CAUSES AND CONSEQUENCES
OF KONDRATIEV'S LONG-WAVE CYCLE
Antal E. Fekete
Professor Emeritus
Memorial University of Newfoundland
Summary for the busy executive
Here we offer a new theory explaining the causes of Kondratiev's long-wave economic cycle in terms of gold and the hoarding of commodities. Our description of the cycle itself is also novel and very different from the conventional. We shall be talking about a huge oscillating money-flow to-and-fro between the bond market and the commodity market. When the money-tide begins to flow at the commodity market and ebb at the bond market, we have the inflationary phase of rising prices and interest rates. When the tide is reversed and it begins to flow at the bond and ebb at the commodity market, we have the deflationary phase of falling prices and interest rates. In one word, Kondratiev's long-wave cycle is the manifestation of the fluctuation in the propensity to hoard. The key question is this: what causes this fluctuation? Is it a natural phenomenon outside of man's control or, perhaps, it is induced by wrong-headed government policy?
Economic cycles
Economists recognize four major cycles, or regular fluctuations, in the economy as follows:
(1) Kitchin's short-wave cycle of average duration 3-5 years, discovered in
1930;
(2) Juglar's cycle of average duration 7-11 years, discovered in 1862;
(3) Kuznets' medium-wave cycle of average duration 15-25 years,
discovered in 1923;
(4) Kondratiev's long-wave cycle of average duration 45-60 years,
discovered in 1922.
J. Schumpeter, who was born in Austria and came to the United States where he also served as President of the American Economic Society in the 1950's, was an outstanding student of economic cycles. He believed that the various cycles are inter-dependent, in contrast with the view of others such as Forrester, who believed that the cycles act independently of one another. Schumpeter baptized three of the four cycles by naming them after their discoverers. The exception was Kuznets' cycle which he did not recognize.
At any rate, Kuznets got a "consolation prize" for being passed over by Schumpeter, namely the Nobel Prize for economics. Moreover, he is the only Nobel-laureate among the four name-giving economists. Kuznets noticed that residential and industrial buildings have an average useful life of 21-23 years. His medium-wave cycle is about fluctuations caused by the amortization-cycle and the problem of replacing ageing buildings. It is interesting to note that all the students of cycles among the four whose name begins with a K were Russian.
Kondratiev's long-wave cycle
The long-wave cycle in the capitalist economy was discovered by the Soviet economist N. D. Kondratieff (1892-1930) in 1922. He had been anticipated by J. van Geldren in 1913 and, even earlier, by Jevons in 1878 and H. Clarke in 1847, among others. Independently of Kondratiev, De Wolfe proposed a theory involving the idea of a long-wave cycle in 1924.
As we have noted above, some important students of cycles believed that they were inter-dependent. In particular, they noted that the average length of each of the four cycles is slightly longer than double the length of the immediately preceding shorter cycle. In the 1930's historians F. Braudel, F. Simiand, ands E. Larousse looked at changes in the "secular trend" that was taking place roughly every 100 years. This suggests that Kondratiev's cycle might also be followed by a centennial cycle of approximately twice the duration.
Kondratiev's methodology involved the analysis of 21 statistical series, that is, 21 economic indicators such as the price index, the rate of interest, wage rates, rents; volume of production, consumption, exports, imports, employment, etc., as well as their standard deviations. In studying volumes Kondratiev used per capita data. He calculated deviation from the trend through the method of least squares. In order to filter out noise caused by the shorter cycles he employed nine-year moving averages. He took his data-base from the French, British, German, and the U.S. economy.
Only in 6 of the 21 series could Kondratiev not confirm the presence of a long wave-cycle. Significantly, in the case of the price level and the rate of interest the evidence was strong. Kondratiev's ultimate conclusion was that he obtained sufficient empirical basis to support the hypothesis of the existence of a long-wave economic cycle in the capitalist economies he studied, with an average duration of 54 years. He allowed a 25 percent deviation from this average. In particular, Kondratiev identified three historic waves:
(i) First wave: rising phase from 1780-90 to 1810-17;
falling phase from 1810-17 to 1844-51
(ii) Second wave: rising phase from 1844-51 to 1870-75; falling phase from
1870-75 to 1890-96.
(iii) Third wave: rising phase from 1890-96 to 1914-20;
falling phase started 1914-20.
Kondratieff was exiled to Siberia by Bolshevik officials who flatly rejected his conclusions. To the faithful there could only be one falling phase of the capitalist economy, followed by the socialist revolution and the dictatorship of the proletariat. And, following that, there was to be only one rising phase, leading to eternal bliss under communism.
Kondratiev died in the Gulag in 1930 at the age of 38. His work was later updated by other economists using his original methodology. They found that the falling phase of the third wave ended 1947-48, and that there is a
(iv) Fourth wave: rising phase from 1947-48 to 1973-80; falling phase
started 1973-80.
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