A Kondratieff Winter?

I’ve said thousands of times (well, many times) that I’m no economist. In fact, I find Economics dreadfully dull. When I read or hear the words “accumulation”, “consumption”, “stagflation”, “deflationary growth”, I start to nod off.  It’s just not sexy stuff. But I’ve been making a concerted effort to grapple with economic theory so I can try to make sense of the global financial hissy fit we’re currently enjoying, not.

I’ve brought you some posts where I try to flesh out my thoughts or share stuff with you – and today is another one of these posts. I’ve started to see the term the “Kondratieff Long Wave Cycle” pop up in the economic blogs and websites I monitor. It’s also called the K-cycle. Do you know what it is? Nope, me neither. So I decided to upskill myself.

Apparently, this Kondratieff dude is a little known Soviet economist. Maybe in economic, pointy-headed circles, he’s well-known but to the average Joe Blogs, I doubt he’s a household name. I encourage you to go off and research yourself but this is what I understand.

Professor Nikolai Dmitriyevich Kondratieff (1892-1938) helped the Soviets formulate the first five-year plan. In some blogs, his surname is Kondratiev. And the entry in Visual Wikipedia shows the relationships and web surrounding Kondratieff. In 1926, he published “Long Waves in Economic Life”, which apparently pissed off Stalin. He was spirited off to a gulag and then copped the death penalty in 1938.

Kondratieff’s gloomy economic theory (which has never been accepted by mainstream economists) was that capitalist economies are fated to long waves (or K-waves) of boom and bust ranging between 50-60 years in duration. He predicted the Great Depression and eventual rise of the capitalist West (that’s probably what pissed off Stalin).

The K-cycle consists of phases that are likened to the seasons:

• Spring – inflationary growth phase, which sees the expansion of production, affluence, falling unemployment, rising wages and so on. This growth phase lasts about 25 years.
• Summer – recession. Growth reaches the limits of resources.  There’s a drop in production, a rapid rise in unemployment and a back-lash against an economy of abundance.  This phase last 3-5 years.
• Autumn – deflationary growth, selective industry production, innovation, rapid increase in debt as society orientates itself towards consumption. This phase can last 7-10 years.
• Winter – depression, the economy contracts sharply, there’s an exhaustion of accumulated wealth. Kondratieff viewed this phase as a time of cleansing when the economy can recover from times of excess and lay the foundation for future growth. He considered this phase would be characterised by a 3-year collapse followed by 15 years of deflation and quiet innovation.

The table below shows how economists have mapped these phases to the booms and busts in the US since 1784.

Joseph Schumpeter trumpeted Kondratieff’s theories. Seems to me the winter chill is setting in and we’re riding the K-wave towards a dark Winter phase. There’s overextension of credit and a worldwide decline in economic activity.

I found this great graphic that explains it all.

You can view a larger graphic here.

I’ve been trying to find out when these cycles began (ie how far back in history did Kondratieff go looking for K-waves?) and what phase are we in fact in now? According to Wikipedia, economists who follow K-wave theory believe that we’ve had 5 K-waves since the late 18th Century:

• 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

And goes on to say: “The current cycle most likely peaked in 1999 with a possible winter phase beginning in late 2008.” So it seems we are still in the fifth cycle, which means we haven’t reached the Winter phase yet – great.

Anyway, not sure I have my head completely around this as I’ve just started researching – maybe you know more. If so, leave a comment. But Kondratieff’s theory makes sense to me.