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That Sunspot Could Make You a Killing

Stephen Mihm, an associate professor of history at the University of Georgia, is a contributor to the Bloomberg View. Follow him on Twitter at @smihm.
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To divine where the markets are headed, you can dissect the latest jobless figures, Fed meeting minutes and other modern methods. But if you don't want to run with the herd, this is an auspicious time to study sunspots.

The largest sunspot observed in 24 years, AR2192, is expected to come back to face Earth today, after being obscured for almost a month by the rotation of the sun. It’s one of many such phenomena, each an area of intense magnetic disturbances capable of throwing off solar flares and clouds of particles that, theoretically at least, could short out electronic equipment on our planet.

Astronomers have long recognized that sunspots come and go in cycles. We’re at the peak of one of these cycles, and activity is set to decline over the next 11 years. Putting aside the infinitesimal risk of magnetic disturbances that wipe out civilization as we know it, this event probably seems to have only the remotest connection to the future direction of the Dow Jones Industrial Index behavior or gross domestic product.

Yet William Stanley Jevons, one of the most brilliant minds of the 19th century, would respectfully disagree.

Jevons, a British economist best known for helping launch the “marginal revolution,” was also one of the first to use statistics and mathematical approaches to the study of economic life. Less well-known, though, is his theory of direct correlations between sunspots and the business cycle.

Jevons was following in the footsteps of Sir William Herschel, an otherwise accomplished British astronomer. Around 1800, Herschel's mining of historical data led him to conclude that sunspot activity correlated neatly with bumper crops of wheat and, by extension, lower prices. Conversely, a lack of sunspot activity seemed to correlate with poor crops and high prices.

Herschel published his research, only to have it savaged in the Edinburgh Review as a “grand absurdity.” The magazine declared that “since the publication of Gulliver’s voyage to Laputa, nothing so ridiculous has ever been offered to the world.”

The ridicule didn't deter Jevons, who postulated his own sunspot theory in 1875 as he tried to answer a rather serious question: Why did the economy seem to oscillate between booms and busts in a rather predictable 10-year cycle?

“Assuming that variations of commercial credit and enterprise are essentially mental in their nature,” he wrote, “must there not be external events to excite hopefulness at one time and disappointment and despondency at another?” Or, as he noted elsewhere, “I can see no reason why the human mind, in its own spontaneous action, should select a period of just 10.44 years to vary in.”

Jevons laid out his theory beginning with the “The Solar Period and the Price of Corn,” which appeared in 1875. He honed this idea over the succeeding decade, publishing articles such as “Commercial Crises and Sunspots” that sought to explain what he called “the mysterious periodicity” of commercial crises.

Jevons had a particular interest in how the sunspot cycle might affect agricultural production in far-flung parts of the British Empire, especially India. Writing of the connections between “the cotton-mills of Lancashire, the paddy-fields of India, and the spots on the sun,” Jevons speculated that sunspots created weather conditions on Earth. These, in turn, resulted in bumper crops, enabling the world’s poor to spend the money they would have spent on high-priced food on British textiles instead.

Jevons believed that just as industrialists ramped up production in response to heightened demand, fueling economic growth, the sunspot cycle would wane, hitting faraway nations the hardest. This would cripple the British economy: “When our manufacturers are prepared to turn out a greatly increased supply of goods, famines in India and China suddenly cut off demand.” 

This would leave manufacturers deep in debt and with much excess capacity, triggering a commercial crisis. From the sun, Jevons declared grandly, “we derive our strength and our weakness, our success and our failure, our elation in commercial mania, and our despondency and ruin in commercial collapse.”

Jevons was aware that his model had flaws. As he conceded in 1878, “the evidence which I have so far found would have no weight if standing by itself.” Nonetheless, he plowed ahead, even resorting to fiddling with the numbers in a desperate attempt to make commercial crises conform to the sunspot cycle -- or vice versa.

His obsession brought him ridicule and ended up tarnishing what was otherwise a stellar scholarly career. Jevons was especially wounded by the academic criticism. The most amusing was a squib published in the Journal of the Royal Statistical Society entitled “University Boat-Races and Sunspot Cycles,” which claimed, with mock seriousness, to explain the outcome of rowing competitions between Oxford and Cambridge.

Jevons's theory never found a receptive audience, save for a handful of like-minded theorists.

But Jevons was by no means the last economist to believe he had cracked the code of the business cycle. In fact, much of his approach, which was reasonably rigorous and mathematical, foreshadowed the techniques of 20th-century economic forecasters such as the eccentric Roger Babson, who successfully predicted the crash of 1929.

These “fortune tellers,” as historian Walter Friedman has described them, were no less confident of their ability to prophesy the future and no less susceptible to falling in love with theory.

And traces of the practice of haruspicy, the ancient art of predicting the future from animal entrails, haven't been entirely eradicated from the dismal science to this day.

Economists have an astonishingly weak record of predicting recessions and other fluctuations of the business cycle, according to several studies by Prakash Loungani. Reviewing consensus surveys, he found that about 95 percent of economists failed to foresee a recession a year in advance. In some cases, a majority of economists have failed to identify recessions well after they have begun.

With numbers like that, the odds might even favor sunspots as a way of predicting what will happen in the economy. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Stephen Mihm at smihm1@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net