Long Waves In Global Business Cycles Versus Sri Lanka’s Disastrous Short Waves

By W. A Wijewardena –JUNE 8, 2020

Dr. W.A Wijewardena

Nikolai Kondratieff on business cycles

The business cycle theory presented by the Russian economist of the early 20th century, Nikolai Kondratieff (in Russian Kondratiev) has received attention of the mainstream economists in the West only recently. Till about early 1990s, he had been relatively unknown, though his theory had had a profound impact on the understanding of business cycles. There was a reason for it. Except a few articles published in leading economics journals in the West, all his writings, done in Russian, had been translated into English fairly recently. That was because, despite his Marxist leanings, he was considered a traitor by the Soviet establishment. On this charge, he was arrested in 1930, kept in prison for 8 years and executed by a firing squad in 1938 at the prime age of 46 years. 

His crime? He had discovered through empirical research that capitalist societies had repeatedly undergone ups and downs in their economies – known as business cycles – but had managed to recover to a new position every time they had suffered from an economic downturn. Such business cycles had typically been experienced by Western economies for long periods of about 50 to 60 years which he designated ‘long-waves’. 

This was against the worldview presented by the Soviet leadership at that time. Their worldview simply said that capitalist societies are inherently defective and would see their eventual downfall whereas communist societies are permanent and progressing continuously. The fate which Kondratieff received at the hands of the Soviet leadership at that time was typical of any authoritarian rule. The authoritarian rulers throughout history have shown that if you express any view opposed to theirs, you have to pay for it dearly. 

That dear payment in the Soviet Union took the form of trading your life for intellectual subservience. Kondratieff did not agree to this trade-off and preferred to be executed. He was in oblivion for five decades and was resurrected among the mainstream of Russian academia only after the Soviet Union collapsed in 1990.

Birth of Kondratieff Waves

Before his arrest and incarceration in prison, he was a leading member of the Soviet establishment. He helped Vladimir Lenin to prepare his New Economic Policy to make a turnaround of the fast decaying Russian economy immediately after the October Revolution of 1917. He prepared the agricultural policy in which small farmers could produce food products for the market. 

Kondratieff’s main research interest was business cycles and in furtherance of this interest, in 1920, he set up The Institute of Conjuncture in Moscow. This led to the publication of a series of papers and books on business cycles starting from the 1922 publication, ‘The World Economy and its Conjunctures after the War’ and culminating, in 1925, in his main work on the subject, ‘The Major Economic Cycles’. 

Before this major work, he published a paper in 1924 distinguishing between a selected point in the economy – known as making a static view – and the movement from that point to a forward point in the future, called the dynamic progression of the economy. All that matters to an economic planner is not this convenient static view but how the economy would progress over time as presented by its dynamic developments. It enables the planner to grow along with the growth of the economy and gauge for himself its strong features as well as weak points. 

This is similar to a mother living with her son or daughter. She would personally experience how he or she is growing and what are his or her strengths and weaknesses. Any intelligent mother would know that his or her growth is only in the forward direction and she could not rewind the clock to an earlier point in his or her life to try out a new beginning, even if she would have loved to do it. Noting this forward direction of economies and inability to move back to an earlier point in history, Kondratieff observed that all economies were subject to a series of repetitive ups and downs in long waves each spanning over 50 to 60 years. 

Out of respect for the discoverer of these long waves, the Austrian-American economist Joseph Schumpeter designated them as Kondratieff Waves or simply K-Waves. The subsequent economists have found that these long waves are in fact a reality and discovered seven such waves pertaining to Western economies as presented in figure 1.

Figure 1 – Source: Google

Presently, the world is going through this last wave that had started in 1970. At the tail end of the seventh wave, the global economy has been hit by an unexpected event in the form of COVID-19 pandemic pushing it further down in the downswing, probably in to the negative area, and postponing the progression into the eighth wave.

Frenchman Clément Juglar on commercial crises   

Of course, before Kondratieff, the French physician and statistician, Clément Juglar had identified in two publications, first in 1880 and the other in 1889, long commercial crises akin to modern day business cycles. He identified three phases of a commercial crises, prosperity, crisis and liquidation.

Read More