Tuesday, 3 June 2008

Kondratiev's Long Waves

Nikolai Kondratieff was a Russian statistician and economist (1892-1938). He developed a theory that capitalism moves in long waves of rise and fall. These long waves are themselves related to the other cycles operating within the capitalist economy such as the business cycle, as well as other cycles affecting, for example, commodity prices, interest rates, the gold price and gold production etc. all of which are interrelated. A very good background on the life of Kondratieff, and his work including the debates he had with Trotsky, Preobrazhensky, Schumpeter and others in the 1920’s in respect of his theory is given here.

Kondratieff by Louca

I intend here to look at Kondratieff’s thesis in relation to the criticism of it by economists of different schools, and the work of others such as Schumpeter who used it as part of their analysis of the Business Cycle, of those that try to explain the Long Wave through innovation or other exogenous factors such as the opening up of new markets or territories, and finally to look at whether a Kondratieff cycle can be identified in current trends, and if so what consequences flow from that. A link to Kondratieff’s essay is given in the above link, but English versions are also available in the Review of Economic Statistics 1935, in a collection of his works published in 1998 by Pickering and Chatto, and in a slightly abridged version in the July 1978 Lloyds Bank Review (Issue 129). Kondratieff’s theory was first published in a volume entitled “Problems of Economic Fluctuations” by the Institute for Business Cycle Research which was actually established by economists of the Austrian School.. At the time of its publication this association was not so strange as at that time there was considerable overlap between economists of the Austrian School of Bohm-Bawerk and Marxist economists. Although, Bohm-Bawerk was in his time one of Marx’s harshest critics, his criticism of Marx’s theory, as Hilferding demonstrated, was based not just on a misunderstanding of Marx’s theory, but on a criticism of that aspect of Marx’s work set out in Vol. I of Capital. Most of Bohm-Bawerk’s criticisms were in fact dealt with by Marx himself in Vol. III of Capital. Moreover, despite that criticism Bohm-Bawerk was moved to comment,

“Marx has become the apostle of a wide circle of readers, including many who are not as a rule given to the reading of difficult books.” (Karl Marx and the Close of his System”)

And it was one of the members of Bohm-Bawerk’s private seminar, von Bortkiewicz who provided the first mathematical solution to Marx’s Transformation Problem outlined in Vol. III of Capital. These seminars were attended by both Austrian and prominent Marxist economists such as Rudolph Hiferding. Hilferding was to provide a thorough refutation of Bohm-Bawerk’s critique of Marx – “Karl Marx and the Close of His System”, which also takes apart much of the basis of Austrian and Neo-classical economic theory.

Nor were the founders of the Austrian School such wholehearted supporters of the free market as their current disciples. Bohm-Bawerk, for example, argued that he feared that unbridled free competition would lead to "anarchism in production and consumption." Nor were the ideas of the Austrians solely the basis for a defence of capitalism. Engels in his preface to Capital Vol III writes,

“One need not strain his thinking powers to see that this explanation for the profits of capital (the idea that profits are merely an additional sum on top of their value put forward by Prof. Lexis – AB), as advanced by “vulgar economy”, amounts in practice to the same thing as the Marxian theory of surplus-value: that the workers are in just the same ‘unfavourable condiiton’ according to lexis as according to Marx; that they are just as much the victims of swindle because every non-worker can sell commodities above price, while the worker cannot do so; and that it is just as easy to build up an at least equally plausible vulgar socialism on the basis of this theory, as that built in England on the foundation of Jevons’s and Menger’s theory of use-value and marginal utility. I even suspect that, if Mr. George Bernard Shaw had been familiar with this theory of profit, he would have likely fallen to with both hands, discarding Jevons and Karl Menger, to build anew the Fabian church of the future upon this rock.” (Capital Vol III p10.)

This reference to Shaw relates to the fact that the Fabian socialists, of whom Shaw was a leading member, based their socialist principles on the Neo-classical/Austrian theory of marginal utility. The theory has as one of its requirements the idea of diminishing marginal utility – in other words the more of something that I have the less utility I will derive from each additional unit. On this basis the Fabians argued, quite rightly, that in this case the more wealth someone has, or the more income they have then the less utility they will derive from incremental units. If therefore, you want to increase the welfare of society this can be achieved quite simply. By taxing the wealth of the rich they will suffer only a small loss of utility because they have a lot of wealth to begin with, transferring this wealth to the poor will, however, cause them to experience a large increase in utility because they have little wealth, and any marginal increase will therefore be that much greater. The same is true of an income tax, which reduces the utility of high pay only slightly. Such an approach fitted completely with a Benthamite, utilitarian philosophy, which argued that the basis of morals was that which maximised the greatest good for the greatest number. But as Engels remarks this kind of vulgar socialism based on redistribution had nothing in common with scientific Marxist socialism.

Another economist who participated in these gatherings was Joseph Schumpeter who used much of Marx’s work in developing his own analysis, and who also took up Kondratieff’s Long Wave theory as part of his own analysis of capitalist cycles. Schumpeter said of Marx, in his monumental ‘History of Economic Analysis’,

“the totality of his vision, as a totality, asserts its right in every detail and is precisely the source of intellectual fascination experienced by everyone, friend as well as foe, who makes a study of him’; and elsewhere “at the time when his first volume appeared there was nobody in Germany who could have measured himself against him either in vigour of thought or in theoretical knowledge.”

Schumpeter, himself, was to be a member of the first Austrian Social Democratic government. He occupied the post of Finance Minister, and it was upon his shoulders that blame for the later hyperinflation was to be placed. Mises was invited to also join it, but he declined. Indeed, Mises, was to go on to support (though not actually join) the Austrian clerical-fascists who opened the door to Hitler. Most of the Austrian School economists had been high-ranking functionaries in the regime of the absolutist Hapsburg dynasty, and so were extremely hostile to the introduction of democracy. But by-passed by history they largely sank into obscurity contenting themselves to private life and carping criticism based on a vision of some past golden age of Capitalism and Liberty that had never existed.

“With the exception of the unlucky Schumpeter, the rival Austrian School economists, most of whom had played important roles in the pre-1918 Hapsburg public life, withdrew into the harbor of private businesses and chambers of commerce and observed the procession of events. They were particularly incensed at the Social Democrats plans for nationalization of certain industries and social insurance schemes. It was during this time that the "Socialist Calculation" Debate with Ludwig von Mises and Friedrich von Hayek erupted. The Austro-Marxian planners had, on their side, the exceptional abilities of several sympathetic Paretian economists -- notably, Oskar Lange and Abba Lerner. Other economists closer to the Marxian tradition, notably Fred M. Taylor, Emil Lederer, Jacob Marschak and Henry Dickinson, participated in this debate on the Marxian side. “Source:

Austrians

“In spite of the deep hostilities between Social Democrats and Conservatives in post-First World War Austria, their basic ideas on the business cycle and on macroeconomic policy were not substantially different. Both considered inflation as potentially dangerous, and neither advocated demand expansion as an approach to the very high level of unemployment. The explanation lies in part in the intellectual tradition of the Austrian School of economics in the years before 1914, when such leading socialist figures as Otto Bauer, Karl Renner, Rudolf Hilferding, and Otto Neurath were active participants in the Bohm-Bawerk Seminar, as was Joseph Schumpeter (Marz, 1986) and Ludwig von Mises. The traumatic experience of the inflations of 1919-22--and most particularly the hyperinflation of October 1921 to May 1922--certainly contributed to a reluctance to rely on monetary expansion and has influenced Austrian (and German) social democratic policy to this day. We return to the consequences of the post-First World War inflations later in this paper.
To understand Hayek's place as a fourth generation star of the Austrian School of economics, it is important to appreciate that neither its founder Carl Menger, nor Menger's two (rival) successors--Eugen von Bohm-Bawerk (1851-1914) and Friedrich von Wieser (1851-1926) were radical antisocialists. Bohm-Bawerk was a true liberal and his Privatseminar in the decade before 1914 was enriched by important controversy with Marxist thought.(*) The leading Marxist participants already referred to were unquestionably influenced by the methodology and approaches of that school in various ways which would take us too far afield were we to treat them in this essay. Austro-Marxist approaches to macroeconomic policies were conditioned by the intellectual formation of those of its leading lights who were trained in economics in the best years of the Austrian school before 1914.

Wieser has been described as the central figure of the Austrian school: central in time, central in the ideas he propounded, and central in his influence insofar as he was the holder of the central chair during nearly two decisive decades. His socioeconomic credo was summarized as follows: "Building on a strong Catholic and conservative foundation he was an interventionist liberal ... with quite an admixture of racist sentiment who still found it possible to admire Marx. Above all, he was an admirer of the state as guided by the supreme wisdom of his own bureaucratic class." (Streissler, 1986) The anti-interventionist, antisocialist current in the Austrian School, which so appealed to Lionel Robbins in the 1920s, was the singular contribution of Ludwig von Mises (1881-1973), and was ultimately carried into the Anglo-American world by his favorite protege, Hayek. Here it must be noted that Mises' extreme anti-interventionism was not shared by all the members of his seminar.”

Source Polanyi:


Polyani

The above link gives an excellent background to Austrian economics and its degeneration into the current apologist sect that should more correctly be described as Misean than Austrian.

An example, of how far, the Austrian economic theory has degenerated from its originators such as Bohm-Bawerk into a purely ideological apologia for capitalism is given in this article critiquing Kondratieff by the rather wretched Murray N. Rothbard (this is a man who believes that there should be a free market in babies!!!) who is one of the leading spokesman for the Austrian School and US Libertarianism.

Rothbard on Kondratieff

Rothbard as I said above is a pretty wretched economist who seems incapable of even reading other economists work honestly let alone presenting a honest criticism of it. In one work I have reviewed elsewhere he claimed that Marx argued that inflation was caused by wage increases, despite the fact that Marx specifically in a number of places including some pamphlets, produced specifically for the purpose, argues exactly the opposite case. In the above work Rothbard says,

“What was wrong about the 1780s, for example? No particular depression there.”

No that is true, but then as Kondratieff says in his work,

“The rise lasted from the end of the 1780’s or beginning of the 1790’s until 1810-17”there is no real contradiction there. But what Rothbard is doing here is he has taken 54 years as being the period of the long wave, and then mechanically looked at individual years, to make his case. However, Kondratieff never said that the period of the long wave was 54 years. On the contrary, he said the period he had analysed showed the period ranging between 40 and 60 years.
Rothbard goes on,

“Fifty-four years from 1789 brings us to the "expected" trough year of 1843, a year in which everything was smooth sailing.”

But according to Kondratieff,

“The decline lasted from 1801-17 until 1844-51”

slap in the middle of which was the crisis of 1847, and was indeed part of a long period in which there had been repeated crises. It was a time when Britain, as the workshop of the world, was repeatedly flooding the world markets to an extent that it took on some occasions more than three years for the world market to absorb the glut of English textile exports, where thousands of workers died from starvation in the textile manufacturing centres, where troops had to be stationed in the main cities to quell the violence that resulted from it, and from the rising tide of working class opposition represented by the Chartists.

Rothbard then continues,

“The third alleged Kondratieff horror point, or trough year, was 1896.”

But Kondratieff writes,

“The rise lasted from 1890-96 until 1914-20.”

In other words yet again Rothbard picks on a particular year whereas Kondratieff says quite openly that such precision is not possible any more than it is possible to be specific about say the business cycle, which at the time varied between 7 and 11 years, and in addition infers years as cycle troughs which do not even tally with the troughs set out by Kondratieff. In short, it is the typical falsification of views used to make a point by a charlatan.

Rothbard adds to this falsification when he says,

“Really, on one and only one ground: each of these years was a trough point for the index of wholesale prices. All the other alleged confirmations of the Kondratieff troughs were simply of prices, or else of monetary phenomena reflected in prices.”

But had he taken the trouble to actually read Kondratieff, or was minded to tell the truth, then he could not make this comment. Kondratieff actually makes the point himself that his data would not mean much unless he could show cycles in physical production. So alongside his series on wholesale prices and bond prices (British Consols, and French Rentes) he also gives series detailing the production and consumption of coal, pig iron, and lead. In another table for France, England, United States, Germany and the Whole World he also gives data for Oat acreage in France, and Cotton acreage in the US as well as other data on Foreign Trade, wages, Savings Bank Deposits etc. In order to ensure that the data is not subject to variations due to fluctuations in prices, he also reduces all prices to a gold price.
Nor is Rothbard’s argument that, even during the downward phases of Kondratieff’s long wave, production and living standards rose, convincing. It is quite possible that, in a constantly upward moving trend line, that phases of decline can be masked by the overall upward trend. Analysis for example of Stock Markets shows that during a secular Bull Market there will be downward movements, but the low point of these downward movements may still be higher than the previous low. In fact, Rothbard later acknowledges that Kondratieff’s actual analysis takes this secular trend on board and, using established statistical techniques, removes it from the data, alongside any effects from the 7-11 year business cycle, which are removed by using a 9 year moving average. But, Rothbard only refers to this in order to criticise Kondratieff for its use, implying that to take out the secular trend is a falsification of the data. Were Kondratieff arguing that no such secular trend exists, that the downward leg of the long wave takes prices and production back down to the same level as the trough of the previous down leg, then Rothbard’s objection would be valid, but Kondratieff makes no such claim, and what’s more it would be a ridiculous argument to make. The whole history of mankind, with or without capitalism, has been one of steadily rising productive capacity, not in some linear fashion, but nevertheless on a secular upward curve. Kondratieff spells it out,

“Even granting the existence of long waves, one is, of course, not justified in believing that economic dynamic consists only in fluctuations around a certain level. The course of economic activity represents beyond doubt a process of development, but this development obviously proceeds not only through intermediate waves but also through long ones."

In other words, just as say, in the Stock Market, a secular Bull Market is characterised by a larger number of rallies than sell-offs, and by higher highs, and higher lows, so an upswing in the long wave is characterised by a greater number of up years than down years, and vice versa. During a down leg of the long wave some down periods such as during the Depression might be very down indeed, but this does not mean that taken as a whole even the down leg of the cycle will not show overall growth, for the very reason Kondratieff sets out, that the long waves themselves are set within the context of a secular upward trend of human productive capacity. In order to see the wood from the trees it is necessary to remove that background trend.

Kondratieff not only removes this secular trend from the output figures, but from the price data too. So, Rothbard demonstrates again, clearly that either he hadn’t actually read Kondratieff or that he really doesn’t understanding economics or statistics very well when he says,

“And second, the cause of the booms and of the subsequent contractions is all too clear. Namely, monetary inflation brought about by war finance. The so-called "Kondratieff" is merely a description of war and peace.”

Despite the fact that Kondratieff makes clear that he has both taken account of secular price movements, and has taken account of monetary inflation by reducing prices to a gold price!!!!

Rothbard persists with this nonsense,

“The severe 1973–75 recession filled the hearts of the Kondratieffites with joy: the peak had arrived on schedule! But inflation still continued. The next big recession came swiftly, but still there seemed to be always recovery, and inflation continued throughout.”

This is all the more ridiculous coming from an Austrian whose theory defines inflation not as an actual rise in prices, but a rise in money supply!!! If during that period the consequences of the huge monetary expansion were removed as Kondratieff did then this inflation would disappear too.

Rothbard’s article was written in 1984, he went on,

“Well, here we are, ten years after the "primary peak," so surely the time for the Big Bang is Now. And yet, instead of that, the economy seems to be bubbling along, recovering nicely. Inflation is still continuing, despite all the propaganda about the problem being over.

Time is inevitably running out on the Kondratieffites. For there will be no Big Bang, no repeat of 1929.”


OOOooops. What do you know, almost right on cue, three years after Rothbard predicted everything was hunky dory and there would be no repeat of 1929 along came the crash of 1987, which was even bigger than 1929, and 58 years after it, right in the comfort zone for Kondratieff’s theory.

He went on,

“The point is that there is no permanent depression, and there is not, and will not be, any deflation. The idea that we are right now in the midst of a Kondratieff depression, but that the deflation is being masked by inflationary bank credit, cannot be the way out.”

Of course, the Austrians sing a rather different tune now. Now the Austrians proclaim doom and gloom in abundance, depression and deflation that is only being hidden by monetary excess.

In fact, in recent years, Kondratieff has in fact found favour amongst some of the Austrian brethren. The last English version of his work published in 1998 by Pickering and Chatto, was promoted by the English Fleet Street Letter, a part of the Agora Publishing network, and edited by Lord Rees Mogg, which regularly quotes from and provides hyperlinks to the Mises Institute and other Misean websites. They also publish other newsletters and quote the work of financial analysts who use the Elliot Wave which is a relative of Kondratieff’s wave analysis, but then Agora’s strategy appears to be publish as many newsletters as you can each saying something different so that having covered all the angles you can at some point in the future claim you predicted such and such an event.

So why then was Rothbard at pains to make this attack on Kondratieff whose work was first published by an Austrian Institute, and whose work was certainly taken seriously by one of the foremost orthodox economists of the 20th century – Joseph Schumpeter. The answer is given in Rothbard’s answer to why business cycles occur.

“We have already seen a hint of the solution: that inflation and the inflationary boom are caused by bank credit expansion generated by governments. In fact, government's central banking system provides the key causal element for all business cycles, a cause exogenous to the market economy. Continuing government intervention sets in motion business cycles by generating inflationary booms. Because these booms distort the signals of the market place in interest rates and in relative prices they bring about grave distortions of production and prices, which must be corrected by recessions and depressions.

In short, government intervention cripples the market economy, and recession or depression is the painful but necessary adjustment by which the market reasserts itself, and liquidates the distortions committed by the government's inflationary boom.”


In short, it is a repetition of the idiotic Say’s Law – the idea that left to its own devices the market economy would not suffer any crises, and markets would always clear. But, of course, the problem with this idea is that the data does not support it. The first downturn in the trade cycle was in 1825, before credit was a major part of economic activity. Throughout the early part of the 19th century, when crises occurred at regular 5 yearly intervals, the Bank of England issued gold currency only in quantities required for circulation, and the use of gold, silver and copper ensured that any surplus currency was thrown out of circulation, yet serious crises occurred during this period.

See the following.

Gold as Money

Its true that capitalism did develop commercial credit to resolve some of its problems in speeding up circulation and trade, but this was certainly not exogenous to the system as Rothbard tries to portray, but was developed by capitalists themselves though Bills of Exchange and Discount houses. Its also true, as Marx demonstrates in Vol. III of Capital, that once this credit becomes established it develops its own dynamic, and in turn affects the business cycle, being one of the reasons why the cycle is extended to a 10 year cycle from a five year cycle, and that in allowing the business cycle to be extended it increases the ferocity of the downturn, but all of this is endogenous to the system not exogenous. Even during the 1920’s, monetary expansion in the US was actually lower than the increase in output, so that rather than being inflationary it was deflationary. But Rothbard cannot admit to these facts, which contradict his case, because that would be to admit that crises are endogenous to capitalism, and, unlike the original Austrians, today’s Miseans are mere apologists for capitalism. They cannot admit of it having any faults, and so must place the blame elsewhere, and if that blame can be put on government interference so much the better.

In this he is right,

“The cause of the boom-bust cycle is not some mystical periodic Force to which man must bend his will; the fault, dear Brutus, is not in our stars but in ourselves, that we are underlings.”

But not for the reason he intends. There is no reason why such cycles should control us. The only reason they do is because we allow our economic destinies to be determined by a mystical force – the market – rather than take control of our economic activity in the same way that we took control of agricultural production rather than believe in the benevolence of the invisible hand of God.

What then of the more substantive criticisms of Kondratieff. Trotsky and others argued that there were exogenous factors, which intervened that were the explanations of certain periods of heightened activity such as wars and revolutions. Kondratieff responds to this criticism by saying that what appear as exogenous forces are themselves the result of endogenous aspects of the cycle.

“Wars and revolutions also influence the course of economic development very strongly. But wars and revolutions do not come out of a clear sky, and they are not caused by arbitrary acts of individual personalities. They originate from real, especially economic circumstances. The assumption that wars and revolutions acting from the outside cause long waves evokes the question as to why they themselves follow each other with regularity and solely during the upswing of long waves. Much more probable is the assumption that wars originate in the acceleration of the pace and the increased tension of economic life, in the heightened economic struggle for markets and raw materials, and that social shocks happen most easily under the pressure of new economic forces.

“Wars and revolutions, therefore, can also be fitted into the rhythm of the long waves and do not prove to be the forces from which these movements originate, but rather to be one of their symptoms. But once they have occurred, they naturally exercise a potent influence on the pace and direction of economic dynamics.” (Kondratieff)


I think this might well be open to question. It is rather mechanical, and determinist. It is certainly true that the drive for imperialist war such as the First World War could largely be placed in the context of a drive to get hold of sources of raw materials, and to get control of markets, and that came at the end of a Kondratieff upswing. A similar case could be made for the Anglo-French Wars at the beginning of the 19th century, which also came at the end of a Kondratieff upswing. But the same could be said about the Second World War, which came during a Kondratieff downswing. Similarly, during the post-war Kondratieff upswing there were plenty of wars and revolutions too, but it is hard to place these within Kondratieff’s explanation. Most of them appear to come within Trotsky’s definition in terms of the revolutions, most of which occurred as part of a national liberation struggle. It is possible to argue that such struggles originated in a weakness of the former colonial power, but this seems to be stretching the explanation somewhat. Nor do the main wars occurring during the period fit the description either – Korea, Vietnam. Again these had more the character of purely politically driven events than a scrabble for markets and raw materials.

Its possible to see in some of these events, for example Suez, or even the CIA overthrow of Mossadegh in Iran, a neo-colonialist/imperialist drive for markets and raw materials – the most important being oil, and it may be argued that the emergence of the US even by the 1950’s as the main western superpower, and development of a kind of ultra-imperialism as described by Kautsky might explain the fact that such expansion was done almost exclusively under the tutelage of the US. It is also possible to see during this time the role of the US in opening up new territories in Asia, and Latin America as new markets, and sources of raw materials but without the kind of inter-imperialist scramble of previous cycles due to the dominant position of US imperialism. But Kondratieff also addresses the extent to which this is cause or effect.

“As regards the opening up of new countries for the world economy, it seems to be quite obvious that this cannot be considered an outside factor which will satisfactorily explain the origin of long waves. The United States have been known for a relatively very long time; for some reason or other they begin to be entangled in the world economy on a major scale only from the middle of the nineteenth century. Likewise, the Argentine and Canada, Australia and New Zealand, were discovered long before he end of the nineteenth century, although they begin to be entwined in the world economy to a significant extent only with the coming of the 1890’s. It is perfectly clear historically that, in the capitalistic economic system, new regions are opened for commerce during those periods in which the desire of old countries for new markets and new sources of raw materials becomes more urgent than theretofore. It is equally apparent that the limits of this expansion of the world economy are determined by the degree of this urgency. If this be true, then the opening of new countries does not provoke the upswing of a long wave. On the contrary, a new upswing makes the exploitation of new countries, new markets, and new sources of raw materials necessary and possible, in that it accelerates the pace of capitalistic economic development.”

In trying to explain the basis of rather than challenge the existence of the long wave Schumpeter put forward the idea that its determination was the introduction of new techniques. In other words the long wave was nothing more than an innovation cycle. This idea is taken up in an interesting essay by George Ray in the January 1980 Lloyds Bank Review (Number 135) “Innovation in the Long Cycle”. As Ray comments,

“Innovation is indeed a cornerstone of Schumpeterian business cycle theory, according to which its economic impact is immense. Schumpeter’s thesis, in its most simplified form, stated that the upturn in the first Kondratiev cycle (1790-1813) was largely due to the dissemination of steam power, the second (1844-74) to the railway boom, and the third (1895-1914/6) to the joint effects of the motor car and electricity. These all fitted Kuznets’ requirement of an all-pervasive influence on all, or many sectors of the economy.”

Ray goes on to refer to the work of Mensch (G. Mensch “Das technologische Patt” Franfurt 1975 and also in “Stalemate in technology”, Ballinger, Cambridge, Mass. 1979) who in suggesting the need for a “new push of basic innovations” to lift the world out of its depressed state of the time also identified clusters of such basic innovations during the last 200 years, which correlated with Kondratieff’s cycle. These were in or around 1770, 1825, 1885, and 1935 with not much since – remember this was written in 1975. Ray compares these two sets of data and concludes,

“Long cycles do seem to appear, albeit with no great regularity and not simultaneously in both areas….The lags between Mensch’s innovation peaks and Kondrtiev’s are approximately 40 years (more precisely:44,49,41, and 32 years respectively).

Kondratiev’s three troughs followed the innovation-poor periods with an even more uniform lag of about 50 years. Given the difficulties of measurement, this apparent regularity provides food for thought since, if the high ‘technological content’ of each of the long wave theories – most explicitly Schumpeter’s – is considered, this surely must be the most important macro-economic aspect of innovation.”


Kondratieff looks at this Schumpeterian approach. He comments.

“Changes in technique have without doubt a very potent influence on the course of capitalistic development. But nobody has proved them to have an accidental and external origin.

“Changes in the technique of production presume 1) that the relevant scientific-technical discoveries and inventions have been made, and 2) that it is economically possible to use them. It would be an obvious mistake to deny the creative element in scientific-technical discoveries and inventions. But from an objective viewpoint, a still greater error would occur if one believed that the direction and intensity of those discoveries and inventions were entirely accidental; it is much more probable that such direction and intensity are a function of the necessities of real life and of the preceding development of science and technique.

“Scientific-technical inventions in themselves, however, are insufficient to bring about a real change in the technique of production. They can remain ineffective so long as economic conditions favourable to their application are absent. This is shown by the example of the scientific-technical inventions of the seventeenth and eighteenth centuries which were used on a large scale only during the industrial revolution at the close of the eighteenth century. If this be true, then the assumption that changes in technique are of a random character and do not in fact spring from economic necessities loses much of its weight. We have seen before that the development of technique itself is part of the rhythm of the long waves.”


Ray picks this up in relation to Schumpeter and Mensch. He looks at the various innovations identified by Schumpeter in relation to the Kondratieff waves. First, the steam engine.

“But what was the ‘basic’ advance, invention or innovation that eventually sparked off the first (steam-power induced) Kondratiev upswing around 1790? Many would attribute it to Watt – but then Watt did not invent the steam engine, it had been introduced long before by Newcomen (1712), or indeed in a simpler form by Savery (1698); Watt’s further developments (separate condenser in 1769 and the rotative engine in 1781) were undoubtedly very significant improvements. In fact, none of these great men invented the steam engine; their merit as innovators is beyond question – but whose was the ‘basic’ innovation? The first scientist who understood the power of steam and the uses of cylinder and piston was Hero of Alexandria, in the first century AD!”

In similar vein.

“We can now ask the same question as before: What – and whose – was the basic invention? Kondratiev’s second upswing started in 1844 – Stephenson’s first locomotive came into operation in 1814; the Stockton-Darlington railway, the first to be built for public transport and not for coal haulage alone, opened in 1825. But Trevithick had built a locomotive to haul coal in Wales as early as 1804. Who was the ‘basic innovator’ – or does the laurel go back to the steam engine?”
And finally for the third upswing.

“Turning again to the originators of the upswing in the third long cuycle, Lanchester and Austin designed their first cars in 1895 but they had been preceded by Daimler (1887) as well as by others in Europe (France produced 500 cars in 1893). The idea of the internal combustion engine, however, originated much farther back in time, in the late 17th century. With electricity we are in similar trouble: the ‘basic’ invention may have been that of Faraday in 1831, but he could not, of course, have presented his theories in that year without the outstanding achievements of scientists like Benjamin Franklin (1749), Galvani (1791), Volta (1800), Ampere (1822) and others.

“Neither Kondratiev nor Schumpeter lived long enough to see the peak of the recent upswing in the 1960’s; it was probably attributable to a combination of major innovations in the chemical industries (catalytic cracking, synthetic materials and fibres, anti-biotics), in aircraft (jet engine, helicopters), in the electrical/electronic industry (TV, computers), and perhaps even in the peaceful application of nuclear power.”


In other words, Ray gives support to Kondratieff’s idea that these innovations are not exogenous to the system. The ‘basic’ innovation may actually be made some considerable time before its application affects economic development. What is important is not the innovation but its application, and its application depends upon a certain level of economic development having occurred, a certain level of technical development having taken place such that the innovation can be implemented. For example, had Leonardo actually produced his flying machine, it is unlikely that it would have been a viable commodity to produce, or even if it had it is unlikely to have been a product which had great economic effects. Only at the point where the economy has developed, trade has reached a certain level, and the potential for producing aeroplanes on a scale for use in passenger and freight transport, warfare etc. exists could such an innovation have any significant consequences for the economy in general. As Kondratieff says, the innovations are introduced to meet requirements of the time, they are endogenous effects not exogenous causes of the upswing. But having been introduced the cause and effect nexus reverses, once introduced the invention does play a crucial role in stimulating economic development.

As Ray puts it,

“Only the widely-based rapid diffusion of some major innovations can be assumed to play any part in triggering off the Kondratiev – or any other - long-term upswing.”
Bearing in mind that Ray was writing in 1980, the year Micrososft started, and probably five years before PC’s even began to be widely used in business let alone in the home, he sets out the possibilities for the innovations that might become widely diffused in the next Kondratieff upswing.

“There are many who believe that the next great innovation, following in significance the motors of earlier Kondratiev cycles and comparable to them in width and depth of impact on the economy, will be the microprocessor. The importance of micro-electronics can be seen already in many areas and it is not surprising that the ‘microprocessor revolution’ has begun to merit serious discussion. It has been emphasized that the microprocessor is a chameleon and that it takes on the character of whatever program has been fed into it; it can detect a guided missile, operate a coffee dispenser, regulate the use of petrol in a car or control an industrial process. If properly programmed it can be used almost anywhere, in communications, in metal machining, and in widely varying applications, from libraries’ bibliographies to medical diagnosis. It is conceivable that it could be a candidate to lead a technological upheaval, giving the necessary push for a swing up out of Mensch’s ‘technological stalemate’.”


Ray looks at this in terms of past cycles.

“Mensch’s innovation peaks followed each other with a lag of 50-60 years; the most recent one was in 1935 – the next on that basis, should follow some time after 1985. Kondratiev’s cycles required about 25 years from trough to peak; if we consider 1975 as the trough, the peak will only be reached by 2000, but in the meantime should come the upswing. On past experience, if the indications in Table 1 are accepted, this is too soon after the innovation peak in 1985, since earlier there used to be 40 years between the peaks of the two series – but then the time lag between the innovation peak (1935 and the economic trough (1975) was also shorter than the 50 years observed earlier.”

But I would take issue with Ray here. Looking back from the tech wreck of 2000 it seems attractive to place a Kondratiev trough in that year as 25 years on from 1975. Moreover, looking at the growth of microprocessor based innovations from the mid 1980’s onwards, and particularly during the 1990’s with the development of mobile phones, laptop computers, and a myriad other devices would seem to confirm the 25-year upswing from the trough of 1975.

This is argued by Ian Gordon.

The Long Wave Analyst

However, I think Gordon's dates are wrong. I would argue that the Kondratiev upswing began after the war around 1949 – Gordon himself talks about this upswing reaching a peak in the 1960’s, so the trough could not conceivably arrive in 1975 less than ten years later.

The chart here looks more relevant to me.

Angelfire Kondratieff Charts

I would argue that the upswing ended in the early 70’s and was marked by the blow-off inflation, followed by the crash of 1974. This position is also that adopted by Ernest Mandel – Long Waves of Capitalist Development (1980). On that basis from around 1974 until around 2000 we were in a downswing. How can that be reconciled with the introduction of new technologies, and birth of new industries during that period? On the basis that Kondratieff sets out that it is set within the long term trend of upward human productive development. Moreover, in reality the period from 1974, whilst being a period of innovation has also been a period of relative economic underperformance in historical terms. Innovations resulted in lower real prices as would be expected in a Kondratiev downward leg. This movement has been masked by the printing of paper money by western governments. The slump of 1974-5 despite expansionary monetary policies dragged on into the recession of the early 80’s, which itself dragged on into the recession of the early 90’s. The upturn in the 90’s witnessed in the West was based actually on the cut in real wages of US workers, and the attacks on wages and conditions by Thatcher in Britain. Moreover, the upturn in those countries has during the 90’s been based largely not on real economic growth founded on increasing wealth and rising real incomes, but has been founded on the very shaky (and ultimately wealth destroying foundation) of massive amounts of debt.

Another factor, however, that needs to be taken into account is Kondratieff’s statements about the US, whose development was slightly out of step with Europe. Moreover, Kondratieff looks at the development of the wave in terms of those economies, which are the dominant and emerging economies of the time. It is possible to argue that the application of the wave to the world economy might show the US experiencing a slightly different pattern than elsewhere, for some of the reasons mentioned above, and others I will come to. Kondratieff’s cycle is broken down into four not 2 phases. The Spring Phase is marked by growth, falling unemployment, rising productivity and stable prices. The Summer Phase is where the cycle reaches its peak and is marked by changes in the psychology of people who have become accustomed to a more affluent lifestyle. Prices rise as capacity utilisation begins to hit a maximum and constraints force up prices. The Autumn phase is often described as a plateau. The limitations of the previous phase begin to exert their influence, but in an attempt to maintain lifestyles, and sustain the boom increasing debt is accumulated.

“Excesses of the plateau period effect a collapse of the price structure. This exhaustion of accumulated wealth forces the economy into a period of sharp retrenchment. Generally, the secondary depression entails a three year collapse, followed by a 15 year deflationary work out period. The deflation can best be seen in interest rates and wages that have shown a historic alignment with the timing of the Long Wave - peaking with and bottoming at the extremes.

Kondratieff viewed depressions as cleansing periods that allowed the economy to readjust from the previous excesses and begin a base for future growth. The characteristic of fulfilling the expectations of the previous period of growth is realized within the Secondary Depression or Down Grade. This is a period of incremental innovation where technologies of the past period of growth are refined, made cheaper and more widely distributed. Incremental innovation consolidates industries.

As increment innovation narrows profits and increases

The Down Grade sees one final period of recession before transitioning to a new period of growth. The final recession is mild with very low inflation and appears far more severe than it will be remembered for later in the Growth Cycle.
Within the Down Grade is a consolidation of social values or goals. Ideas and concepts introduced in the preceding period of growth while radical sounding at the time become integrated into the fabric of society. Often these social changes are supported by shifts in technology. The period of incremental innovation provides the framework for social integration.”


Source:

K-Waves

As is argued here the Kondratieff Winter is associated with the clearance of debt. It is quite possible that for the US the huge amounts of debt that have been accumulated during the 90’s, together with the massive supply of liquidity and the ability of the US to use its position as the holder of the world’s reserve currency, have extended the Autumn phase of the cycle for it, whilst others primarily China, India and other Asian countries have already begun the Spring phase. The application of the cycle in the above link predicted the bottoming of US stock prices fairly accurately as coming at the end of 2002 with an upswing from 2003 leading to another fall in 2005-6, which also looks potentially likely.

Kondratieff looked at one other supposed explanation of his long wave.

“There remains the question whether the discovery of new gold mines, the increase in gold production, and a consequent increase in the gold stock can be regarded as a casual, outside factor causing the long waves…..

“These fluctuations are by no means simply a function of inventors and of the discoveries of new gold mines. On the contrary, the intensity of inventors’ and explorers’ activity and the application of technical improvement in the sphere of gold production, as well as the resulting increase of the latter, depend on other, more general causes. The dependence of gold production upon technical inventions and discoveries of new gold mines is only secondary and derived.

“Although gold is a generally recognised embodiment of value and, therefore, is generally desired, it is only a commodity. And like every commodity it has a cost of production. But if this be true, then gold production –even in newly discovered mines – can increase significantly only if it becomes more profitable, i.e. if the relation of the value of the gold itself to its cost of production (and this is ultimately the prices of other commodities) becomes more favourable. If this relation is unfavourable, even gold mines the richness of which is by no means yet exhausted may be shut down; if it is favourable, on the other hand, even relatively poor mines will be exploited.

“What is the relation of the value of gold to that of other commodities most favourable for gold production? We know that commodity prices reach their lowest level toward the end of a long wave. This means that at this time gold has its highest purchasing power, and gold production becomes most favourable.

“We, therefore, can suppose theoretically that gold production must in general increase most markedly when the wave falls most sharply, and vice versa.”


However, he points out that the reality is not this simple. Changes in technique, and new discoveries will affect the cost of production so that it may become more profitable to produce. This, of course will only be in the short run because these lower productions costs will affect all producers reducing the value of gold, such that profitability is unaffected. And of course these discoveries and changes in technique are more likely when the price of gold is high. Moreover, the actual relation of gold prices and production to the wave will be affected by a time-lag.

“In reality, therefore, gold discoveries and technical improvements in gold mining will reach their peak only when the long wave has already passed its peak, i.e. perhaps in the middle of the downswing. The available facts confirm this supposition.”

He goes on to give details of gold discoveries during the 19th century. If we take 1974, as the peak of the last upswing Kondratieff’s thesis is again confirmed. Gold prices continued to rise considerably past this point throughout the 1970’s reaching their peak in the early 80’s.

If Kondratieff’s thesis is right then the last upswing began in 1949 according to most observers. That upswing ended, most would argue in 1974, and sure enough 1974-5 witnessed the worst slump since the 1930’s. Moreover, despite the kind of lower real interest rates that Kondratieff predicted growth remained sluggish well into the 1980’s. It only picked up as a result of the attacks on workers pay and conditions pushed through by Thatcher and Reagan. But further slowdown occurred through the 90’s with the world’s second largest economy Japan going into a recession in 1990 that has lasted more than 15 years and has been accompanied by the kind of low interest rates, and price deflation predicted by Kondratieff. The US has seen real wages fall for 20 years, and despite blips real interest rates have been falling in the US for 20 years too.

But if Kondratieff is right then the downswing that began around 1974 should now be ending and the world should be on the verge of a new upswing. Are there any grounds for believing that might be true? As far as the major economies are concerned, and the US in particular, the answer at first glance appears to be no. Europe is experiencing low growth and high unemployment, the UK has higher growth, lower unemployment but at the expense of huge levels of debt and has been achieved by a steady erosion of workers pay and conditions over the last 20 years. The US is a similar picture to the UK but writ large. Sooner or later the huge borrowing of the UK and US will cause a massive crisis. But it is that crisis which might, together with other factors, be the very basis of the new upswing. Every upswing of the cycle has seen new economies enter the fray. Britain led the way up at the beginning of the 19th century, and held the dominant position in its latter half, but the latter half saw the emergence of France, Germany and the US. The beginning of the 20th century saw Germany emerge as a dominant economic force alongside the US. The post-war period saw Japan develop rapidly as well as Germany. But in line with Kondratieff’s observations the basis for this emergence was set in the preceding period. We now see the emergence of China and India as increasingly important economic powerhouses, and the basis of that emergence is fully in keeping with Kondratieff’s observations. Having reached a peak of the cycle, dominant economies begin to decline, but the nature of the decline is not uniform. Real wages decline, but do not necessarily decline enough, prices decline but again not necessarily enough. But during this intervening period other economies in this case China and India, where wages, prices and interest rates are already low can begin to develop using the latest techniques, and thereby with their lower wages, prices, and interest rates begin to capture market share. It is they that have in place the more dynamic economies to take advantage of the upswing of the long wave when it begins.
But at the end of the down leg, there is likely to be a considerable blow-off. According to Kondratieff the upswing at the beginning of the 20th century ended around 1914-20, with the downswing beginning in the same period. If 1914 is taken as the start date, then the Depression of the 1930’s begins towards the end of the subsequent down-leg, and it is possible that this down-leg would have been more pronounced had the Second World War not intervened. Even allowing for the War it is not until a few years after the end of the war that we can detect a real upswing in economic activity overall. The accumulation of contradictions in the capitalist system that have been stored up during the last downswing from 1974 are likely to cause a similar blow-off before the commencement of the new upswing, at least as far as the now dominant western economies are concerned, and even allowing for the new economies entering a Spring Phase of the cycle, this Depression in the West will have serious effects for them too. It is this blow-off which will see real wages and conditions in the West decimated, the liquidation and appropriation by capital of large amounts of wealth, accumulated by workers during the upswing from 1949 to 1974, in the form of residential property, but now at risk because of high levels of personal debt, which will by increasing the stock of capital, and at the same time sharply raising the rate of exploitation and rate of surplus value, provide the basis for the new upswing.

That upswing will be marked by an even greater development of China, India and other Asian economies whose workers will fight for and get increasing real wages, which will provide the basis for the kind of consumer driven economy that developed in the West after WWII, it will see a scramble for commodities around the world which has already begun, with a 20 year increase in those commodity prices, and consequent effect on the economies of the raw material producing countries, and only later after the adjustment of Western wages and prices, will western economies be drawn into the upward spiral, with a steady increase in wages, prices, and interest rates once again taking place.

For socialists this phase is also of considerable interest because it is during these upward phases that workers regain their confidence, and combativity having the ability to fight for and win increased pay and conditions. We would expect to see considerable growth of the size and strength of labour movements in Asia in particular, and the development of new radical ideas as part of that, and indeed such developments are beginning to occur. Just as the innovations and changes in technique introduced in the innovation peak during the downturn form the basis for new production in the upturn, so ideas generated during that downturn also form the basis for the development of the Labour Movement in the upturn. That could be seen in the flourishing of ideas at the beginning of the 20th century, which led to the Russian revolution, and also was to be seen in the period after the Second World War with the spread of radical socialist ideas during the 1960’s, which had themselves had their formative period during the 1930’s and 40’s.

If Kondratieff is correct then the next 25 years could be a very exciting time, but the locus of the action may well be in Asia. Already, we see mounting strikes and combativity amongst Asian workers, but we have also seen a rise in strikes and combativity amongst European workers, particularly in France and Germany, as well as a rising tide of militancy and development of new forms and ideas in Latin America with the development on a fairly wide scale of co-operatives such as that at Zanon in Argentina. Crucial as in the past will be the ability to analyse and codify the lessons of these new struggles, and to extend their lessons through the adequate development of Workers Parties.

2 comments:

Anonymous said...

Dear Arthur,

This is not a substantive comment, but merely a format point: that is, that I find that the blog format makes your quite important theoretical arguments badly inaccessible

- (a) because it is a pain searching through the tags or hotlinks to find the most relevant of older posts, and

- (b) because the format presents the text on screen in a way which makes reading contributions of any length seriously tedious and there is a real risk of losing the thread of the argument.

Have you considered putting up some of the longer and more substantive pieces in some other form?

Mike Macnair

Arthur Bough said...

Mike,

Thanks for the comment. I recognise a problem with long posts. There is also a problem now with long replies due to the character limit. That is something I have put to Jacob Richter in his replies. I have tried to divide long pieces into several parts.

My intention once I get chance is to revamp the blog. One idea I have is to draw up a kind of Index in the sidebar so that it covers the main areas. Each listing will then have a link to a post listing all the main posts covering that subject/topic etc., and each of these then linked to that particular post.

It would be good to be able to post longer theoretical articles to somewhere where other such theoretical articles appear. Is this what you are suggesting? Is the CPGB in favour of developing such a site? I would be happy to contribute. Unfortunately, I am going to be tied up for the next few weeks though.