Kondratiev : Wrong Time, Wrong Place

by | Jul 22, 2014

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Nikolai Dmitriyevich Kondratiev, Wave Theorist. Born March 1892 in Kostroma, near Moscow. Shot by Josef Stalin in September 1938


 

Cyclical theory pioneer

The early Soviet Union didn’t produce many theorists with anything worthwhile to say about capitalism. Most simply scoffed that the internal contradictions of the profit system would inevitably bring the West crashing down without even a push. But Kondratiev, a key figure in Lenin’s New Economic Policy team (1917), was later to find himself a cult figure in the West, thanks to an introduction from Joseph Schumpeter.

Kondratiev was, of course, dead by then – having fallen out with Stalin and having spent a decade in the gulag before his eventual execution. But his rather crude Kondratiev Wave theory, which tries to explain the so-called ‘long wave’ behaviour of economies, still still gets a respectful nod from academia today.

So it was a half-baked idea to begin with?

Give the man a chance. Back in 1917, hardly anybody had achieved anything much more than empirical observations of economic cycles. Keynes had yet to start work on his counter-cyclical ideas, and Ben Graham’s inclination was to suffer cyclical turns rather than try to second-guess them. There simply hadn’t been much data to go on.

Kondratieff’s theory said, essentially, that industrialised economies tend to move in 50 to 60 year ‘long waves’ of boom and depression, which are overlaid with shorter cycles – the most important drivers being the technology cycle and the shorter credit cycle. Predictably, the arcane ‘wheels within wheels’ nature of this cyclical system has a pseudo-technical appeal which still gets “supercycle” commodity buffs all sweaty today. Now, if only they could all agree on what stage of the various cycles we’re at, we’d be getting somewhere….

But we digress…

As far as Kondratiev was concerned, the great mover behind cyclical behaviour was technological innovation. He parcelled up Britain’s experience in terms of the Industrial Revolution (peaking in 1771), the arrival of the railways (1829), the steel and heavy engineering boom (1875), and the arrival of big oil, cars and mass production (1908 onwards). More recently, his acolytes count the age of information and telecommunications (starting 1971) as the latest of these innovation waves. All quite nicely spaced, time-wise.

Kondratiev’s ideas about credit cycles are closer to our own standard perceptions – essentially, the boom-bust sequence of growth, over-supply, falling demand and slump, followed by eventual recovery and regeneration.

Sounds good

It wasn’t. Kondratiev’s tidy British model (a fast-moving industrialised economy) was one thing, but the relatively agricultural French model or the feudal Japanese model were quite different – and America’s growing economy was always in a different cyclical place from everybody else. Kondratiev’s world picture became a cacophony of clocks running fast and slow, and it proved hopeless trying to assemble a coherent global view. Today’s globalised marketplace requires a more systematic predictive system, which is probably why Kondratiev fell out of favour.

Still a great way to start a fight

You’ll still find long wave fans explaining why the 1990s dotcom mania was an expression of Kondratiev’s prediction of a late “frenzy” stage, and why this always leads to speculative excesses before the cycle moves heavily downward. The 2007/8 banking crisis was inevitable, then. And bond yields? Kondratiev says they’re about to soar. Oh yes he does. Sorry chaps.

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