Innovation, Real Primary Commodity Prices and Business Cycles

Abstract

We follow Schumpeter’s approach to analyzing price movements as set out in Business Cycles. While Schumpeter emphasizes movements in prices of finished manufactured goods, our focus is on the real prices of primary commodities, which are measured by the price of particular commodities or an index of commodity prices relative to an index of prices of manufactured goods. Our analysis leads to an expectation of a long-run downward trend for the real (or relative) prices of primary commodities with a distinctive cyclical pattern, rising in the upswing of the Kondratieff cycle and declining by a larger amount in the downswing. This characterization of price movements applies in general, but is subject to disturbance by history. We demonstrate the role of primary commodities in the process of economic development using a long historical series of prices of twenty-five primary commodities and a corresponding series for an index of prices of manufactured goods. We provide examples of the role of innovations in both technology and institutions in driving trends over particular periods for particular commodities.