LONG WAVES (Social Science)

Since the beginning of the twentieth century, observers of the world economy have been analyzing long-term regularities associated with the behavior of the leading economies. Statistical analysis of more than a century of price behaviors and output series in the United States and Britain led Nikolai Kondratieff (1892-1938), a Russian Marxist economist, to conclude in the 1920s that boom-and-bust long-wave cycles exist and that their duration is between fifty and sixty years. The study of key growth indicators of industrial and world output between 1826 and 1968 by Ernest Mandel (1995) found that the periods 1826 to 1847, 1848 to 1873, 1874 to 1893, 1894 to 1913, 1914 to 1939, and 1940 to 1967 were marked with striking fluctuation in the average rates of growth, with ups and downs between successive long waves ranging from 50 to 100 percent. His analysis provided strong evidence of long waves in capitalist development.

In the 1930s the economist Joseph Schumpeter (1883—1950) endorsed the long-wave concept as a reasonable explanation of macroeconomic activity, and he named the pattern, after Kondratieff, K-waves. Schumpeter’s own work focused on the clustering of innovations during the phase of economic depression (the Winter phase). He used the terms "swarms of technological progress" and "gales of creative destruction" to describe this phase. Innovations are hypothesized to cluster during the Winter phase because only then do firms resort to the highly risky strategy of introducing basic, new-to-the-world innovations. This phase is thought to be a key driver of new techno-economic paradigms or structural shifts in the economy. Societies’ adjustments to the basic innovations take the form of S-shaped growth or learning life cycles and are accomplished in the latter three phases (Spring, Summer, and Autumn) of the long waves. Here, firms extract profit from the dominant technologies, rather than seeking new innovations.

Long waves are most often written about during periods of economic downturns and are viewed as a way out of an impending crisis. They receive considerably less press during times of prosperity because the long-wave theory would suggest the less popular hypothesis, namely, that the good times will not last.

ORIGIN

Long waves are not thought to be unique to the nineteenth and twentieth centuries. Some authors have traced them back in Europe over five hundred years, others have identified nineteen such waves dating back to printing and paper in 930, and others assert that they go back at least five thousand years. This entry, however, discusses only the last five such waves (between 1800 and 2025), which represent the industrialization of modern economies. Each appears to have a dominant technology driver, but technology is only one part of a much broader innovation system that is responsible for the long-wave phases. The transportation systems, communication modes, primary energy sources, manufacturing processes, corporate organizational structures, and public administration approaches appear to be unique to particular waves and provide the all-important context for the full depth and breadth of the technology to flourish for each long wave. Thus, long waves arise from the clustering of fundamental innovations that initiate technological revolution and that in turn create leading commercial and industrial sectors. (See Table 1.)

THEORY

According to Schumpeter, long waves are caused by the demand for solutions to new problems, and innovative firms supply these solutions. Each new wave has its own unique innovative character, its own identity, but it is composed of four common phases. The four phases, often described as seasons, are thought of as dramatic mood changes of the economy that can be anticipated by individuals and can influence their actions. As discussed previously, the Winter (depression) phase is characterized by a collapse of the price system, which forces the economy into a sharp period of retrenchment. A three-year collapse is followed by a fifteen-year deflationary work-out period where risky innovation takes place.

The Spring phase (the inflationary growth phase) requires approximately twenty-five years to complete and is characterized by wealth accumulation, new innovation, great upheaval and displacement, and significant social unrest. The exponential growth reaches its limit, inefficiencies build up in the system, and a Summer (stagflation, recession) phase is entered and lasts for twenty to twenty-five years. The Autumn (deflationary growth, plateau) phase of seven to ten years follows with rapid rises in prices, selective industry growth, a strong feeling of affluence, and a general isolationist mood in the citizenry. Interest in long-wave theory waned in the 1940s, 1950s, and 1960s (and again in the 1990s) because predicting a downturn during boom times was not fashionable, but the theory resurged when a new group, known as neo-Shumpeterians, sought to explain the economic downturns of the 1960s, 1970s, and 1980s.

Long waves and critical drivers

Table 1

EMPIRICAL SUPPORT

Kondratieff was the first to use regression procedures to reveal long waves in economic time series data, and Jay Forrester’s computer simulation of the macroeconomic process also reproduced long-wave patterns of roughly fifty years. While subsequent econometric research using time series data and equilibrium assumptions do not find unambiguous support for them, long-wave supporters argue that methodologies based on equilibrium assumptions are flawed because today’s economy is structurally unstable and evolutionary in nature. They suggest long waves need to be measured by observations of physical events associated with the economy, like innovations, rather than traditional economic measures.

Robert Metz’s study (2005) of over fifteen thousand innovations during the 1750-1991 period found innovation clusters peaking in 1840, 1890, 1935, and 1986, followed by an upswing in economic growth eighteen years later, thereby confirming the depression-trigger innovation hypothesis. At the beginning of a long-wave cycle, innovations usually center around one country and a few breakthrough technologies; however, the creation of a new techno-economic system, as shown in Table 1, requires sustained innovations in the related, complementary areas.

POLICY SIGNIFICANCE

If, as asserted above, long waves are a consequence of the inner dynamics of economic growth, then policy makers can put forth prescriptions during different phases of the economic cycle. For example, a government’s policy would have its greatest impact on innovation during the Winter phase, for entrepreneurs need to be encouraged most then. During the Spring phase, governments have to keep a check on inflation to ensure that the economy does not overheat. During the Summer phase of stagflation or recession, the government can offer policies to stimulate the economy. The last prescriptive area is during the Autumn phase, when government policies should be most concerned about controlling inflation. Another interesting finding is that international political economists have studied the relationship between long waves and war and find that wars and revolutions are much more likely to occur during the economic-upswing phase.

LEGITIMATE CONCERNS

Some economists argue that long waves have less validity in a post-World War II (1939-1945) economy given the monetary and fiscal tools available to governments. They cite Federal Reserve Chairman Alan Greenspan’s providing of massive liquidity after the dot-com bust of 2000 to prevent a Kondratieff Winter. Wave supporters counterargue that the resulting debt from this policy has become unsustainable and only temporarily postponed the pending Winter phase for a few years. As evidenced by the above arguments, the timing of each phase is critical to policymakers and economists. Unfortunately, long-wave theory lacks precision in this domain, particularly in the area of explaining the downswing at the end of the prosperity phase.