The Kondratiev Wave

In economics, Kondratiev waves (also called supercycles, great surges, long waves, K-waves or the long economic cycle) are hypothesized cycle-like phenomena in the modern world economy. The phenomenon is closely connected with the technology life cycle.

It is stated that the period of a wave ranges from forty to sixty years, the cycles consist of alternating intervals of high sectoral growth and intervals of relatively slow growth.

Long wave theory is not accepted by most academic economists. Among economists who accept it, there is a lack of agreement about both the cause of the waves and the start and end years of particular waves. Among critics of the theory, the consensus is that it involves recognizing patterns that may not exist.

The Soviet economist Nikolai Kondratiev (also written Kondratieff or Kondratyev) was the first to bring these observations to international attention in his book The Major Economic Cycles (1925) alongside other works written in the same decade. In 1939, Joseph Schumpeter suggested naming the cycles "Kondratieff waves" in his honor. The underlying idea is closely linked to organic composition of capital.

Two Dutch economists, Jacob van Gelderen and Salomon de Wolff, had previously argued for the existence of 50- to 60-year cycles in 1913 and 1924, respectively.

Since the inception of the theory, various studies have expanded the range of possible cycles, finding longer or shorter cycles in the data. Ray Dalio in his book “The Changing World Order” speaks of this cycle.

Kondratiev identified three phases in the cycle, namely expansion, stagnation and recession. More common today is the division into four periods with a turning point (collapse) between expansion and stagnation.

Writing in the 1920s, Kondratiev proposed to apply the theory to the 19th century:

• 1790–1849, with a turning point in 1815.
• 1850–1896, with a turning point in 1873.
• Kondratiev supposed that in 1896 a new cycle had started.

A rough schematic drawing showing growth cycles in the world economy over time according to the Kondratiev theory

The long cycle supposedly affects all sectors of an economy. Kondratiev focused on prices and interest rates, seeing the ascendant phase as characterized by an increase in prices and low interest rates while the other phase consists of a decrease in prices and high interest rates. Subsequent analysis concentrated on output.

When inequity is low and opportunity is easily available, peaceful, moral decisions are preferred and Aristotle's "Good Life" is possible (Americans call the good life "the American Dream"). Opportunity created the simple inspiration and genius of the Mayflower Compact, for example. Post-World War II and the post-California gold rush 1850s exemplify times of great opportunity and low inequity, and both resulted in unprecedented technological and industrial advances. On the other hand, 1893's global economic panics were not met with sufficient wealth-distributing government policies internationally, and a dozen major revolutions resulted, which some argue were significant causes of World War I. Few would argue against the assertion that World War II began in response to the economic strictures of World War I's Treaty of Versailles and the failure to create government policy that supported economic opportunity during the Great Depression.

According to the innovation theory, these waves arise from the bunching of basic innovations that launch technological revolutions that in turn create leading industrial or commercial sectors. Kondratiev's ideas were taken up by Joseph Schumpeter in the 1930s. The theory hypothesized the existence of very long-run macroeconomic and price cycles, originally estimated to last 50–54 years.

In essence, Ray Dalio speaks of similar cycles which explain the rise and fall of empires. The transition of one cycle to another is probably 20-30 years. And we are likely in that transition.

Reference:

Kondratiev Wave, Wikipedia