If only all economic theories were like this: gory, easy to grasp … and largely right

18 Oct 2017


Josef Stalin had the economist Nikolai Kondratieff shot for claiming that capitalist economies were not doomed to inevitable self-destruction, but actually followed long-term cycles of death and rebirth. Kondratieff’s wave theory has since been proven largely accurate. So accurate, in fact, that it could be time to start worrying.

When I told my father I was planning to do a degree in history he said to me: “What are you going to do, be an effing librarian?” (His language has been sanitised for readers of a sensitive nature.) He felt I’d be better off avoiding university altogether which, he pointed out, was full of lazy Trots doing nothing - at his expense. “Become a farmer,” he said, like him.
 
In the end I chose neither libraries nor livestock and ended up – I’m not quite sure how – as a financial journalist. I only mention this career quandary to make the point that I was a historian before I was a journalist. And as a historian I am very interested in patterns. That is why I was fascinated to read this week about Kondratieff waves. I am ashamed to say, I’d not heard of these before Monday.
 
I think they might have come up when I studied the Marxist historian Eric Hobsbawn during my A-levels. But, if they did, I soon banished them from my memory. After all it was The End of History when I was at school in the early nineties so old-school lefties, like Hobsbawn, were utterly discredited. (Oh how times change.)

Dead right
So, what exactly is Kondratieff’s theory? I hear you ask impatiently. Nikolai Kondratieff’s idea was that capitalist economies go through 50-year super-cycles punctuated by ‘evolution and self-correction’. Each wave has four distinct phases: prosperity, recession, depression and improvement. He based this theory on the fortunes of European agricultural commodity and copper prices. Unfortunately for Kondratieff, Stalin did not agree with him – because, obviously, capitalist economies were doomed to final self-destruction and not periodic rebirth - and so sent him to the gulags in 1930 and had him shot in 1938. Good for Kondratieff for sticking to his guns. And taking a bullet for the cause. He’s been proven largely right.
 
Since the Wall Street crash of 1929 economists and historians have consistently applied and reapplied Kondratieff’s theory to the history of Western economies. These waves of prosperity and pain appear to fit perfectly with profound and life-changing technological change. From the birth of steam power in the late 18th century, through to cars in the 20th century, right up to today’s information technology revolution - K's waves correspond.

We're all doomed, for a bit
This chart proves that Kondratieff’s theory has been largely accurate since 1780. And it also shows, worryingly, that we are at the end of the fifth cycle (IT) - the depression phase – and have been since 2000. Though to look at stock markets and bond yields today, you really wouldn’t think it. But maybe this is because of unprecedented market intervention by central banks. And rather than bring us out of recession, this extraordinary intervention – in the shape of low rates and QE - has merely postponed a ‘great reset’ that is long overdue. But don’t worry, after the misery, we’re all due a good long dose of prosperity, according to Prof K.

Whether any of us will be young enough to appreciate it, is quite another matter.

And as for the next technological revolution that will drive the next extended phase of prosperity? Answers on a postcard please, to Charlie Corbett c/o Euromoney Conferences, London. Or email: charlie.corbett@euromoneyplc.com

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