Nikolai Dmyitriyevich Kondratyev
(1892 - 1938)
Who Was Kondratyev?
To introduce the Kondratyev Theory, we must go back over seventy years and
examine a remarkable story in economic history, encompassed within the life of one still
little known man. I am certain that, in time, Kondratyev will rank with the giants of
discovery as Einstein, Newton and Keynes. Like these men, his insights have begun to alter
radically and permanently our perceptions of economic history.
Professor Nikolai Dmyitriyevich Kondratyev ( or, "Kondratieff",
pronounced "Kon-DRA-tee-eff") was a Russian economist of the early
1900's and a pioneer of dynamic economic theory.
Having almost a free hand for research Kondratyev produced
ground breaking theories interrelating
economics and politics, taking into consideration such events as war, discoveries, public
opinion, and weather as integral parts of a long-term economic life-cycle. Within a
market system, Kondratyev proposed economic trends tend to generate
harmonics with a periodicity of approximately 53 years. These harmonics are
systemic.
Kondratyev's works were first translated into English in the early 1930's when
it was discovered that he had accurately predicted not only the thirties depression, but
also the speculative orgy that preceded it. During the 1930s considerable
research was done on business cycle theory, culminating in Joseph Schumpeter's extensive two
volume work on the subject. Later, with the advent of Keynesian simulative polices and
their progressive effect on the economy, Kondratyev's ideas as well as business cycle
theory slipped back into obscurity. Not until the early 1970's, when growth faltered and
simulative monetary policies began to produce inflation similar to that of the 1920's,
were his ideas rediscovered. Not only were Kondratyev's theories valid, but they actually
predicted the course of today's economy -- 60 years in advance.
The Measurement of Change
Human affairs are rarely admitted into general discussion of economic theory.
Kondratyev acknowledged public reaction as directly influential to the ebb and flow of
prosperity, and therefore as vital to the economy. He viewed rational public response as
tides of change, with its measurement and its effect on the future forming the basis of
his Wave Theory.
Kondratyev believed that people act differently over time in a continuing
repetitive pattern. By combining environmental and demographic factors with the cumulative
body of human knowledge, his theories refute mere historical repetition, but offer each
era as unique. The Kondratyev Wave Theory consolidates seemingly random events, coherently
and predictably.
Accumulation and Consumption
U. S. wholesale prices dating back to 1800 show several periods of accumulation
followed by periods of over consumption. Because these periods are statistically difficult
to measure our outline follows historical events, pinpointing major changes in trend.
During periods of relatively cheap prices, assets accumulate. As prices increase, the
consumption of assets are necessary to maintain a standard of living. When new production
fails to keep up with consumption, due to relatively high prices, the economy begins to
decline to another period of cheap prices, and a new growth cycle begins.
Determination of mood
A Kondratyev cycle consists of four distinct phases, or distinguishable,
dramatic mood changes, the tone of which determines the actions of individuals involved in
the economy. The awareness of these characteristics allows for the anticipation of the
change in the economy and the psychological mood that will prevail.
The Growth Phase
A common premise among business cycle economists supposes inflation as an
inevitable part of growth. Government becomes a passive participant in the inflation
cycle. Growth begins from a depressed economic base and expands in an ever-increasing
spiral. The interaction of the participants within the economy causes wealth, as
represented by savings, and the production of capital equipment to be accumulated for the
future. The expansion of production and affluence causes prices to rise, and the increased
volume of goods requires a higher velocity of money, thus creating a higher price
structure.
Historically, the growth phase requires 25 years to complete. During this time,
unemployment falls, wages and productivity rise and prices remain relatively stable. The
mood of the growth phase is one of accumulation and the desire for new product
manufacture.
Accompanying growth is a shift in social demands. As wealth is
accumulated and new innovation introduced great upheavals and displacements take
place. The process of social unrest builds with growth culminating in
massive shifts in the way work is defined and the role of the participants in
society.
Primary Recession
Eventually, the continuation of exponential growth reaches its limits. Excess
capital produces a shortage of key resources and the economy enters a period where
growth creates a shortage of resources. An economy will only support expansion to the limits of its
resources, both human and material.
The mood of affluence also brings a change in attitude
towards work. As an economy gets closer to its limits inefficiencies build up
The imbalances of this period have been historically exaggerated
by what can be labeled a "peak war". Examples such as War of
1812, the Civil War, World War I and Vietnam, came at the end of a very
affluent period. These Wars produce strains on the economy increasing the
impact of inflation. A dramatic drop in output, rapid rise in unemployment and unusually severe
recession characterize this period. Although this primary
recession is short lived lasting only three to five years, it is key in altering
perceptions and the structure of the economy. No longer does excess create
an abundance. The "Limits to Growth" now define a maximum level
of economic activity that traps the economy into consolidation and tight bounds
for the next 20-25 years. With the change comes a conservative shift in
the popular
mood reinforcing the limits..
Plateau Period
The primary recession occurs out of an imbalance forced upon the economy by real
limitations. The rapid rise in prices and changes in production correct this imbalance --
at least temporarily. The change in price structure, along with the mood of a population
used to consumption accompanied by the vast accumulation of wealth from the past 30 years,
causes the economy to enter a period of relatively flat growth and mild
prosperity. Due to structural
changes and the limits of the existing paradigm the economy becomes consumption oriented.
Excesses of an unpopular war, along with fiscal liberalism, cause popular
reaction toward stability or normalcy. A mood of isolationism permeates . The
plateau period generally lasts seven to ten years and is characterized by selective
industry growth, development of new ideas ( both technological and social ) and a strong
feelings of affluence, terminating in a feeling of euphoria. The inflated price structure
from the primary recession, along with the desire for consumption, produces a rapid
increase in debt. Eventually, wealth consumption expands beyond all practical limits, and
economy slips into a severe and protracted depression.
Secondary Depression
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.
Kondratyev 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 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.
It is important to realize the Long Wave as global.
While global issues are of prime importance today with increased air travel and
communication, the Long Wave defines a time table for geo political
events. The Growth Period is one of political stability. Staring a
the peak old alliances become challenged. Through the process of the Down
Grade old alliances fail and new alliances are formed. The final stages of
the Down Grade is a period of coalescing or "quickening" of the
alliances that will govern the next period of growth.
Summary
Probably Kondratyev's greatest contribution to the science of
investment is not his observation the world economy operates in long
cycles. Cycles would suggest a repetitive nature to events. While
the underlying economic conditions will repeat over time due just to the
physical nature of our world, our reactions will always be tempered by knowledge
and experience. The history of man has been one long climb higher.
Kondratyev recognized progress as the irreversible trend.
Imposed upon our progressive nature are the physical limits of
life. It is the interaction of these physical limits with our dreams and
aspirations that creates the constant push pull of the economy known as the Long
Wave.
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