Rethinking Long Cycles in Development

Economic growth is not a guaranteed thing. While there has been a general upward trend in GDP and standards of living, there are constant recessions and depressions along the way. Some of the recessions are passing; others are more severe and tend to go on forever.

    

When the economy is bad, nothing else seems to work. Governments become ineffective, a) because they have no money and b) there are usually other causes of the depression which the government can’t do much about. People become cynical. People become distrustful. Ethnic hostility goes up. Government leaders start looking for military adventures to cover for their lack of success in the economic sphere. All in all, long depressions make everything else bad.

    

Recessions and depressions are frequent phenomena because economic growth at the global level is loosely cyclical. Periods of prosperity alternate with period of major downturns. The most famous theory of cycles came from the Soviet economist, Kondratieff who posited 50-year cycles of 25 years of boom and 25 years of bust. There are lots of reasons to be skeptical of a tight 25/25 characterization. Some nations are not on the same rhythm as the rest of the world. Some booms and busts don’t start right when a 25-year prediction says they should. But the basic long cycle phenomenon is real and has a lot to do with when depressions occur.

    

My own personal favorite of long cycles is technological and comes from the work of Gerhard Mensch. But as good as Mensch is, he is not the entire story. There are global factors that matter as well. Let’s look at the five big Kondratieff waves and then deal with the factors that caused them.

The Industrial Revolution – which was the origin of the prosperity we now enjoy in the modern world – was really a case of new product development. Previously, clothing had been hand-made which made clothing very expensive.  Machine spinning and weaving dropped the price of clothing dramatically; now even poor people could afford whole wardrobes. The world went on a clothes-buying binge, leading to one of the greatest economic expansions in history. The clothes-buying binge began to fade in the 1820’s. The British and world economy however, were rescued by railways.

    

The building of the railways was a tremendous source of world growth in the 1840s and 1850s (although some important lines had been built before then). Nearly every major city was connected with everywhere else in the world. The railway boom required not only the buying of a lot of land and laying a lot of rails. It required constructing vast numbers of railway engines and passenger cars, building railway stations in every city, and digging enough coal mines to keep all those steam engines running.  Ultimately, this boom too ran its course. All the lines that made sense had been built, and subsequent lines were money losers. Then the world economy was rescued again – by structural steel.

    

The invention of modern steel led to a reconstruction of every large structure in the developed world. Wood buildings became steel-framed buildings. Wood boats and bridges became iron boats and bridges. Cheap, high quality steel facilitated the use of heavy machinery and of large amounts of wire – paving the way for the electrical revolution.  Unfortunately, much of the transformation of world structures from wood to steel had been accomplished by 1920. The 1920’s saw depression throughout Europe – followed by the Great Depression of the 1930’s. Then the world economy was rescued again – by the automobile.

    

Every family came to own one, and later on, two cards. The automobiles were rapidly replaced as technology improved. Cars with hand cranks became cars with keyed ignitions. Cars with manual brakes became cars with power brakes.

    

Furthermore, the automobile generated a huge number of by-product industries. Highways had to be built to accommodate the new vehicles. The cars needed gasoline – dramatically expanding the petroleum industry. Cars made commuting to work feasible – making it possible for people to live in suburbs and drive to the city. This led to a complete restructuring of world cities with the creation of vast new suburbs and the shopping facilities to go with them. Restaurants became economically viable as an industry; people might not walk fifteen miles to have a fried clam dinner, but they would drive fifteen miles to have a fried clam dinner. The insurance industry thrived since all of the vehicles needed to be insured.

    

Ultimately, however, shoppers in the developed world had all the cars they needed. Worse, the great new innovations stopped coming, so there was no need for people to jettison older generation cars for better models. The saturated market made the 1970s and 1980s years of economic stagnation and slow global growth. The world economy was saved again – this time by the personal computer and the internet.

You probably know the history of the computer/internet era. There is no need to review that here.

 

The Technological Basis of It All

    

Mensch argued that Kondratieff cycles are driven by natural cycles in the advance and stagnation in scientific development. Long term economic growth is driven by technological innovation. Economic development is extremely dependent on having new products to sell. Mensch argued that the great expansionary cycles of the world were linked to fundamental technological innovations that generated a broad range of related products. Busts occur when the scientific community becomes exhausted – when the engineering of a given product becomes so well understood that there are no more viable new improvements that can be made.

    

Cycles start with a break-through innovation: Inventing factories that can make clothing, making cars cheap by building them on an assembly line. The new breakthrough innovation makes a product that everyone has to have. There were a huge amount of sales linked to people acquiring this new basic product for the first time.

    

The new product produced collateral growth through multipliers. The textile factories and the auto factories needed supplies. Cotton growers in the Industrial Revolution and steel makers in the Auto Age got rich supplying the new factories. The workers in the factories also stimulated the economy with the consumer purchases they were making from their new wages. The breakthrough product thus provided a simultaneous triple boom: a boom in the core product itself, a boom for the industrial suppliers and a boom for the people who made and sold consumption goods to workers.

    

The excitement over the new product attracted new engineers into the relevant industry. The new engineers looked for ways to improve our advance the hot product. The early automobiles of Henry Ford’s day were not very good. They could not go very fast. They were hard to drive. They had to be started with a hand crank. Engineers found lots of ways to make the new product even better. They invented key ignitions, bigger engines, automatic transmissions, power steering, power brakes.

    

Everyone replaced their old vehicles with new vehicles. This meant brand new sales to all the people who had bought cars originally. These brand new sales had multipliers too. So, there were booms for all the industrial suppliers as well as the makers of consumer goods for workers.

     

The party gets ruined when the engineers run out of ideas. In the 1970’s, the automobile industry went stale. The 1950’s and 60’s had seen the invention of power steering, power brakes and convertibles. All of those were big sellers. Then after that, Detroit would come up with no more major blockbuster ideas about autos until SUVs were developed in the 1990s.

    

Technological stagnation does not kill an industry but it does cripple it. Replacement of worn out goods with new goods can be the basis of a business. But it does not create nearly the volume of sales that come from everyone buying new products. An economy without major innovations will have mediocre growth rates.

    

Growth will stay mediocre until some new breakthrough innovation comes. As long as a new breakthrough innovation can be developed, capitalism can ride triumphant from one Kondratieff cycle to the next. If the breakthrough innovation doesn’t happen, and there is no cosmic law that says breakthrough innovations need to happen, then capitalism can enter a period of long term stagnation.

 

The Global Dynamics of Cycles

 

In Mensch’s world, the entire world gained equally or lost equally from the dynamics of technological cycles. In the real world, technology is a critical tool of global domination. During the periods where technological innovation is thriving, the rich world gains at the expense of the poorer nations. When technological innovation is stagnant, the poor nations get their revenge. Wealth accrues to the Global South at the expense of the Global North.

    

During the period of technological advance, the country creating new and desirable products obtains a strategic monopoly. No one else has the capacity to fill this need. The innovating nation can charge top dollar for its new goods. The rest of the world does not have this advantage. The result is that money flows from the rest of the world to the innovating nation. This is what underdevelopment theorists refer to as unequal terms of exchange.

   

When the breakthrough product first appears, the economic advantages accrue to one and only one nation – the country that developed the breakthrough. Every other country, rich or poor, suffers from unequal terms of exchange as they have to deal with the new monopolist on the block.

    

Second wave and third wave innovations are somewhat more democratically dispersed. Any nation that can generate a reasonably sized population of engineers can find small improvements to make to a pre-existing product. This means the nation that created the original product and once had a unique impressive monopoly will now live in a world where a number of countries have smaller monopolies or will be part of oligopolies. Money will continue to accrue to the original breakthrough nation, but other nations will be receiving positive income flows as well. Generally, only developed nations will have the engineering capacity to develop these second and third generation innovations. The underdeveloped world will still be out of the game. So, the rich nations as a whole will experience unequal terms of exchange in comparison with the poor nations; money will flow from the Global South to the Global North, with the advantage of the original innovator being less apparent.

   

Unfortunately for the rich nations, no scientific monopoly remains a scientific monopoly forever. There are lots of ways for poor nations to learn rare skills. They can hire scientists or engineers from the wealthy nation to work in their own country. They can send their own students to learn engineering in rich nations and them bring them home. They can buy the monopoly product and reverse engineer it. If need be, they can just start a company to build the scarce product, and try and try and try again over thousands and thousands of versions until they finally figure out how to make the scarce good. Nothing stays a secret forever.

   

Once technology is stagnant and the skills to produce products have become widely dispersed, then competition is based on price rather than quality. If everyone can make a standard good, the only question is: who can make it cheaper? Now all the advantages accrue to the poor nations.

 

1.Wages are lower in the poor nations. The one advantage of having lots of unemployed and underemployed people is that they are willing to work for cheap. Low labor costs guarantee that the underdeveloped nations will win the price war.

 

2.The nations that enter an industry last will have the newest best equipment. The last in the game is frequently the most productive.

 

3. Manufacturers in the rich nations will find it makes sense to move production from their own countries to the underdeveloped nations because nearly every factor of production will be cheaper in the poorer economy.

    

The Mensch dynamics and the Global dynamics hit at exactly the same time. So just as the rich nations are running out of sales due to technological stagnation, lots of low cost competitors appear to fight for whatever sales are left. The rich nations are hit with a double whammy; the recessions that come out of this double threat can be massive.

 

What Will Happen During the Next Cycle? Nobody knows.

    

It is difficult to know what the next big product will be. In the textile factory era, railways only existed in mines to help bring heavy ore from the mine face to the outside. No one imagined it would become the dominant form of transportation for the century. In the steel era, no one imagined that horseless carriages would be a serious product. No one could see that the automobile would be the great creation of the twentieth century.

    

It is also difficult to know what country will invent the next great innovation. England invented the key products of the first two Kondratieff cycles: textile factories and railways. The great innovation of the third cycle, steel, was jointly developed by the United States and Germany, leaving England out in the cold. The United States developed the innovations for the fourth and fifth Kondratieff cycle, automobiles and computers. The fact that the United States was the developer of the key product in three out of the last three Kondratieff cycles explains why America is the dominant economic and political force in the world today.

    

But will the next great innovation come from the United States? Or will it come from China? Or will it come from the excellent scientists that work in Russia? Or will it come from the European Union? No one knows what that product will be and no one knows where that product will be developed.

    

No one even knows if a product worthy of a sixth Kondratieff wave will even be developed. Most of history has not seen breakthrough inventions every fifty years. Who says that this trend is necessarily going to continue?

    

If the United States wants there to be a sixth Kondratieff wave, and if it wants the key invention to be developed in the United States, then protecting and maintaining America’s scientific capacity is essential. America became technologically superior because we had the best research universities in the world.  The world is now heavily invested in catching up to America. Will a future America be forced into economic and technological submission by a country that can make strategic goods that we simply can’t replicate?

    

The ownership of science means the ownership of the Kondratieff cycle. Right now, our technological advantage is quite substantial. Whether we will keep that advantage in the future is very much an open question. 

For More Information

For a super simple introduction to Mensch and Kondratieff cycles, see Berry, Brian, Edgar Conkling and D. Michael Ray. Economic Geography: Resource Use, Locational Choices and Regional Specialization in the Global Economy. Englewood Cliffs, New Jersey, Prentice Hall. Chapter 11.

For diehards who have to read authors in the original, see: Kondratieff, Nikolai. 1935. “Long Waves in Economic Life”. Review of Economic Statistics 17: 105-115.


Mensch, Gerhard. 1983. Stalemate in Technology: Innovations Overcome the Depression.  New York, Harper Collins.

For technical econometric debates over K-Cycles, see Joshua Goldstein. 1988. Long Cycles: Prosperity and War in the Modern Age. New Haven, Yale. Chapter 3. The debate did not stop after this book.