Articles

Jan. 15, 2004

Long Wave Phases

A number of descriptions of the "Long Wave" have evolved over time. Popular today are seasons. Before seasons, there were Plateaus, Primary Recessions and Secondary Depressions. Personally, writing about the "Long Wave" for 30 years I find none of these schemes satisfactory. It is interesting to note Kondratyev and Schumpeter both referred to only an "up grade" and "down grade". Other labels have been added since.

Even the labels "up grade" and "down grade" do not adequately convey the theory. The term economic depression has a negative connotation. However, the "down grade" is a period of consolidation where many good things happen. The "up grade" is a period of growth connoting a positive. Growth creates displacement and as such causes social strife. One of the things Kondratyev examined was the frequency of wars, finding more wars in the up grades than the down. War can have a devastating impact on those involved.

It must be noted Kondratyev was first to relate wars and social changes to economics. This integration is critical to the understanding of the process.

Kondratyev identified two components to his theory. The first is the irreversible trend. Mankind learns and adapts. As we do, new knowledge is incorporated into society. The progressive nature of knowledge accumulates forming an upward trend. While the Roman Senate may have had district representation, the organization of their political system was not as sophisticated or efficient as modern day democracies. Throughout history, new systems replace the old increasing per capita GDP, health and the quality of life.

Imposed on the irreversible trend are oscillations forming a periodicity running from "limits of opportunity" to "limits of growth". Let me digress here as this seems to be a difficult concept to communicate. In any market at any time when value exists there is a bid and ask. An economy is no different. As Adam Smith put it man's desire for goods is insatiable. There are rare exceptions, but a market and economy tend to seek balance.

With longer trends, there are also limits. As we saw with the Dot Com boom, the public will only chase a dream so far. When the crash came the value of the existing infrastructure was revalued and integrated into the overall economy. This integration represented the "limits of opportunity".

Taking the Dot Com Boom example a little farther gives more insight into the nature of the Long Wave. At the peak in IPOs all types of schemes were floated. The best minds in the country tried to select the winners. Few expected an international garage sale to become one of the more successful new companies. Wisdom is tempered over time. Free market economies for all their waste and messiness do a better job of sorting out value than planned economies. Time from realization to actualization is required to find value. It took the Soviets 75 years to figure out their system of government would not work.

A number of factors characterize the "up grade". In the past few cycles it has been a period of super sizing. The restraints to economic growth are removed by new technology and the economy expands in areas not previously possible or even imagined. The period from 1949 to 1972 saw the space exploration with a man on the moon and the development of computers. The period for 1896 to 1921 saw the development of the Internal Combustion Engine and powered flight. Previous periods saw the development of rails, canals, the steamboat and exploration of the new world

The vast changes brought about by new innovation and exploration create social change. The 1896 to 1921 period saw women getting the right to vote and the fall of the majority of the Monarchies of Europe. The 1843 to 1865 period saw the emancipation of the slaves. The 1949 to 1965 period saw the Hippie movement and the beginning of globalization.

The duality of growth and social change identify the "up grade". There are many other minor characteristics, which I will deal with later, but the mood of the times is set by innovation creating social change.

The "down grade" is characterized consolidation. Innovation takes a back seat to geopolitical trends. The social displacement caused by innovation spills over borders causing geopolitical realignments. Innovations in communication ended the information black out in the Soviet Union causing it to crumble from within.

Innovation becomes incremental during the "down grade". The refinement of the microcomputer was built on the development of main frames in the 1960s and the solid state technology required for space exploration. Socially the Hippie movement morphed into the Yuppies. In the previous "down grade" 1921 to 1949 the technology of the automobile consolidated around one design with most of the features we see in today's cars. The flappers became mothers and raised families. Yet at no time did the freedom won by women regress back to the previous Victorian Era.

With the "down grade" there is little duality. The major changes come in the global arena. In the 1930s, it was the rise of the Nazi's and dictatorships to manage industrialization worldwide. The entire period from the end of WW I to WW II was a sorting out period for political systems driven by new technology. The outcome was the two poles of Capitalism and Communism. Over the past 30 years, the world has seen as massive a period of Geopolitical change as any time in history. The Soviets became Capitalists and the Red Chinese opened their markets to the West. As fantastic as the changes due to innovation are for the "up grade" so are the geopolitical changes in the "down grade".

The geopolitical changes of the "down grade" are necessary to form the next base for growth. The cost of Arms Race limited the economic growth of both the US and the Soviet Union. During the 1980s Japan and German derived a strategic advantage over the US by not having to pay a defense cost. Ultimately, the Arms Race broke the back of the Soviets. A stable Geopolitical environment characterizes each "up grade" where growth compounds with little restriction.

I have tried to describe the two periods alternating over time. It is impossible in such a brief space to give a complete analysis of 1000 years of history. My examples are narrow but designed for the maximum impact. There are those who will find other reasons to support the events I have given as examples. All events have different interpretations and are unique to their time. Kondratyev's Theory is validated by the consistency with which "up grade" and "down grade" conditions appear, generally with little expectation. The 1970s energy crisis, the loss and unpopularity of the Vietnam War, the Fall of the Soviet Union and the current low inflation environment are all events unexpected by the experts of our time. These events all fit very nicely into the expectation of the "Long Wave". The value is not so much in the ability to predict events, but in the ability to anticipate outcomes from landmark changes.