Kondratiev wave

A rough schematic drawing showing growth cycles in the world economy over time according to the Kondratiev theory.

In economics, Kondratiev waves (also called supercycles, great surges, long waves, K-waves or the long economic cycle) are supposedly cycle-like phenomena in the modern world economy.

It is claimed that the period of the wave ranges from forty to sixty years, the cycles consist of alternating intervals between high sectoral growth and intervals of relatively slow growth.

Unlike the short-term business cycle, the long wave of this theory is not accepted by current mainstream economics.

History of concept

The Soviet economist Nikolai Kondratiev (also written Kondratieff) was the first to bring these observations to international attention in his book The Major Economic Cycles (1925) alongside other works written in the same decade. Two Dutch economists, Jacob van Gelderen and Samuel de Wolff, had previously argued for the existence of 50 to 60 year cycles in 1913. However, the work of de Wolff and van Gelderen has only recently been translated from Dutch to reach a wider audience.

Kondratiev's ideas were not supported by the Soviet government. Subsequently he was sent to the gulag and was executed in 1938.

In 1939, Joseph Schumpeter suggested naming the cycles "Kondratieff waves" in his honor.

Since the inception of the theory, various studies have expanded the range of possible cycles, finding longer or shorter cycles in the data. The Marxist scholar Ernest Mandel revived interest in long wave theory with his 1964 essay predicting the end of the long boom after five years and in his Alfred Marshall lectures in 1979. However, in Mandel's theory, there are no long "cycles", only distinct epochs of faster and slower growth spanning 20–25 years.

The late-2000s financial crisis has increased an interest in the theories of long economical cycles as a potential explanation of its cause.

The historian Eric Hobsbawm wrote of the theory: "That good predictions have proved possible on the basis of Kondratiev Long Waves—this is not very common in economics—has convinced many historians and even some economists that there is something in them, even if we don't know what." [6]

Characteristics of the cycle

Kondratiev identified three phases in the cycle: expansion, stagnation, recession. More common today is the division into four periods with a turning point (collapse) between the first and second phases. Writing in the 1920s, Kondratiev proposed to apply the theory to the 19th century:

1. 1790–1849 with a turning point in 1815.

2. 1850–1896 with a turning point in 1873.

3. Kondratiev supposed that, in 1896, a new cycle had started.

The long cycle supposedly affects all sectors of an economy. Kondratiev focused on prices and interest rates, seeing the ascendant phase as characterized by an increase in prices and low interest rates, while the other phase consists of a decrease in prices and high interest rates. Subsequent analysis concentrated on output.

Explanations of the cycle

Technological innovation theory

According to the innovation theory, these waves arise from the bunching of basic innovations that launch technological revolutions that in turn create leading industrial or commercial sectors. Kondratiev's ideas were taken up by Joseph Schumpeter in the 1930s. The theory hypothesized the existence of very long-run macroeconomic and price cycles, originally estimated to last 50–54 years.

In recent decades there has been considerable progress in historical economics and the history of technology, and numerous investigations of the relationship between technological innovation and economic cycles. Some of the works involving long cycle research and technology include Mensch (1979), Tylecote (1991), The International Institute for Applied Systems Analysis (IIASA) (Marchetti, Ayres), Freeman and Louçã (2001) and Carlota Perez.

Perez (2002) places the phases on a logistic or S curve, with the following labels: beginning of a technological era as irruption, the ascent as frenzy, the rapid build out as synergy and the completion as maturity.

Demographic theory

Because people have fairly typical spending patterns through their life cycle, such as schooling, marriage, first car purchase, first home purchase, upgrade home purchase, maximum earnings period, maximum retirement savings and retirement, demographic anomalies such as baby booms and busts exert a rather predictable influence on the economy over a long time period. Harry Dent has written extensively on demographics and economic cycles. Tylecote (1991) devoted a chapter to demographics and the long cycle. 

Debt deflation

Debt deflation is a theory of economic cycles, which holds that recessions and depressions are due to the overall level of debt shrinking (deflating): the credit cycle is the cause of the economic cycle.

The theory was developed by Irving Fisher following the Wall Street Crash of 1929 and the ensuing Great Depression. Debt deflation was largely ignored in favor of the ideas of John Maynard Keynes in Keynesian economics, but has enjoyed a resurgence of interest since the 1980s, both in mainstream economics and in the heterodox school of Post-Keynesian economics, and has subsequently been developed by such Post-Keynesian economists as Hyman Minskyand Steve Keen.

Modern modifications of Kondratiev theory

There are several modern timing versions of the cycle although most are based on either of two causes: one on technology and the other on the credit cycle.

Additionally, there are several versions of the technological cycles, and they are best interpreted using diffusion curves of leading industries. For example, railways only started in the 1830s, with steady growth for the next 45 years. It was after Bessemer steel was introduced that railroads had their highest growth rates; however, this period is usually labeled the "age of steel". Measured by value added, the leading industry in the U.S. from 1880 to 1920 was machinery, followed by iron and steel.

The technological cycles can be labeled as follows:

4. The Industrial Revolution—1771

5. The Age of Steam and Railways—1829

6. The Age of Steel and Heavy Engineering—1875

7. The Age of Oil, Electricity, the Automobile and Mass Production—1908

8. The Age of Information and Telecommunications—1971

Any influence of technology during the cycle that began in the Industrial Revolution pertains mainly to England. The U.S. was a commodity producer and was more influenced by agricultural commodity prices. There was a commodity price cycle based on increasing consumption causing tight supplies and rising prices. That allowed new land to the west to be purchased and after four or five years to be cleared and be in production, driving down prices and causing a depression, as in 1819 and 1839. By the 1850s the U. S. was becoming industrialized.

Other researchers

Several papers on the relationship between technology and the economy were written by researchers at the International Institute for Applied Systems Analysis (IIASA). A concise version of Kondratiev cycles can be found in Robert Ayres (1989) in which he gives a historical overview of the relationships of the most significant technologies. Cesare Marchetti published on Kondretiev waves and on diffusion of innovations. Arnulf Grübler’s book (1990) gives a detailed account of the diffusion of infrastructures including canals, railroads, highways and airlines, with findings that the principal infrastructures have midpoints spaced in time corresponding to 55 year K wavelengths, with railroads and highways taking almost a century to complete. Grübler devotes a chapter to the long economic wave.  

Korotayev et al. recently employed spectral analysis and claimed that it confirmed the presence of Kondratiev waves in the world GDP dynamics at an acceptable level of statistical significance. Korotayev et al. also detected shorter business cycles, dating the Kuznets to about 17 years and calling it the third harmonic of the Kondratiev, meaning that there are three Kuznets cycles per Kondratiev.

More recently the physicist and systems scientist Tessaleno Devezas advanced a causal model for the long wave phenomenon based on a generation-learning model and a nonlinear dynamic behaviour of information systems. In both works a complete theory is presented containing not only the explanation for the existence of K-Waves, but also and for the first time an explanation for the timing of a K-Wave (≈60 years = two generations).

A specific modification of the theory of Kondratieff cycles was developed by Daniel Šmihula. Šmihula identified six long-waves within modern society and the capitalist economy, each of which was initiated by a specific technological revolution:

• 1. (1600–1780) The wave of the Financial-agricultural revolution

• 2. (1780–1880) The wave of the Industrial revolution

• 3. (1880–1940) The wave of the Technical revolution

• 4. (1940–1985) The wave of the Scientific-technical revolution

• 5. (1985–2015) The wave of the Information and telecommunications revolution

• 6. (2015–2035?) The hypothetical wave of the post-informational technological revolution

Unlike Kondratieff and Schumpeter Šmihula believed that each new cycle is shorter than its predecessor. The main stress is put on technological progress and new technologies as decisive factors of any long-time economic development. Each of these waves has its innovation phase, which is described as a technological revolution and an application phase in which the number of revolutionary innovations falls and attention focuses on exploiting and extending existing innovations. As soon as an innovation or a series of innovations becomes available, it becomes more efficient to invest in its adoption, extension and use than in creating new innovations. Each wave of technological innovations can be characterized by the area in which the most revolutionary changes took place ("leading sectors").

Every wave of innovations lasts approximately until the profits from the new innovation or sector fall to the level of other, older, more traditional sectors. It is a situation when the new technology, which originally increased a capacity to utilize new sources from nature, reached its limits and it is not possible to overcome this limit without an application of another new technology.

For the end of an application phase of any wave there are typical an economic crisis and stagnation. The economic crisis in 2007–2010 is a result of the coming end of the "wave of the Information and telecommunications technological revolution". Some authors have started to predict what the sixth wave might be, such as James Bradfield Moody and Bianca Nogrady who forecast that it will be driven by resource efficiency and clean technology.[22] On the other hand, Šmihula himself considers the waves of technological innovations during the modern age (after 1600 AD) only as a part of a much longer „chain“ of technological revolutions going back to the pre-modern era.[23] It means he believes that we can find long economic cycles (analogical to Kondratiev cycles in modern economy) dependent on technological revolutions even in the Middle Ages and the Ancient era.

Criticism of long cycles

Kondratiev waves associated with gains in IT and health with phase shift and overlap

Long wave theory is not accepted by most academic economists, but it is important for innovation-based, development, and evolutionary economics. Among economists who accept it, there has been no universal agreement about the start and the end years of particular waves. This points to a major criticism of the theory: that it amounts to seeing patterns in a mass of statistics that aren't really there.

Moreover, there is a lack of agreement over the cause of this phenomenon. Health economist and biostatistician Andreas J. W. Goldschmidt searched for patterns and showed in 2004 phase shift and overlap of the so-called Kondratjev cycles of IT and health (shown in the figure). He says that historical growth phases in combination with key technologies does not necessarily imply the existence of regular cycles in general. Goldschmidt is in the opinion that different fundamental innovations and their economic stimuli do not exclude each other, they mostly vary in length, and their benefit is not applicable to all participants in a "market“.

During development, GE passed several stages, according to selecting the next types of economies:

1. Appropriating economy

2. Renewable economy – the basis content is in active influence on nature. The component in industrial type. About existing of this type of economy attests giant industrial complexes, which changing character of production, first of all, and environmental face of planet at all. The process of production growing is using huge quantity of resources, poisoning environment. That in 70^th was brought forward conceptions of so called “zero growth”, which allowed stabilization of production development and holding on the same level. This theory didn’t confirm itself (the Western countries didn’t reduce temps and values of production). But it doesn’t remove the problem of economic growth.

3. Industrial type of economy getting close to its end. Examples:

• more faster the natural resources of industrial development are getting down; humanity consume food and resources in 1000 times more as there’s resources in virgin nature

• anthropogenic pressure on environment is growing

• the crisis phenomenon in economy and society (have an impact on productive forces, production relations, policy, ideology)

Most acutely this crisis phenomenon took place in countries of former USSR, Central and Southern Europe. This was, caused by the industrial transformation of modern level, which wasn’t held there, totalitarian system was progressive form of ownership and types of production. (these crisis didn’t touched developed countries, due to accumulated forces for transition to new type of economy). All this factors influenced on the fact, that countries of Central and Eastern Europe had inflation, unemployment, exacerbated other economic and social problems.

The crisis covered developing countries too. Poverty, hunger, diseases, illiteracy, lack of resources, imbalance of economy, availability of “past” types of economic and political life. Approximately, 1 billion of the people are suffering from malnutrition. 40 000 are deign from hunger every day.

There’re 77% of world’s population living in developing countries, as scientists – 13%, but education expenditures is only 15%. External debt is 1.5 trillion USD. Nowadays, the differentiation among new independent states is occurring, basing on difference of developing factor provision. So, having huge oil reserves countries (OPEC countries, Persia Gulf countries, etc.) have used favorable situation on world’s energy markets and grew; other countries have effectively used their own internal markets and natural resources (Argentina, Brasilia); another – foreign finance help, profitable economic-geographical position and national manufacturing traditions (South Eastern Asia) – that’s why all of them stand on the way of industrial development.

Crisis processes had an influence on Western countries: market mechanism give possibility to adopt for changes in global economy and keep high level of manufacturing, life conditions, etc. But these countries, due to internal reasons and deep relations with global economy, start to fill global crisis approaching (there’re some results – unemployment growth, external and internal imbalance on U.S. economy) Therefore, crisis phenomenon extends for all countries without exceptions. Also they extended on relations between the countries: aggravating contradictions in relationship system among Northern and Southern countries (as the result of huge differences in economic development of the countries, developing countries are more often displacing to periphery of global economy). The relations between East-South are activating now. Upheavals in economic relations are having place among East-West.

Among developing countries the problems are accumulating as erupts conflicts between South-South (India-Pakistan in 1998, Gulf War in 1990).

Therefore, those were an examples of crisis of renewable economy exist and it’s modern forms – industrial economy.

What are the features of crisis?

The features of industrial economy crisis:

1 maximization of economic development, but not the optimization

2 dependence of humans from the system of machines, technocratic approaches domination and weakening of anthropogenic in socio-economic development.

3 blending and interweaving of civilization and formation contradictions

4 problems of surviving of humanity as biologic species escalates contradictions of industrial development.

As follows, GE is on the way of new type economy and new civilization formation. That will be: post-industrial society and noosphere-space civilization (Vernadskij) – prior way of science evolution, wide intellectualization of production. But now we have transition epoch. This transition epoch generates information type of economy. The development of this kind economy will relate with extensive way of Earth space and other planets of Solar system development; ascension of human to the highest stage (the human which creating the world) – this will require colossal investments into education, culture, extension of international cooperation in these branches.

To information type of economy all countries will implicate and they will have the next changes in economy and social life:

1 transition from energetic to information sources of activity (the creation of economy, not depending on environment – autotrophic economy)

2 production and social life informatisation, prevalence of modern technologies and scientific inventions in industrial area.

3 the main form of accumulation will become not accumulation of tangibles, but knowledge.

4 the next labor division is possible: separation of information activity into specific spheres of socio-economic life. Than electonization of production and way of life will occur (the human will release from manufacturing); the requirements for qualification of educational life will be lifted.

5 dematerialization of production, energy and resource-intensive reducing; the strengthening role of services

6 expansion of relation between the countries: processes of internationalization lead to union of international economic system.

Together with these processes in sphere of production the social relations will change too, and the first will be the forms of social property for means of production. Property for means of production lost their value in general, because, the main resources could become intellectual resources. So, the primary element of property of new economic system property for workforce and intellectual potential will occur.

During transition period information type of economy is. But will be the same for all countries of the world?

• Less developed countries are industrial models with elements of before industrial forms

• The states of forms USSR, central and Southern Europe are transition economies

• In developed countries – postindustrial model of information-technological type is.

The main global trends in GE will be dictated by the last information-technological model. The features of this model are: transition from energetic to information basis, from material to postmaterial society, from environment exploitation to human mind usage, from system of reproduction to system of art. Exactly in this order the policy of developed countries is developing now (investment and structural policy). For example: in the U.S., Japan, Western Europe and South-Eastern Asia investment to informatics are bigger than to such branches of economy as energetics, processing industry. The services sector is most developed in these countries and stands for 70-75%. In economy of these countries the flexible forms of property and managing are existing; the economic advisability is defining moment in structural property formation (but not some stereotypes). The primary social criteria of these countries are – life quality, system of interests protection of society, providing social guaranties, strengthening democracy institutions, guarantee real human rights.

About trends of strengthening intellectualization in these countries attest the next data: in Japan in 1973 program “About intellectualization of national economy and population capability development” was implemented, which started wide process of social work intellectualization. Such king of programs took place in the U.S., France, Great Britain, Sweden. In leading countries net weight of employment with mainly art character of activity increased from 20% in 1960 to 46% in 1988.

In the U.S. accumulation of human capital exceed capital accumulation in material form: the value of human capital of the U.S. was equal to 44 trillion 584.7 billion USD, in the same time corporation actives were equal to 12 trillion 770 billion USD.

The formation of XXI century economy is on the terms of technological revolution, which is characterized by the next features:

• Depreciation of goods and quality increasing

• Fast improvement of technical characteristics machine systems and technological processes (for example, in Japan renewal of microelectronic systems components occur every 2-3 month)

• Social and political perception of new technological systems

• Conformity of economic environment to properties of new technical systems

• Strong influence of innovations for the whole economic system

In information-technological society question of regulation mechanisms and managing of economical processes is also important

There’re 4 paradigms of modern economic sciences, regulative mechanism of management of economic processes are based on: neoclassicism, (economic liberalism), Keynesianism, institutionalism, Marxism. But any of them is dominating in global scale. Nevertheless, leader positions are have two economic systems have: 1) economic liberalism (typical for the U.S., Great Britain and others countries of Western Europe); 2) Keynesianism, implementing in South-Eastern Asia, named “model of development strategies” or “developmentalism”.

The model of economic liberalism appearing fully and most effective operating in developed market relations and appropriate legislative, monetary, bank institutions. These forms of economic development are mostly self-regulated, based on interaction of market forces and instruments: competition, prices, currency rates, taxes. They occur minimal state intervention into economic life.

Developmentalism is economic policy, based on state intervention in economic processes, protection of national manufacturers interests by high customs tariffs. The parliament of such kind of countries determines priority branches, the policy as supporting policy is existing too. Such variant of economy development was successful implemented in Japan, later in Hong-Kong, Singapore, Taiwan, South Korea and other countries in South Eastern Asia. In economics of XXI century new systems of regulation will exist, which will be characterized by flexibility, openness and dynamism. Such economy will provide economic liberty and create harmonious environment.

Common features of GE

1. Contraditions and features of GE

2. The structure of GE and its basic characteristics

1. GE is the complex of different national economies, which can take a part in International Labor Division, which are possible to be united into typical modern economic systems: market (capitalism), non-market (socialism, communism), transition, etc.; its an international economic system.

Individual demands are on the basis of GE development, which are forming the society. These demands on the modern stage are complicated and growing. But diversity of demands are detecting by way of life, behavior stereotype, psychology, religion, habits; demands are limiting by economic potential, and during for the last years – ecological requirements.

There’re some contradictions in GE development on the modern stage: 1) natural resources depletion; 2) population growing. Solving of this contradiction needs searching for the new ways of economy development, which can consume new type of resources, also regulates correlation between population and quantity of consuming wealth, on practice.

This contradiction in all over the world influence on the fact that all countries want to move their economies into new state. The main feature of GE is: 1) the global transformation of economic systems. The another feature is: 2) Inside GE strengthening of interaction and whole interdependence of national economies is, basing on International Labor Division deepening, whole economic life (globalization); 3) Inside GE the intensify of regional integration processes is growing. That leads to appearance of huge economic areas with large scales of production; to global market segmentation as global economy owing to creation close trade and economic structures and integration structure creations.

4) GE has an influence on growing rates, dynamic, proportion of single countries economic development, as the elements of GE

5) GE has influence factors. Nowadays socio-geographical have decisive impact; intellectual information, developing under Science-Technological Progress have also great influence

6) Nowadays, the new model of GE is forming: from industrial model, GE transits to post-industrial, is in priority of knowledge, human capital, “mind economy’ creation. In perspective GE, human will conduct Earth space resources into production processes.