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Kondratieff Waves and the Greater

Depression of 2013 - 2020


By Christopher Quigley
Created 24 Feb 2012
There are very few heroes in economics but for me one of the patron saints of
that profession should be Nikolai Kondratiev who was shot by firing squad on
the orders of Stalin in 1938. He died for what he believed was the truth. His
execution was ordered because his academic work propounded that the
capitalist system would not collapse as a result of the great depression of
1929. This truth Stalin did not want to hear, thus Nikolai was exterminated and
his work suppressed for over two decades.
[1]
Kondratiev's analysis described how international capitalism had gone through
many such "great depressions" and as such were a normal part of the
international mercantile credit system. The long term business cycles that he
identified through meticulous research are now called "Kondratieff" cycles or
"K" waves.
The K wave is a 60 year cycle (+/- a year or so) with internal phases that are
sometimes characterized as seasons: spring, summer, autumn and winter:
Spring phase: a new factor of production, good economic times, rising
inflation
Summer: hubristic 'peak' war followed by societal doubts and double
digit inflation
Autumn: the financial fix of inflation leads to a credit boom which
creates a false plateau of prosperity that ends in a speculative bubble
Winter: excess capacity worked off by massive debt repudiation,
commodity deflation & economic depression. A 'trough' war breaks
psychology of doom.
Increasingly economic academia has come to realize the brilliant insight of
Nikolai Kondratiev and accordingly there have been many reports, articles,
theses and books written on the subject of this "cyclical" phenomenon. An
influential essay, written by Professor W. Thompson of Indiana University, has
indicated that K waves have influenced world technological development
since the 900's. His thesis states that "modern" economic development
commenced in 930AD in the Sung province of China and he propounds that
since this date there have been 18 K waves lasting on average 60 years.
William R. Thompson:
"Most people are quite familiar with business cycles that tend to be
denominated in terms of months. Sales are good, people are confident about
the future, and unemployment is reduced. Then sales fall off, the immediate
future seems gloomier, and unemployment increases. The Kondratieff wave is
a longer version of economic fluctuation, albeit with the added traits of initial
spatial concentration of technological innovation and subsequent diffusion at
the world level. It also has some rather major implications for war, peace, and
order in the world system that conventional, short-term business cycles lack.
Therefore, the k-wave is a core component part of the most significant
processes of the world system. Precisely what drives k-waves has been the
subject of considerable analytical dispute. Arguments have been advanced
that bestow main driver status on investment, profits, population growth, war,
agricultural-industrial tradeoffs, prices, and technological innovations. This
debate has by no means been settled but at this time the emphasis on
technological changes appears to be the best bet
In the case of the Kondratieff, the argument is that the first appearance of a
paired K-wave pattern in economic innovations is found in the 10th century in
Sung China which is sometimes credited with developing the first modern
economy. The expansion of maritime trade in the South China Sea and the
Indian Ocean, as well as the revived use of the Silk Roads on land, facilitated
the transmission of long wave, paired growth impulses to the other end of
Eurasia. Thus Modelski and Thompson analyze 18 k-waves encompassing
some one thousand years between 930 and 1973
In sum, the Kondratieff wave appears to be a highly pervasive and hence a
critical process in the functioning of the world system. As such, it deserves
more recognition than it currently receives. When more attention is paid to its
influences, we will no doubt discover that it is even more central to world
system development than we suspect currently."
In addition to technology being a major factor in K cycles, credit and banking
also play a crucial role. This is due to the fact that new technology spurs
growth, initiative and risk taking. This mindset encourages investment and
lending thus when the multiplier effect kicks in, economies expand rapidly.
Thus as we focus our analysis on more modern times we find that periods of
"K" expansion and contraction bring with them phases of bigger booms and
busts. The picture is doubly exacerbated by increasingly more integrated
world funding mechanisms which means these booms and busts are global
rather than local and increasingly more political than economic.
Implications for 2012 and Beyond
Based on Professor Thompson's analysis long K cycles have nearly a
thousand years of supporting evidence. If we accept the fact that most winters
in K cycles last 20 years (as outlined in the chart above) this would indicate
that we are about halfway through the Kondratieff winter that commenced in
the year 2000. Thus in all probability we will be moving from a "recession" to a
"depression" phase in the cycle about the year 2013 and it should last until
approximately 2017-2020.
Like all cycles, K wave analysis is more "descriptive than prescriptive", but
provides enormous insight into our current economic condition. This it would
be wise for our political and economic leaders to accept the lessons of history
and realize that based on comprehensive economic evidence, following the
2007 systemic collapse of world banking and credit, things are likely to get
much worse before they get better. Such evidence also supports the
proposition that the USFED and the EUROECB instead of prolonging the
agony through 5 trillion of credit expansion should liberate the "international
market" and let it intelligently and efficiently do what it has done 18 times
before. World bankers if they were properly versed in their craft would realize
that Kondratiev's heroism has given them the understanding they require to
correctly comprehend and deal with the crisis. However, instead of seeing "it"
as an acceptable development based on the natural result of technological
stagnation they have panicked and mis-diagnosed it as a credit/monetary
problem. Thus the epiphany of truth will only finally dawn when the both the
FED and the ECB go bust and as every financial dog on Wall Street knows,
this is not a matter of "if" but "when".
The good news is that after this creative destruction period is over the world
economy will be ready for a new epoch making spring boom which will propel
it to new levels of political, social and economic development. Hopefully
enough reasoned minds will prevail to prevent the only catastrophe that will
completely destroy this paradigm blossoming into fruition and that prospect I
do not even wish to contemplate or enunciate as I desire to end this brief
article on a resoundingly positive note.
References:
1. Chart courtesy of longwaveanalysis.ca
2. "The Kondratieff Wave As Global Social Process" William R. Thompson,
Dept. of Political Science, Indiana University, U.S.A.
3. "Leading Sections and World Politics: The Co-evolution of Global
Politics and Economics" Modelski G. and W.R. Thompson, Columbia:
University of South Carolina Press.
4. Delwn Lounsbury, EZine Articles.