Can K-Waves Predict the Next Boom (and Bust)?
In 1925, Russian economist Nicolai Kondratieff published a paper arguing that capitalist economies followed a regular, long cycle, from boom to bust and back again.
Each 'K-wave' follows a similar pattern -- an inflationary boom with easy credit that climbs to dizzying levels -- then a much quicker slide into a deflationary slump with a shortage of credit that mirror images the boom.
So we have the slumps of the nineteenth century, the 1930s-40s and, a bit behind schedule, our own present little difficulty. Each slump is preceded by a boom, with both being roughly the same length -- around 27 years on the up and the same on the down.
Evidence bearing out Kondratieff's discovery is compelling, though it did him no good. Marxist doctrine held that capitalism possesses the seeds of its own destruction: there is no place for its periodic rebirth. To the Soviets, Kondratieff's discovery was heresy -- and Stalin saw to it that ended his days in Siberia.
His theory tends to be neglected at times of boom but is now being taken seriously once again.
This is partly for obvious reasons: if we can be sure that economic activity does follow a regular pattern, then we have a tool to see the future, to invest and make our fortunes -- or at least to avoid the expensive mistakes of dodo investment.
But there's a sting in this 'long wave theory': economic cycles are not as regular as bus timetables. So pundits disagree on the precise dates of economic starts and stops. This makes it difficult from any one position in a recession to decide whether this really is the big one or whether the optimists are more correct.
And yet - and yet! I believe there is enough regularity to give us guidance about our investments. Since Kondratieff's day we now have more experience.
In particular, we have key knowledge that links waves of innovation to Kondratieff's long waves. Innovation has been found to occur with the same regularity -- from cotton textiles and wrought iron in the 1780s and 1790s to aerospace and electronics in the mid 1930s '40s, and every severe slump in between.
Each wave of innovation occurs in the depths of depression: it is innovation that drags the economy into its next boom and makes the fortunes of a new wave of investors. While inventions occur randomly at any time, innovations occur in batches and are concentrated in short periods during slumps when they can exploit cheap and plentiful labour, capital and land.
Unfortunately, though, investment is never simple. As economies have become global, so the location of innovation has shifted from country to country. The Industrial Revolution's first wave based on iron and cotton textiles was centred in Britain. Successive waves shifted ideas to Germany, then the US, along with Japan and the Pacific Rim.
The new K-wave, with its focus on micro-processors, bio-engineering and perhaps new forms of energy looks as if it might well be based on China, India and Asia Pacific.
So if there is a recognisable series of cycles, why is it that people never seem to learn from mistakes of the past?
It seems the cycles are so long that anyone who has experienced the trough of one wave will no longer be in a position to influence the next one.
Here's a final thought. The archaeologists have discovered that Kondratieff waves were operating in Roman Britain. Their conclusions are based on known evidence of pottery production and the speed (velocity) that silver coinage circulated. Their waves were shorter than ours -- approximately 40 to 50 years compared to our 50-70.
Could this be based on a shorter life span? Whatever the reason, the Romans were probably as surprised at the gyrations of economic life as we are and -- for the same reasons -- probably no more successful at learning from the past.