interpretation  of  Weimar's  Konjunkturforschung  as  a  synthesis  of  business-cycle

research  with  macroeconomic  accounting  also  implies  that  we  cannot  stop  our  narrative  with  the  Great

Depression. After 1933, the advocates of Konjunkturforschung adapted and developed their instruments to

serve  the  needs  of  Hitler's  terroristic  dictatorship.  For  Wagemann  and  his  staff,  the  final  years  of  the  war

brought  the  culmination of  two decades of  pioneering empirical  macroeconomics. It  was a  remarkable

achievement, but one it was convenient to forget.

57 Imperial War Museum Sp Film 18 3038/49 Sc. 434 No. 61, p. 6.
58 DIW (IfK), Das Deutsche Institut fuer Wirtschaftsforschung (IfK) 1925-1945 in der Erinnerung frueherer Mitarbeiter (Berlin, 1966), p. 113.
59 On Gruenig and his French audience see F. Fourquet, Les Comptes de la Puissance (Paris, 1980), pp. 20-22 & 392-394.

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