The Cambridge Economic History of Modern Britain

INTRODUCTION

The period 1870 to 2010 is unique, not because it is necessarily particularly rich in cycles and exhibits the occasional depression; cycles also existed in preindustrial Europe (Craig and García-Iglesias 2010) and are unlikely to vanish completely in the future. What stands out about the past 140 years is how economists and policy-makers have positioned themselves with respect to cycles. At the beginning of our period, several economists (Juglar 1862; Kondratiev 1925) discovered cyclical patterns in economic activity and tried to explain them. Such rather descriptive approaches no longer seemed enough when the Great Depression of the early 1930s led to output losses of close to 30% in many economies, including the US and Germany, respectively the first and the third largest economies of the time. Henceforth, the objective was to tame the cycle.

The (supposed) ability to smooth economic cycles was one of the main attractions of the Keynesian policies which came to dominate the Western world in the 1950s and 1960s. While Keynesian macroeconomic management fell into disrepute in the turbulent 1970s, the idea of smoothing the business cycle remained in fashion; a large body of economic literature, emerging in the 1990s, claimed that the 1930s dream of eliminating cycles of boom and bust had been achieved at last; or at least, it was claimed, ‘moderating’ them, which gave rise to the name ‘the Great Moderation’ for the period c. 1982 to 2007. As late as 21 March 2007, Gordon Brown, the then Chancellor of the Exchequer (and later British Prime Minister, 2007–2010), claimed that those cycles belonged to the past. Less than two years later the complacency of the Great Moderation interlude came to an abrupt end: all major economies experienced output declines of 4–6 % in the 2008–9 recession, and most (including the UK) had yet to recover their pre-crisis GDP levels three years later.

For students of business cycles all this comes as little surprise. Burns, one of the founding fathers of modern business cycle research, wrote in 1947: ‘For well over a century, business cycles have run an unceasing round.