Overview

Before Kondratyev published his now famous paper on the "Long Waves of Economic Life" he published a paper on Dynamic Equilibrium.  The paper published in 1921 was attached as a preamble to the 1925 "Long Waves" paper, but deleted before publication.  History being what it is Kondratyev's  theories on Equilibrium have been largely ignored.  

Business Cycles

Business cycle theory was very much in vogue in the late 19th century and remained the primary economic theory until the implementation of Keynesian policies in the early 1930s.  Indeed the names coming out of the period, Juglar, Kitchin, Kuznets and even Schumpeter were all business cycle theorists.  Kondratyev made a departure from standard business cycles not because he failed to note periodicity, but because he questioned the cause of the periodicity.  

A New Model

In researching the theory for over 30+ years it is apparent the popular interpretations of seasons or extended plateaus are at best misdirected.  It matters little the "point on the wave" as the process of dynamic equilibrium is continuous.  For years I have wrestled with the better model to explain Kondratyev's ideas.  The typical wave formation is misleading and skewed to advance and decline.  

One of the most confusing labels of the "Long Wave" theory is in calling the downgrade a secondary depression.  In reality both the typical upgrade and the downgrade have their own unique characteristics neither of which are all good or all bad.  The difference lies in the intensity of the various factors.  Understanding these factors and their balance at different times gives a better overview of current events and increases accuracy.

In developing the model it was necessary to reduce events to their components. A model is never realty, but simply a format in which to order and discuss thoughts.  Events such as Women Rights might not directly relate to economics or finance yet are still driven by economic conditions and opportunity.  One cannot be separated from the other, but can have a varying impact on outcomes.  Thus the interpretation becomes one of  balance. 

Model Structure

All of the events that impact an economy fall into one of four main categories with the associated sub categories.  Instead of looking at "The Theory" as a wave it is viewed as a wheel - a square wheel to be sure but nevertheless a wheel.   This interpretation better supports Kondratyev's separation of the reversible and irreversible trends.  The irreversible trend is progressive building on accumulated knowledge.  The reversible trend can then be visualized as a wheel running along the irreversible trend providing character and opportunity.

Financial.  The base of the model is financial.  The ability to value assets and wages is the key to an economy.  In any economy, be it agricultural, industrial, manufacturing, mercantile or information, financial structures and markets provide an important base.  Historically  periodic disruptions to financial systems are acute and easily sorted out.  Even after the destruction of war, where anarchy reigns, methods of valuation and a currency of exchange are easily defined.  As with all components of the model financial systems evolve to meet the needs of society.

Innovation.  Without innovation economic growth is bounded by the fluctuations of nature.  From the first planting and cultivation of crops to the creation of computer chips innovation drives growth. Without innovation there is no economic growth.   Innovation occurs through out the overall model but is most pronounced when financial opportunity is the greatest.

Social.  Borrowing from Newton's Laws of Motion - for every action there is a reaction.  Innovation creates displacement.  Paralleling the growth though innovation is social conflict.  Innovation brings wealth and freedom and thus demands upon society.  As the displacement exceeds the capacity of innovation to increase wealth, limits to growth are reached.

Geopolitical. Economic growth is best supported by Geopolitical stability.  As social pressures build from the displacement of innovation they spill over and force Geopolitical realignments.  Wars and treaties play an integral part in producing balance and accommodating change from new innovation.  

A Question of Balance

Probably the biggest misconception about Kondratyev's theory is the concept of a beginning and an end.  What is suggested from Dynamic Equilibrium is an on going process.  Such an approach more closely matches the real world.  Yet one other piece must be added to the puzzle. 

At times events come to completion and at others remain open ended.  Open ended issues need attention.  The same principle apples to psychology.  Avoiding conflict only serves to delay the inevitable and increase apprehension.  Individual psychology collectively reflects on society.  

The separation of any point in time into the four primary components allows for the measure of imbalance, the identification of trends and the evaluation of conflict.  The events with the greatest conflict are also the events that create the most predictable harmonics.  

External Artifacts

Walking around the model it is clear, while all four components are in play at all times, there is never a point where balance is achieved.  Always one aspect of the model dominates.  Such an interpretation is life-like as competition and humanity are a struggle for rewards.  Any economic model not reflecting these aspects is less than honest and not reflective of the real world.

The process of compounding innovation creates both social conflict that accumulates over time and strains to the financial system attempting to accommodate new products into the price structure.  As a result inflation is a by-product of new innovation.  New innovation when first introduced has a small impact.  As innovation spreads small displacements compound requiring refinements in design.  New innovation also impacts resources leading to shortages further driving inflation.

As social issues dominate innovation is stifled.  New innovation moves to incremental innovation correcting the errors of the past.  The lag in new products and the increased competition in known markets leads to deflation.   

The push of social change and the strategic advantage gained from innovation forces Geopolitical realignments first creating instability and eventually creating a new base for economic growth.

Summary

Dynamic Equilibrium provides a method for ordering historical events.  The degree of closure determines harmonics exposing the timing of future events  - politically, economically and socially.  Instead of looking for a beginning and end the process transcends time allowing for evaluation of risk and opportunity on continual basis.