Friday 28 November 2008

Kondratiev Comes Full-Cycle

TO hear the business reporters tell it, this "credit crunch", while serious, is not beyond the wit of the world’s economists to fix. With just a few billion – or trillion – more dollars, the financial markets will begin to free-up, and then, quite quickly, life will return to normal.

Our own Treasury officials confidently predict that New Zealand’s current recession will be shallow and short.

By 2010 – 2011 at the latest – we should all be out of the woods.

Let’s hope so.

Personally, I’m not quite so optimistic.

Why? Because earlier today I was reading about an economist who discovered the secret to predicting the economic future. And I’m not referring here to the immediate future – what’s going to happen to the stockmarket next week, or next month. No. I’m referencing a guy who was able to accurately predict what the global economy would look like ten, fifty, even a hundred years into the future.

His name was Nikolai Kondratiev.

In a saner, less bloodthirsty 20th Century, Kondratiev would have been celebrated as one of the Soviet Union’s greatest economists, and hailed throughout the world as the scholar who first discerned the long waves of economic expansion and contraction that periodicize the history of capitalism.

In the 20th century that actually happened, Kondratiev enjoyed only a few years of productive endeavour before falling victim to the political pathologies of Stalinism, dying in 1938, at the age of just 46, in front of an NKVD firing-squad.

His immediate offence was being too closely associated with the "New Economic Policy" (NEP) – an essentially social-democratic response to the abject failure of Lenin’s "war communism", which had brought the Soviet economy to its knees. Kondratiev believed that the development of heavy industry in the Soviet Union should only be attempted after the successful modernisation of its agriculture. Only when all Russians had enough to eat, and only upon the base of a thriving light industrial sector, producing agricultural equipment and consumer goods, should the growth of heavy industries be encouraged. Such thinking was anathema to Stalin and his henchmen, and Kondratiev was driven from his post as head of the Institute of Conjuncture and hauled off to the gulag.

His real crime, however, was to call into question the whole notion that economies could be made to perform according to the conscious interventions of human planners.

In his studies of capitalism he had discerned patterns of development that contradicted the linear notions of economic growth then favoured by his Soviet colleagues. Rather than progressing in a straight line, the evolution of the global capitalist economy appeared to describe a regular wave pattern, with a cycle of approximately fifty years.

For a detailed description of Kondratiev’s theories, follow the links here and here. Suffice to say that he and his followers, which included the great Czech-American economist Joseph Schumpeter, broke down the development of the global capitalist economy into five distinct waves of development.

The first wave, beginning in the late 18th Century was generated by the invention of the steam engine and the growth of factory-spun textiles.

The second wave commenced in the 1830s with the worldwide expansion of steam-powered transportation – especially railways.

The third wave got underway in the 1880s, driven by the growth of the steel, electricity, chemical and heavy-engineering industries.

The fourth wave witnessed the rise of the petrochemical, automobile manufacturing, and other mass production industries, which gathered momentum in the years immediately prior to World War I.

The fifth wave (our present) began in the 1970s with the revolution in telecommunications and information technology – giving birth to the age of the personal computer, cellphones, and the Internet.

Kondratiev’s waves have four distinct phases: Improvement – when the new inventions revolutionise the way people work and live. Prosperity – when the new technology has had time to bed-in and the wealth it is generating flows in all directions. Recession – when innovation slows and growth begins to falter. Depression – when wealth generation ceases and the economy collapses.

Kondratiev’s seminal work, The Major Economic Cycles, was published in 1925 – at the height of the Roaring Twenties – but working from his basic premises he was able to predict the Great Depression a full five years before it happened.

And Kondratiev’s foresight didn’t end with his prediction of the Slump. By plotting his fifty-year cycles along an axis divided into years, his disciples were confident of another steep slide into recession and depression in the late-1970s and 80s, and yet another big crash, timed for, yes, you guessed it, the start of the second decade of the 21st Century.

Historically, the contractionary phase of the Kondratiev Cycle tends to last not just for one or two years, but for anything from ten to fifteen years.

Kondratiev’s theory would suggest that times are about to get a whole lot worse before they get better.

Hence my pessimism.


Steve said...

It is now well over a year since the start of the sub-prime crisis. The first 12 months were characterised by the city "experts" continually declaring that the worst was over. Now the mantra has shifted to "the recession may last into 2009 and possibly beyond".

Meanwhile Freddie Mac & Fannie Mae, by far and away the biggest mortgage lenders in the US, have been bailed out and nationalised. Lehman Brothers has collapsed. AIG, Citigroup, Northern Rock & Royal Bank of Scotland have been effectively nationalised by their respective governments to prevent catastrophic systemic failure. The three largest remaining car manufacturers in the US will likely be bankrupt by early next year. World share markets have dropped by around 50% and house prices in most of the western world are falling significantly for the first time in about 20 years

These developments have been compared by many commentators to what happened in the 1930s but the idea is sold that it is different this time as governments have learnt from the lessons of the Great Depression. I agree - it is different this time but for the following reasons.

1) Most peoples pensions, and hence their sense of financial security, are inextricably linked to
the value of world sharemarkets - they weren't in 1929.

2)Many people have borrowed at unprecendented levels to invest in residential housing on the assumption that house prices always rise. The value of a persons house, or investment properties, is inextricably linked to their sense of financial security. Again this was not the case in 1929.

3)The ammount of leverage in the financial system is huge when compared to 1929.

Chris, your look at Krodatiev's analysis certainly supports my own pessimistic view that we are entering a very deep recessionary period. I believe this is likely to completely reverse the belief in unregulated free market capitalism that has been the hallmark of western economies for the last 20 years.

Anonymous said...

Good Lord. You agree with most reputable economists then Chris. The question begged now is, what opportunity does this give the vast majority of the world's population who produce the "wealth" now "at risk" to assert their right to a more equitable share?
I await your considered reply.....

Anonymous said...

Everything Steve said. Most of the rational economists in the USA are very worried.

Carol said...

Chris’s blog entry, about the cyclic nature of capitalism and its relationship to technological change, has given me much food for thought. Kondratiev’s theory, is very depressing, not just because it predicts that the world is entering a very difficult period, especially for the less wealthy and powerful, but because it suggests the inevitability of the perpetuation of a continually morphing, and always exploitative, economically divisive, and socially destructive capitalist system.

Kondratiev’s theory also raises questions about the nature of any current technological development that will be harnessed to fuel the next re-birth of capitalism. It seems to me that the most significant developing technological form is biotechnology, which covers a range of possible applications and areas of research. As well as genetic engineering, cosmetic surgeries, and new forms of medical intervention, there are potential uses for control and manipulation of populations through microchip implants, all of which are in the process of being developed.

But these chaotic moments of economic down-turn also widely expose the fracture points, weaknesses, social divisiveness and destructive potential of capitalism. In so doing it highlights possible ways to challenge and change an inherently unfair system. It may be a good moment to promote changes that will benefit the majority of people, as for instance with the proposals by some for a green new deal.

Anonymous said...

I first read about Kondratiev in a science fiction book. It was in a collection of articels and short stories by John Barnes in it he describes how he uses Kondratiev's cycles to make predictions about the future to set dates and such for his fiction. I think a discussion of Marx's idea of fictitious captial is also relevant today.

Anonymous said...

Very interesting post. Building on what Steve said, I've been thinking about whether you can apply Kondratiev’s analysis to today and that whilst it seems obvious that one can see cyclical patterns in the expansion and contraction of capitalism, his model seems to be geared to a linear progression of western capitalism and roughly comparable economic positions within states – meaning that extra growth came from within those states.

I’m not so sure it fits as well with the new world and rapidly expanding ‘eastern’ or developing states. Seems like the turbo-capitalism going on there might offset the predicted long period of global recession/depression (and yes I know they’re experiencing the downturn too – but they’re still growing pretty quickly). Extra global growth is coming from within developing economies that are buying the products and services of developed economies.

Demand for increasing standards of material wealth in east and south East Asia might force a realignment of the theory.

Anonymous said...

'Demand for increasing standards of material wealth in east and south East Asia might force a realignment of the theory.'
I very much agree on this point. While we do not know precisely what underlies the K cycle it seems that it follows waves of innovation, consumption, and then satiation, under capitalist motives for production, a macro level process similar to individual humans buying the next 'good thing' then getting tired of it, then a period of latency before the next innovation-production-consumption cycle.

But as you point out the emerging two economic worlds situation may well disrupt the neatness of Kondratiev's theory.