Everybody knows the economy and thus the markets move in cycles.
Economic expansion naturally leads to
contraction, driven by credit and
business cycles. But are economic booms followed by busts inevitable?
At Business School today we accept and even teach cycles, for example the
Kitchin inventory cycle (three to five years in length, first postulated by Joseph Kitchin in 1923), the
Juglar fixed investment cycle (seven to eleven years in length, discovered by French physcian Clement Juglar in 1860) and the
Kuznets infrastructue investment cycle (fifteen to twenty five years in length, postulated by Nobel Laureate
Simon Kuznets), but could there be longer wave cycles dominating and driving these higher frequency waves?
Nikolai Kondratieff was a Russian economist who favoured a holistic view, believing that efficient forecasts of economic activity and thus the markets
had to integrate social and cultural trends. This broad perspective convinced him that amid the apparent chaos of the capital markets, long term unifying processes existed which could be leveraged for forecasting purposes. Kondratieff believed capitalism followed forty to sixty year cycles of economic growth followed by depression.
These cycles are now known as "Kondratiev waves".
Kondratieff waves postulate four basic "seasons" to the economic cycle; Summer, characterised by sharp increases in the money supply, leading to investment and inflation. Spring follows as the money injected into the economy during summer drives an expansion in business activity. Autumn, which sees a peak in share prices and relatively high debt levels amid slowing business activity is followed by Winter, where we observe bankruptcies and cratering share prices.
To many followers of Kondratieff, the G20 are currently
deep in winter [.jpg]. , and some have put together data summarising
Kondratieff winters since the 1700's.
While there is not much academic research corroborating Kondratieff's work, during periods of economic stress we tend to see
increased interest in wave theories.
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Let us then look more closely at the long contraction, or "long depression," phases of the Kondratieff cycle. To make any sense, they should in some way look and feel like depressions, like grim periods of decline in business activity. The first Kondratieff long depression was supposed to be the period 1814-1849. But these thirty-five years were by and large a period of great expansion, prosperity and economic growth for the United States, England and France, the three countries Kondratieff used for his statistical analysis. And what of the second Kondratieff depression, the period 1866–96? Was that in any sense a depression? For the United States, and to a large extent for Western Europe as well, this was the period of the most dazzling spurt of production and economic growth in the history of the world. Production and living standards skyrocketed. How in the world could three such glorious decades be called a period of secular decline?
Obviously, it is absurd to call these periods long-wave depressions. The point is that in real terms – production, activity, growth, employment – these "Kondratieff depressions" were all periods of gigantic growth and prosperity. The only sense in which the two nineteenth-century "Kondratieff contractions" were contractions at all is that prices, by and large, fell during those decades. And that is that.
But if only prices fell, while all real or physical units increased, this means that the Kondratieff contractions could only be considered depressions if we define periods of falling prices as depressions or declines in economic well-being. And here we have one of the many fundamental fallacies of the Kondratieff doctrine.
posted by anotherpanacea at 6:19 AM on March 6