Nikolai Kondratiev

Nikolai Dmitriyevich Kondratiev, Russian: Николай Дмитриевич Кондратьев (1892-1938) was a Soviet economist.

He proposed a theory that Western capitalist economies have long term (50 to 60 years) cycles of boom followed by depression. These business cycles are now called "Kondratiev waves", or grand supercycles.

Biography

Nikolai Dimitrievich Kondratiev was born on 4 March 1892 in the province of Kostroma, north of Moscow, into a peasant family.

He was tutored at the University of St. Petersburg before the revolution by Mikhail Tugan Baranovsky. A member of the Revolutionary Socialist Party, his initial professional work was in the area of agricultural economics and statistics and the important problem of food supplies. On 5 October 1917, at the age of 25, he was appointed Minister of Supply of the last Alexander Kerensky government, which only lasted for several days.

After the revolution, he dedicated his attention to academic research. In 1919, he was appointed to a teaching post at the Agricultural Academy of Peter the Great, and in October 1920 he founded the Institute of Conjuncture, in Moscow. In 1924, after publishing his first book, presenting the first tentative version of his theory of the major cycles, Kondratiev travelled to England, Germany, Canada and the United States, and visited several universities before returning to Russia.

A proponent of the Soviet New Economic Policy (NEP), Kondratiev’s influence on economic policy lasted until 1925, declined in 1926 and ended by 1927. Around this time, the NEP was dissolved by a political shift in the leadership of the Communist Party, Kondratiev was removed from the directorship of the Institute of Conjuncture in 1928, arrested in July 1930, convicted as a "kulak-professor" and sentenced to 8 years in prison.

Kondratiev served his sentence, from February 1932 onwards. Although in poor health due to prison conditions, he continued his research. Some of these new texts were indeed completed and were published in Russian.

On 17 September during Stalin's Great Purge, he was subjected to a second trial and executed by firing squad . Kondratieff was 46 when he died and was only rehabilitated almost fifty years later, on 16 July 1987.

His Major Works

The Kondratiev ( long-wave) Cycle is his major work, acknowledged by the economics professionals and theorists alike till today. It is a theory based on a study of nineteenth century price behavior which included wages, interest rates, raw material prices, foreign trade, bank deposits, and other data.

It predicts 50-60 years long cycles of economic booms and depressions. Kondratiev was the first to bring these observations to international attention in his book "The Major Economic Cycles" (1925) and other works written in the same decade.

Long-Wave Cycle theory

Kondratiev was convinced that his studies of economic, social, and cultural life proved that a long term order of economic behavior existed and could be used for the purpose of anticipating future economic developments. He observed certain characteristics about the growth and contraction phase of the long wave. Among them, he detailed the number of years that the economy expanded and contracted during each part of the half-century long cycle, which industries suffer the most during the down-wave, and how technology plays a role in leading the way out of the contraction into the next up-wave.

Early on, several schools of thought emerged as to why capitalist economies have these long waves. These schools of thought revolved around innovations, capital investment, war and capitalist crisis.

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. The theory hypothesized the existence of very long-run macroeconomic and price cycles, originally estimated to last 50-54 years.

The fifty to fifty-four year cycle of catastrophe and renewal had been known and observed by the Mayans of Central America and independently by the ancient Israelites. Kondratiev's observations represent the modern expression of this cycle, which postulates that capitalist countries tend to follow the long rhythmic pattern of approximately half a century.

In the idealized long wave model, which is illustrated in the diagram above, the cycle (which averages 54 years in length) begins with the "up-wave" during which prices start to rise slowly along with a new economic expansion. By the end of a 25-30 year up-wave period, inflation is running very high. Its peak sets the stage for a deep recession that jolts the economy. The recession, which begins about the time commodity prices break from their highs, is longer and deeper than any that took place during the up-wave.

Eventually, though, prices stabilize and the economy recovers, beginning a period of selective expansion that normally lasts nearly a decade. Referred to as the secondary plateau, the expansion persists, giving the impression that "things are like they used to be," but its anemic nature eventually takes its toll as conditions within the economy never reach the dynamic state that occurred during the up-wave. The secondary plateau ends with a sudden shock (financial panic/stock market crash) and the economy rolls over into the next contraction phase, which is characterized by deflation and the start of an economic depression (Solomou 1990).

Most cycle theorists, backed by the new statistical data “mining” techniques, agree with the "Schumpeter-Freeman-Perez" paradigm of five waves so far since the industrial revolution, and the sixth one to come. These five cycles are

• The Industrial Revolution—1771
• The Age of Steam and Railways—1829
• The Age of Steel, Electricity and Heavy Engineering—1875
• The Age of Oil, the Automobile and Mass Production—1908
• The Age of Information and Telecommunications—1971

According to this theory, we are currently at the turning-point of the 5th Kondratiev.

Real-life cases of Kondratiev's long-wave-theory

The message of this revolution of the Kondratiev cycle, which is a cycle of debt repudiation and not just of commodity price deflation, is that humanity is much more aware of the effects of the cycle than, say, in the 1930s, and that the contraction can be handled.

Although it was indicated that the masses have been in a state of denial as to the likelihood that this type of economic collapse can actually occur in this "new era," as it always seems to be considered when the masses fear the change from prosperity to economic contraction, awareness of the problems that are becoming apparent and a recognition of the mistakes that were made can serve to mitigate the contraction.

An example: The current reevaluation and almost universal acknowledgment of the Kondratiev Wave began after the global economy pulled out of a deflationary depression in the 1930s. Prices began to accelerate upward after World War II, and reached the commodity price blow-off stage in 1980. Since that time, and then after the recession of 1990-1991 (much longer in some locations such as California and Japan, the latter of which has never really recovered from economic contraction), the global economy has been treading the secondary plateau. During this period, consumers and investors become aware that inflation is not accelerating Kondratiev Wave upward, and disinflation becomes the buzz word. Paper assets such as stocks and bonds do well since neither inflation nor deflation-both of which are damaging to stock investment returns-hurts the marketplace.

The stock market crash of 1997 was the signal that the period of economic growth along the secondary plateau is ending. Additional economies collapse and plunge into deflationary contraction, as characterized during this revolution of the Kondratiev cycle by the domino effect coming from Thailand, Indonesia, Asia, and South America. Stronger economies such as those of Europe and North America were able to hang on until the last moment, then fall off into the much less serious deflationary contraction.

From that, we can theorize that these stronger economies, due to their superior handling of monetary policy during the secondary plateau relative to the countries that made serious enough mistakes to cause a plunge into serious financial collapse, will not be affected as gravely as these other countries with collapsing economies.

Criticism of the Long-wave Theory

Much controversy exists on whether the Kondratiev wave is valid for the post WWII economy. Many have rejected it on the basis that the 54-year mark was reached a decade ago, and should have been the trough. It can be argued, however, that the start of the "up" cycle began in 1940 or 1945, rather than 1930.

Also, life expectancy has increased in the 20th century. If the 54-60 year cycle is based on generation aspects, then it would naturaly be 'stretched' beyond 60 years. Since these cycles of wars and economic birth and renewal occur every 2-3rd generation, we can say that when the generation to last see a depression dies off, it's time for another cycle to begin.

Long wave theory is not universally accepted by neo-classical ("standard textbook") economists, who necessarily see technical change and innovation as exogenous rather than endogenous to economics, but it is one of the bases of innovation-based, development, and evolutionary economics, i.e. the main heterodox stream in 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 another 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 as to the cause of this phenomenon.

But Kondratiev spells the problem out quite clearly :”….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….”( Kondratiev 1935 ).

The Kondratiev’s legacy

Let us recapitulate the major ideas of Kondratiev theory:

“….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. …”( Kondratiev 1935 )

Thus, Kondratiev 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 by increasing competition.

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.

If the Mayans were known for there intricate tracking of cycles such as this one. By embracing the inevitability of the cycle, but not as a destiny but as a tendency, they were able to mitigate its effects and emerge from the cycle bottom in better condition that otherwise would have been possible. Will modern humanity entering the 21st century take heed to the lessons of the past?

If so this will be the Kondratiev’s greatest achievement and legacy.

=References

• Barnett, V., Kondratiev and the Dynamics of Economic Development, Macmillan, London 1998.
• Goldstein, J., Long Cycles: Prosperity and War in the Modern Age', Yale University Press, New Haven, 1988. [1]
• Kondratiev, N.D., On the Notion of Economic Statics, Dynamics and Fluctuations ( in Russian ), Moscow 1924 ( translated and published in : “Problems of Economic Fluctuations” by the Institute for Business Cycle Research, 1936 )
• Kondratiev, N. D., “Die langen Wellen der Konjunktur”, Archiv für Sozialwissenschaft und Sozialpolitik, 56:573-609, 1926 ( also in: Review of Economic Statistics 1935)
• Kondratiev, N.D., The World Economy and its Conjunctures During and After the War ( in Russian ), Moscow 1922, Dynamics of Industrial and Agricultural Prices (Contribution to the Theory of Relative Dynamics and Conjuncture) 1928,Main Problems of Economic Statics and Dynamics (in Russian ), Moscow 1934 ( all translated and published by Lloyds Bank Review, Issue 129, July 1978 )
• Kondratiev, N. D., "The Long Waves in Economic Life," Review of Economic Statistics. 17(6) Nov 1935, pp.105-115

faculty.washington.edu /~krumme/207/development/longwaves.html

• Kondratiev, N.D.,The Major Economic Cycles ( in Russian ) , Moscow 1925 ( translated & published as ,The Long Wave Cycle, by Richardson & Snyder, New York 1984 )
• Kondratiev, N.D., The Long Wave Cycle, Richardson & Snyder, New York 1984
• Kondratiev, N. D., Dynamics of Economic Development: Long Cycles and Industrial Growth in Historical Context, Macmillan, London 1998, xiv + 251 pages
• Solomou S., Phases of Economic Growth, 1850-1973: Kondratiev Waves and Kuznets Swings, Cambridge University Press 1990

External link

• Kondratiev wave website - by Gunter Krumme, University of Washington

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