Two Cheers for Kondratieff

Around 1930 the most famous Russian economist was undoubtedly Nikolai Dmyitreyvich Kondratieff. For years his famous ‘Kondratieff cycles – long boom-bust cycles of business activity – fascinated economists and business analysts. Then he fell out of fashion, and is now unknown. By abolishing capitalism, Stalin abolished the business cycle, and had Kondratieff liquidated. In the capitalist west, too, the business cycle disappeared in the 1950s and 1960s, as governments learnt how to ‘manage’ economies with fiscal tools and monetary tools bequeathed by John Maynard Keynes. Today, as food, energy, and raw material prices press relentlessly upwards, threatening poor-country consumers with starvation, and rich-country economies with stagnation, it is worth taking another look at what the old boy said.

The simplest version of Kondratieff’s cyclical theory (which was based on a study of price movements going back to the late 18th century) is as follows. The 50 year cycle starts with a shortage of food and raw materials, which leads to a rise in their price. Real wages in the other sectors fall, and there is a heavy investment in new sources of supply. In the 19th century this took the form of opening up the ‘New World’ for grain and cotton production. The ensuing fall in the relative prices of primary products causes real industrial incomes to rise, and industrial expansion to go forward, based on leading sectors – textiles, railways, and steel in the 19th century; motor cars, mass consumption industries in the 20th century. Rising demand from population growth and industrial expansion brings about a renewed shortage of food and raw materials, which causes their prices to rise again, leading to industrial depression, a new wave of investment in new supplies, and a reverse movement in prices.

Kondratieff himself plotted these ‘long waves’ till the 1920s, but they can be carried forward. The long industrial boom of the 1950s and 1960s was based on cheap food and energy. The industrial boom drove up commodity prices in 1972-5 as demand outpaced supply. The slowdown in the industrial world then brought about a collapse in commodity prices, and there is no discernible trend from the early 1980s to 2000. From about 2000 the relative price of energy and food has been rising again, with a consequent slowdown in the west’s growth.

Will this slowdown, plus investment in new crops and cheap, renewable, and hopefully non-polluting sources of energy have its usual effect in reversing the commodity boom? Or will the rate of population increase in relation to food supplies, the pressures of expanding industrial production on raw material supplies, the high cost of energy itself from existing sources and technologies, and the inescapable cost of preserving the ecological future finally bring mankind up against its production frontier?

The Kondratieff theory will not tell us. It is not an engine of precise prediction. Its cycles are too elastic in length, short cycles interfere with long cycles, and its idealised waves are too much distorted by random events like wars, revolutions, speculative bubbles, financial collapses, and the like. What the theory does is to remind us that a de-regulated capitalist system is subject to alternating rhythms of activity, rooted in sluggish adjustment to changes in fundamentals.

There is one alarming change since Kondratieff’s day. This is the huge expansion of demand for exhaustible supplies from the newly-industrialising world, especially China and India. This may make today’s recession in the west far longer than in the 1970s. The nightmare scenario is increasing competition leading to wars between a rising east and a declining west for access to a limited supply of non-renewable resources.