Looking at the Crisis “From Above” Kondratiev, Schumpeter and the “Long Waves” of Economic Development

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Beyond immediate crisis management, the design work for a new and sustainable global economic order and financial architecture necessesitates new conceptual approaches in economic theory. Such “new thinking” must be more than a mere negation of discredited neo-liberalism. Most relevant here are two 20th century economists: Joseph Schumpeter and Nikolai Kondratiev.

By Michael Liebig


If you follow the Anglo-American – and some continental European – media, you must think that, yes, there are certain economic and financial problems in America, but the real disaster has struck elsewhere, notably in Russia, Brazil, India and China, and, naturally, in export-dependent Germany. On top of this, Barak Obama has been elected President of the United States and, we are being told, he will will fix those problems in America. Of course, reality is very different, but I do sincerely hope that Obama will not become the “American Gorbachev”, who was well intentioned, but failed.

Here in Germany, the financial crisis remains at the center of public attention. I spend probably 10 hours a week on commuter trains going to Frankfurt; the impression I am getting is that people are not really so much excited about the financial crisis, but they do worry what it might do to the real economy, for example the auto industry and its Mittelstand suppliers. More than Chancellor Merkel, Finance Minister Peer Steinbrück is being perceived as a competent “crisis manager” radiating confidence that the government is “in control” of the situation. But, as Steinbrück readily admits, the ordeal is far from over, inspite of intense international crisis management.

On November 7, the 27 EU heads of government met in Brussels to finalize the EU agenda for the G-20 Summit in Washington on Nov. 15. One day earlier, on Nov. 14, Russian President Medvedev will meet French President Sarkozy for the EU-Russia Summit in Nice. Following the Oct. 24 EU-Asia Summit in Beijing, Chinese Prime Minister Wen had travelled to Moscow for talks with Medvedev and Prime Minister Putin. On Nov. 7, the finance ministers of the BRIC group (Russia, Brazil, India and China) met ahead of the G-20 Finance Ministers meeting in Sao Paulo the next day. On Nov. 9, the Chinese government announced a $600 billion national investment program to offset the likely decline of exports.

The big question mark for the Nov. 15 World Financial Summit in Washinton is: What will be the American agenda? Obama’s “Transition Economic AdvisoryBoard”, including Roger Ferguson, Robert Reich, Robert Rubin, Larry Summers, Luara Tyson, and Paul Volcker, is too much of a “mixed bag” to make any predictions.

Questions to be asked

Inmidst of the hectic crisis management and ahead of the next months’ intellectual and political-strategic struggles over the new global financial architecture, one ought to pause for a moment and ask some fundamental questions: How can we conceptualize the crisis? Do we really know how we came here?

During the past two decades, many sober folks, albeit a small minority when compared to the mainstream, have forecast that a major financial rupture will come. Their main argument was simple, but correct: When the financial realm is increasingly divorced from the real economy and takes a life of its own, the implosion of the ensuing speculative financial bubble is preprogrammed. However, forecasting, even roughly, the timing of the big rupture is most difficult – and on that one, all “Cassandra” forecasters were wrong. But that should be taken a chance to rethink some fundamentals in respect to the global economic system and its historical evolution, not just during the past three decades.

Is the crisis merely the outcome of greedy and incompetent bankers and impotent governments who let speculators do as they pleased, while the latter knew that they would be bailed out when things would go really bad? Is the past decades’ “disconnect” between the financial sphere and the real economy a sufficient explanation for what has happened so far and what is yet to come? Has the world economy really undergone a secular tendency towards deindustrialization and infrastructure atrophy? Is the the secular rise of the “de-materialized” service sector really the dominant economic trend worldwide?

Finding answers to these questions will necessitate new conceptual approaches beyond utterly discredited neo-liberal economics – and its (mostly) well-intentioned opponents.

Happily, I do see the beginnings of such new conceptual approaches in Germany and Europe, in the USA and in Russia. Of course, a new appraoch is never really “new”, it always starts off from past intellectual achievements.

Enter Kondratiev and Schumpeter

Today, the work of two 20th century economists is most relevant: Nikolai Kondratiev (1892-1938) and Joseph Schumpeter (1883-1950). Both have spent their life’s work on analyzing the inner workings of capitalist economic development.

Kondratiev and Schumpeter are not unknown, but both have been treated as essentially irrelevant during the past three decades. Even worse, some “catch phrases” have been extracted from their works and employed for opportunistic purposes. In the case of Schumpeter it’s the phrase “creative destruction” which was used to exculpate deregulation and speculation. Kondratiev has been treated as “historical materialist” ignoring “free market forces” by mainstream economists, even though he was jailed and then executed for being a “pro-capitalist deviationist” on Stalin’s personal orders.

In 1911, Schumpeter wrote his ground-breaking “Theory of Economic Development,” while teaching in his native Austria. Kondratiev wrote his ground-breaking “The Major Economic Cycles” in 1925. Schumpeter made sure that Kondratiev’s essay was translated and published in Germany in 1926. Schumpeter incorporated Kondratiev’s theory in his 1939 opus magnum “Business Cycles”, in which the “Kondratiev waves” play the central role. After six years at Bonn University, Schumpeter had moved to Havard University in 1932, where he stayed till his death in 1950.

The essentials of Kondratiev/Schumpeter approach can be summed as following:

  • Capitalism is an inherently instabile system of permanent, albeit discontinous change, driven by technological and organizational innovations.
  • The self-induced transformation of the capitalist economy occurs in “waves” – long waves of 40-60 years and shorter conjunctural cycles of 3-10 years.

The long waves of economic development in capitalism – “Kondratiev waves” or “K-cycles” – consist of basically four conjunctural cycles:

  1. Basic innovations – expanding capital formation – prosperity
  2. Saturation – Stagnation
  3. Decline – Rezession
  4. “Depression” – Triage of “uncompetitive” economic activity – Gestation of “new basic innovations”

In their approach to the issue, Kondratiev and Schumpeter regard the financial system as an integral part of the capitalist system, because it is “credit generation” that renders possible the “recombination of productive forces” for the realisation of innovations. Both see the tendency of increasing separation of financial activities from the real economy as growing from one conjuntural cycle to the next. The further this separation advances, the worse the depression will be in terms of length, scope and destructiveness. Triage of “uncompetitive” economic activity is inherent and inevitable in capitalism – but a lengthy, destructive world depression is not.

Thus, the Kondratiev/Schumpeter approach features a “determinism/indeterminism” paradox. The promotion by the state(s) and private entrepreneurs of basic innovations in technology and the institutional framework of the (world) economy, including the financial sector, is the directionality to contain and shorten the depressive triage phase for “devalued” economic assets and activity in capitalism.

My sketch of Kondratiev’s and Schumpeter’s economic analysis is obviously crude, but it might help in trying to figure out where we are standing now, in November 2008? Recent writings by American economist Immanuel Wallerstein and Russian economist Andrey Kobyakov are indicators of a fresh and intellectually stimulating debate on economic theory. Such theoretical work is no “luxury” under pressing crisis conditions, but the precondition for new and sustainable economic policy making. If you are still sceptical, you may ask yourself why the “NATO Institute for Advanced Studies,” in cooperation with the “Russian Academy for Public Administration” (RAPA), has launched a major scientific project on “Kondratiev Waves and World Security”.

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