Printer Friendly

eMail Article

April 28, 2005

The Paradigm Cycle Model
by Michael A. Alexander

Over the last four years I have written about a variety of cycles I employ to develop economic or financial forecasts. The Stock Cycle¹ defines secular bull and bear markets and was used to forecast that money markets would outperform stocks for twenty years in my 2000 book Stock Cycles. The Kondratiev cycle² defines long-term movements in interest rates and commodity inflation. This cycle forecasts that 10 year interest rates won't rise above 5.5% in the coming years.³ The political cycle⁴ suggests that the decline in small government conservatism since 2000 is not a transient anomaly, but the beginning of a long-term trend. The hegemony cycle projects that there will be no showdown between the U.S. and China in this decade and that Asian central banks will continue to support US borrowing when necessary for the rest of the decade.

I believe all these cycles are linked in that they are all generational in nature and act largely through politics. Government and other institutional behavior shapes the socioeconomic landscape, giving rise to historical cycles. This behavior reflects the beliefs of the people occupying the top positions in government, business and other institutions. I hypothesize that beliefs change in a predictable fashion because the changes arise out of the replacement of one generation by another, each with its own particular set of beliefs. This article presents my paradigm model for how these generations and the cycles they create arise.

The paradigm model is closely associated with the political cycle I presented last November.⁴ Table 1 presents this cycle in terms of the liberal eras that make up one half of the cycle. As described in my book Cycles in American Politics, the political cycle aligns with the Strauss and Howe generational cycle called the saeculum. Specifically, liberal eras tend to occur at the same time as social moments. A social moment is an era, typically lasting about a decade or two, when people perceive that historical events are radically altering their social environment.⁵ There are two types of social moments: secular crises, when society focuses on reordering the outer world of institutions and public behavior; and spiritual awakenings, when society focuses on changing the inner world of values and private behavior.⁵

Table 1 shows dates for particularly significant elections called critical elections. Included amongst these is the date for another significant political milepost, American independence. Also shown are mileposts from two financial cycles which are related to the political cycle. After the 1920's the Stock Cycle correlates well with the political cycle and the saeculum. Secular bull market peaks are shown to represent this cycle. Before the 1920's, the real estate or Kuznets cycle⁶ was best correlated with the political cycle and the saeculum. This cycle is represented in Table 1 by pairs of adjacent financial panics.

The paradigm

The mechanism I propose for the political cycle, the modern saeculum and their related economic cycles involves the paradigm. A paradigm is a model of the world that people use to make sense of the social, political, economic and cultural world they inhabit. A person's behavior is influenced by his paradigm, which acts as sort of a road map for life. A paradigm is largely based on personal experience and everyone's is different.

According to the paradigm model, social, economic and political trends, as the collective behavior of society, reflect its collective paradigm. A collective paradigm is the "average" paradigm of a group of people and as such, many differences between individual paradigms "cancel out" leaving those features that are widely shared. Social trends reflect the changing nature of commonly held ideas in individual paradigms. For example, the decline in crime rates over the last decade and a half represents a change in attitudes towards crime amongst young people. Although there are still plenty of individual paradigms that hold that crime does pay, they are less common than in the past. The collective paradigm of the young today is less pro-crime than in the past and as a result they engage in less crime

A group of people sharing a common collective paradigm due to the proximity of their birth years is called a paradigmic generation. Paradigmic generations are very similar to the psychological generations proposed by Strauss and Howe.⁵ The exact dates for paradigmic generations are slightly different from those of Strauss and Howe, but there is a good deal of overlap between the two. In this article, I will refer to the two interchangeably as I believe that my paradigm model captures the same dynamic described by Strauss and Howe in their work.

What separates generations is the influence the past has had on their collective paradigm. A younger generation only knows the recent history through which they have lived, whereas an older generation's paradigm is influenced both by the recent past and an earlier time that they know but the younger generation does not. Current events and the recent past will necessarily affect the paradigms of the young adults more strongly than those of older adults.

When recent history has been particularly eventful, the impact on paradigms is heightened. A momentous era in history (i.e. a social moment) will strongly imprint the paradigm of those coming of age during the social moment, binding them together into a common generational outlook. People coming of age just before and just after the social moment will fall into different generations. The recent film Seabiscuit illustrates this concept. One of the film's characters, the jockey, was raised in an erudite, professional household. His course in life was changed dramatically by the Depression. In ordinary times he would have gone to college, gotten a professional job and led a comfortable middle class life. But the Depression wiped out his family's finances and he was left on his own to make his way as a small-time pugilist and eventually as a jockey. The common experience of coming of age in the Depression and WW II shared by those born in the early 20^th century is what binds them together as what Tom Brokaw⁸ calls "The Greatest Generation" and Strauss and Howe call the GI Generation.

Generations formed by the experience of coming of age during a social moment are called dominant generations, while those coming of age at other times are recessive. Thus, the GI generation is a dominant generation while the Silent generation that follows them is recessive. Similarly, the Baby Boom generation who came of age during the tumultuous "New Consciousness" spiritual awakening (1964-84) is dominant while Generation X is recessive. It is the paradigms of dominant generations that shape the political zeitgeist.

For example, the GI generation was tempered by the fire of depression and war. They knew that long-term unemployment was something that can just happen to people through no fault of their own. In addition, the experience of the GI's with the New Deal and WW II had created faith in government as part of what I call their "Progress through Public Action" paradigm. In contrast, the experience of the dominant Baby Boomer generation coming of age during the New Consciousness social moment (1964-1984) created a very different view of government in their collective paradigm. During this social moment they saw the nation defeated in war for the first time, a president resign in disgrace, and an economy seemingly running out of control with something called stagflation. The first wave of Boomers (1943-60) came of age protesting the government while the last wave came of age with a popular president proclaiming "Government is the problem". The Boomers came to put their faith in the free market and in private behavior. That is, their "Self Actualization" paradigm is opposed to the Progress through Public Action paradigm, despite the fact that most Boomers take for granted the government benefits and protections introduced in support of the GI paradigm.

The paradigm cycle model

Table 2 lists the historical paradigms that were created in each liberal era/social moment. An oscillation between "freedom" and "progress" is described. Both of these themes were present at the birth of our nation. The Revolution was about the desire for self-rule (Freedom) and the Novus Ordo Seclorum that it created represents a step forward in human development (Progress). During the spiritual awakening, when the focus is on the inner world, the paradigms formed emphasize individual freedom. These paradigms tend to be idealistic and impractical. Conversely, the paradigms formed during the secular crisis, when the institutions of society are retooled, focus on progress. They tend to be pragmatic and call for collective action. Social moments are times of vigorous national activity, times of activist government, and should naturally coincide with liberal political eras.

The idealistic Freedom paradigms tend to rise in opposition to the pragmatic Progress program of the elder generation. People often don't like some of the sacrifices called for by progressive policies (e.g. high taxes and the military draft in the last spiritual awakening). Conversely, pragmatic Progress paradigms tend to rise because of a perceived problem (e.g. unemployment during the great Depression) that is not being effectively addressed by policies favored by leaders holding Freedom-type paradigms. That is, a perception that government is doing too much helps create a Freedom paradigm, while a perception that government is not doing enough creates the Progress paradigm.

Young people develop a paradigm that reflects their experience of living through history during a social moment. It is the acquisition of a paradigm that creates the generation out of the young adults of the time (history creates generations). The social moment itself reflects the policies of the older generation (generations create history). These policies reflect the paradigms held by that older generation, which were created during the previous social moment. History creates generations, which, after a lag, create history. The lag reflects the time between paradigm acquisition in young adulthood and paradigm expression in middle age.

This idea can be made concrete by defining a generation as those who experience the liberal era/social moment at a particular age when paradigms are formed (A_PAR). For our purposes let us assume that A_PAR is age 25. In this case, a generation is defined by subtracting 25 from the dates for the liberal era/social moment. Table 2 presents midpoints for liberal eras and social moments and their associated economic cycles. By subtracting 25 from them, one obtains the midpoint of the generation birth years whose paradigm was created in that era. The paradigm model says that the next social moment/liberal era should begin when this generation reaches the age when they occupy the maximum number of positions of power. I call this age A_MAX and a good estimate for it would be the average age of Congressmen and governors.⁹ This age is given in Figure 1.

This says that the next liberal era/social moment should begin A_MAX minus 25 years after the midpoint of the previous era. Because liberal eras average 15 years long, the time from the beginning of a liberal era to its midpoint is 7.5 years. From this it follows that liberal eras/social moments should be spaced A_MAX - 17.5 years apart. Figure 1 plots this quantity and also the spacing between eras given in Table 2. Spacing has lengthened over the past two centuries in line with the increase in A_MAX. I should stress that the spacing given in Table 2 for today's era is a minimum value. It is not yet clear that a liberal era/social moment began in 2001 or that 2004 was a critical election. The only thing that seems fairly sure is that the secular bull market ended in 2000. Should it turn out that the new era didn't start in 2001, but instead will begin at a later date, this would increase the spacing, moving the red dot upwards in Figure 1. Should this occur it would fit the paradigm model even better than the dates I am using now do.

Figure 1. Average age⁹ of congressmen & governors compared to spacing in Table 2

This correspondence between spacing and A_MAX provides the primary evidence in favor of the paradigm model. Another factor in its favor is it explains the changes in the length of the Strauss and Howe saeculum since 1820. Up until this date, the spacing between social moments averaged 51 years.¹⁰ The spacing between the next pair of social moments was only 31 years (see Table 2), and the three after that average 39 years, considerably shorter than what they were before 1820. Strauss and Howe explain this with what they call the Civil War anomaly. The Civil War came about a decade early, which resulted in a greatly shortened Civil War social moment and the dropping of a civic-type generation.⁵ Had the Civil War not come early, the first spacing would be around 40 years, in line with the next three, but still shorter than the previous ones. Strauss and Howe also argue that generation length has shortened since 1820, reflecting a faster pace of life.¹⁰ Thus, Strauss and Howe have added two modifications to their generational model to explain post-1820 cycle shortening.

The paradigm model is considered to have come into play only after 1820. A spacing of 30-40 years observed for social moments is consistent with A_MAX values of 47-57 years, close to the 47-56 year range shown in Figure 1. Prior to 1820, a different mechanism, closely related to the Kondratiev cycle, was in operation. This mechanism is described in detail in my book The Kondratiev Cycle.¹¹  It calls for the spacing between social moments to be two biological generations, about 50 years or one Kondratiev cycle, which is what is observed. I employ only one assumption (the rise of the paradigm mechanism) to explain cycle shortening. Furthermore, the observed cycle lengths are consistent with independently observable phenomena: biological generations and rising longevity (A_MAX).

The origins of the paradigm

The origins of the paradigm mechanism for cycle generation were in the aftermath of the Revolutionary War secular crisis, in the emergence of the first political divisions in the new nation. The first "Progress" paradigm arose out of support for George Washington, hero of the Revolution, and was based on the progressive ideas of Alexander Hamilton, Washington's aide during the war and Secretary of Treasury in his administration. The first "Freedom" paradigm was based on the libertarianism touted by Thomas Jefferson in opposition to Hamilton's Federalists.

Federalists called for a national army and navy, with high taxes to pay for it. The government was to balance its budget and pay its debt. They favored a central bank (like Britain had) and a tariff to encourage domestic industry. These things, they argued, would bring prosperity and allow the United States to develop into a great nation; they represented Progress. Jefferson, for his part, argued that Federalist "Progress" hurt rather than helped the common man. Most Americans were farmers, not industrialists, merchants or financiers. Jeffersonians believed that American "yeoman" should be left alone (Freedom) to pursue their own lives.

Federalist thinking justified the Federal government's decision to honor Revolutionary War bonds at full value. These bonds had been issued by the Continental Congress to fund the war and had long since become worthless. Federalist speculators, who had bought Continental bonds for pennies on the dollar, pressed their fellow Federalists in office for this policy and made vast fortunes as a result. Increased taxes were required to pay the speculators, which were raised via excise taxes on whiskey and other goods. These taxes led to the Whiskey Rebellion, which Washington put down by force of arms. As this example shows, it is not hard to see how Jefferson's opposition to the Federalists (once their icon George Washington had left the scene) could have broad emotional appeal for rank and file Americans.

In 1800, Jefferson was elected president and the Federalists were swept from power. This realigning election was the first of a regularly-repeating series of critical elections that shifted power from one group to another. Critical elections are associated with liberal political eras and, after 1820, social moments too (see Table 1). Once elected, Jefferson and his successor Madison found that the realities of governing were incompatible with their idealistic program. One by one, they discarded its elements until by the end of Madison's second term, their party was essentially ruling like the Federalists they had so despised in 1800.

This should not have happened according to the paradigm model, Jefferson and Madison should have stuck to their paradigm, which would have caused a secular crisis and the formation of a progressive counter paradigm. Instead they pragmatically adopted Federalist-style progressivism. Both Jefferson and Madison were members of a Civic-type generation rather than the Idealist generation that is normally characterized by Freedom-type paradigms. The paradigm model was not yet fully operative before 1820. What had happened was the same generation of Civics were split into two paradigmic camps, represented by the Federalists and Jeffersonians. The latter imbued a younger generation with their Freedom paradigm, but then proceeded to become progressives (to which, as pragmatic Civics, they were naturally inclined). When this younger generation came to power in the 1820's they became Jacksonians in rejection of neoFederalism. They triumphed in the election of 1828, our nation's second critical election.

The time of Jackson was also a spiritual awakening, the last one caused by the old Kondratiev mechanism. The younger generation at this time developed a Freedom paradigm as a complement to the struggle against the neoFederalists. They also became an Idealist generation because it was a spiritual awakening. Because of the spiritual awakening, the Freedom paradigm developed by the youthful Idealist generation included concepts of freedom besides opposition to tariffs and central banking that Jacksonians espoused. Spiritually-informed concepts like Abolition also became part of the new paradigm. It is easy to see how the different versions of the Freedom paradigm held by the youthful Idealist generations of the 1820's and 1830's were on a collision course. Once those imbued with this paradigm came to power, the fundamental incompatibility between two competing versions of an unrealistic Freedom paradigm would produce the next social moment, the Civil War secular crisis.

The action of paradigms in recent times

Table 3 presents a detailed comparison of the four most recent paradigms. Some of the differences between Progress paradigms and Freedom paradigms are noted. Progress paradigms tend to conflict with economic rights, usually through restrictions of property rights. The classic example is the confiscation of slaveowner's property by Emancipation during the Civil War secular crisis. The next secular crisis saw confiscatory taxation and a host of regulations restricting how private businessmen may use their property. Freedom paradigms often conflict with traditional rights and values. For example, the Freedom with Limits paradigm supported both Womens's suffrage and Prohibition. Similarly, the Self Actualization paradigm supports civil rights for African Americans and increased restrictions on the use of tobacco. On the Right, this paradigm calls for increased freedom from environmental and safety regulations for businessmen, coupled with restrictions on privacy and reproductive freedom. On the Left, this paradigm calls for gay civil rights and restrictions on the right to bear arms.

Freedom paradigms are more friendly to economic rights and market values. As a result, freedom paradigms are favorable to financial speculation. The Boomer's Self Actualization paradigm supported policies that favored financial and corporate elites as shown by the enormous rise in executive compensation after 1980. A soaring stock market was seen as evidence for the correctness of the 1980's fiscal and monetary policy. A similar dynamic operated during the 1920's under the Freedom within Limits paradigm  Self Actualization-fueled policies culminated in the 1997 capital gains tax cut and the stock market insanity that followed. Stock market valuation at the end of the secular bull market in 2000 was the highest in history. In contrast, the 1966 peak, when the Progress through Public Action paradigm ruled, had the lowest valuation of all secular bull market peaks.

Dominant generations tend to see their paradigms supported by events in the turning after the social moment that originally created them, resulting in their uncritical acceptance by the next recessive generation. This support makes these post-social moment eras fairly quiescent and conservative. The Progress through Public Action paradigm supported heavy taxation to provide for domestic welfare and a vast peacetime military. It also supported an aggressive foreign policy of confronting Communism.  These policies had led to prosperity and security in the 1950's. As a result the younger Silent generation by and large supported their elder's paradigm as compliant rising adults.

These calm eras have their dark side. The policies carried out during these quiescent turnings end up setting the stage for trouble later on, which brings about the social moment. For example, Silent (and Boomer) support for the Vietnam War was broad and strong in the beginning. But when the war started to go horribly wrong, the assumptions behind the GI paradigm began to be called into question, beginning the spiritual awakening and the development of a new Freedom paradigm. Discontent with Progress through Public Action deepened with Watergate and stagflation in the late 1970's. Candidate Ronald Reagan, sensing the changed zeitgeist, announced the end of the GI paradigm with his proclamation that "Government is the problem", that is, Progress through Public Action should be scrapped and replaced with a Freedom paradigm.

Paradigms are not well suited to deal with events two generations after they were formed. This is why they are social moments. The reason for this, the model tells us, is that the dominant generation has reached an age where they have the greatest power to shape the world in accordance with their paradigm. The GI generation reached this apogee in 1965. And it was just around this time that a GI president decided it was time to abolish Jim Crow in the South and to go for broke in Vietnam. This was the beginning of the crumbling of the Progress paradigm and the start of the spiritual awakening. Similarly, today should be the time of peak Boomer power and the beginning of the decline of the Self Actualization paradigm

What happens this time will be different from what happened in the sixties. Secular crises differ from spiritual awakenings in the way the old paradigm collides with reality. In secular crises, problems arise that cannot be successfully addressed by the old paradigm. In the previous secular crisis, it was the Freedom-type paradigm of President Hoover's Idealist generation that did not support the types of market interventions that could have averted catastrophe. Thus, they were not done and the result was the Great Depression. In the wake of the collapse of the 1990's bubble, authorities have avoided the mistakes made the last time. History has provided new problems, however. One is the virulent new strain of international terrorism made all too real on September 11, 2001. Another is the possibility that oil production will soon reach a peak, leading to energy shortages and soaring prices. The existing Freedom paradigm with its emphasis on individual empowerment, globalization and fluid borders, is inadequate for these problems, just as the paradigm of Hoover's generation was for the problems he faced. The task of the secular crisis is to come up with solutions to these problems. These solutions will help define the content of the next progressive paradigm.

In spiritual awakenings, it is the policies offered by elders expressing the old paradigm that are the problem. For example, the accommodative policies of the 1970's Fed were designed to maintain high employment in accordance with the Progress through Public Action paradigm. When they resulted in inflation and lower employment they were discredited and replaced by the highly restrictive policies of the 1980's designed to control inflation. In contrast with the 1970's, the goal of today's accommodative policies is to maximize the success of private investment and enterprise in accordance with the Self Actualization paradigm. That is, the motivation of the "easy" Fed today is no different from that of the 1931 Fed when they hiked rates to defend the gold standard. The 1931 policy was successful in terms of the operating Freedom paradigm of the day. It sought to preserve the value of the currency against gold, maintaining an even monetary field for investors and entrepreneurs. The fact that it probably made the Depression worse is irrelevant, the outcome for the public is of importance only for Progress paradigms, not Freedom ones.

Today, Fed policy has minimized the impact of current fiscal policy by igniting a "counter bubble" in real estate to offset deflation of the stock market bubble. It seeks to empower individuals by supporting Republican efforts to reduce taxes. The possibility that present Fed policy could result in a bad outcome is also irrelevant with respect to the Self Actualization paradigm.

Current fears about inflation, oil shocks and a repeat of 1970's stagflation are misplaced. Not only does the Kondratiev downwave argue against stagflation, but so does the paradigm. All these concerns are fears of a repeat of the troubles of the spiritual awakening, the conditions that gave rise to the Self Actualization paradigm. Like generals fighting the last war, the paradigm of the Boomers now in leadership positions is quite suitable for combating these problems of the past. If this is what we face, there would be no social moment. What is coming must be a surprise and something that would never be expected based on the current paradigm. One such change has been the disappearance of small government conservatives amongst Republican ranks and their replacement with religion-friendly, "big government" conservatives. These conservatives are progressives in the same sense as the Federalists were, including their own version of the Alien and Sedition Acts. They offer a program for the country, a Godly vision of progress. And like the Federalists, their vision involves plenty of goodies for special interests on their side. In contrast to the Republicans, the Democrats haven't offered their own vision of progress. What they have offered in recent elections is opposition to Republican-style progressivism: pacifism, fiscal conservatism and support for an open society--views that echo Jefferson in some respects.

There are differences too. The current Freedom paradigm contains a lot of progressive baggage from the last progress paradigm. It calls for people to be all they can be, to take risks to achieve success, to fulfill their innermost desires; yet at the same time, be protected form the unpleasant consequences of risk taking. On the Right it is failed CEOs walking away from massive capital destruction on their watch with their own fortunes intact due to stock option compensation and golden parachutes. On the Left it is practitioners of risky sex who demand society cure the disease their behavior gave them.

This combination is inherently unstable. In the past, progress paradigms called for protection from personal mishap, but also for some sacrifice of personal freedom in exchange. Freedom paradigms insisted that with freedom comes responsibility. It is possible that one of the tasks for this secular crisis will be to develop new formulations for paradigms, as happened in the aftermath of the Revolutionary secular crisis.

References:

1. Alexander, Michael A, "Secular Market Trends", Safehaven, March 16, 2001.

2. Alexander, Michael A, "The Kondratiev Cycle and Secular Market Trends", Safehaven, May 12, 2001.

3. Alexander, Michael A, "Inflation, Monetary Stimulation and Interest Rates - A Cycle Perspective Trends", Safehaven, March 7, 2005.

4. Alexander, Michael A, " American Political Cycles", Safehaven, November 29, 2004.

5. Strauss, William and Neil Howe, Generations: The History of America's Future 1584 to 2069, New York: Quill William Morrow 1991.

6. Alexander, Michael A, "Generations and Business Cycles - Part I", Safehaven, November 6, 2002.

7. Alexander, Michael A, Cycles in American Politics: how political, economic and cultural trends have shaped the nation, iUniverse, Inc., 2004.

8. Brokaw, Thomas, The Greatest Generation, New York: Random House, 1998.

9. Lifecourse Associates http://www.lifecourse.com/leaders

10. Strauss, William and Neil Howe, The Fourth Turning, New York: Broadway Books, 1997.

11. Alexander, Michael A, The Kondratiev Cycle: A Generational Interpretation, Writers Club Press, 2002.

Mike Alexander

Mike Alexander is the author of four books: (2000) Stock Cycles: Why stocks wont beat money market over the next 20 years; (2002) The Kondratiev Cycle: A generational interpretation; (2003) Retiring Rich: The ultimate IRA and 401(k) investing guide (now available in paperback under the title Investing in a Secular Bear Market) and (2004) Cycles in American Politics: How political, economic and cultural trends have shaped the nation.

Michael is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

Copyright © 2000 - 2008 Michael A. Alexander

Image rendition and html coding Copyright © 2000-2008 SafeHaven.com

« BullionVault.com -- Buy gold online - quickly, safely and at low prices »
« Honest Money: A History of U.S. Gold & Silver Currency -- by Douglas V. Gnazzo »

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »