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A note on technology-driven economic long waves (aka, the ghost of “Kondratiev” roars)

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Nikolai Kondratiev, martyr of Economics and Statistics of cycles, shot by Stalin

Nikolai Kondratiev was a Russian economist in the 1930’s who was shot by Stalin on September 17, 1938, because he had the integrity and courage to say the economic crisis of that decade, on statistical evidence, was largely a generation(s) length cyclical oscillation; not the Crisis of Capitalism leading to global Socialist Revolution that Marxist theory as understood by Stalin demanded. (Echoes in current debates on trends vs oscillations in climate trends etc are not coincidental. [Note, climate, technically, is a 30+ year moving average of weather.])

Joseph Schumpeter picked up his thought, and there has been a (somewhat marginalised/ “misunderestimated”) school of thinking on long waves across time.

One aspect of that, has been a focus on how key enabling technologies can drive the global economy . . . now, arguably struggling to break out of the ICT-1 trough and climb the ICT-2, AI & new energy etc led wave . . . arguably, held back by the missing investment in solar system colonisation-relevant tech since the 1970’s:

A suggested pattern of K-waves since the Industrial Revolution

Arguably, this sort of pattern has played out over the past 1,000+ years, where on this count we are looking for K20 to rise with globe-transforming strength:

Analysing the driving dynamics, we can see how a relatively low level of pioneering investment across years or even decades plausibly enables the “next wave” . . . so, further arguably, we have been living off the Space Race since the 1970’s but may well have failed to adequately invest in the follow-on generation. So, we may be stuck in a low-growth patch of “looking for the next wave”:

A display chart on driving dynamics of the K-wave

Applying a cluster of strategic marketing models, we can then ponder the impact of a market for a product or technology that is sufficiently strong to dominate the global economy, reflecting a wave of adoption by investors and consumers alike:

Speaking of which, here is a Hayek Triangle of value-added driven view of a macro economy . . . economies gain strength when they lengthen the “tail” and invest in long term roots of production, which shifts balance to investment and accelerated growth:

Let me add a bit more on the Hayek, value-added Triangle:

However, tickling a dragon’s tail is a risky venture, and malinvestment led deep, persistent recession due to a shocked economy — aka, depression — is a serious issue.

I am of course arguing in the context of further global transformation and the future of our civilisation, with an eye to exorcising the ghost of Malthus.

In that light, I find the following from Richard Lipsey et al in Economic Transformations (OUP, 2005), “interesting”:

We start by observing that long-term growth is driven mainly by techno- logical change. This leads us to study the nature of technology and how it changes, building on material found in books such as Rosenberg’s Inside the Black Box. We argue that understanding technological change requires an evolutionary approach, such as was pioneered by Nelson and Winter in An Evolutionary Theory of Economic Change. We outline such an approach and contrast it with neoclassical theory. Because over the centuries new technologies radically alter more or less everything in the socio-economic order, doing much more than just increasing output per person, standard neoclassical theory is a relatively poor tool for studying their effects. We argue that one approach that handles these effects well is a combination of institutional and evolutionary economics that we call structuralist-evolutionary (S-E) theory . . . .

Big GPT [= General Purpose Technology] shocks change almost everything in a society and revitalize the growth process by creating an agenda for the creation of new products, new processes, and new organizational forms . . . .

We then discuss the nineteenth-century emergence of sustained growth of output in the West, building on the analyses in Rosenberg and Birdzell’s How the West Grew Rich and in Landes’ The Unbound Prometheus, but putting much more emphasis on science than is usual. This leads us to ask why sustained growth of output was not generated endogenously outside of the West, where we use much of the analysis found in Toby Huff’s The Rise of Early Modern Science, and take issue with some of the arguments in Kenneth Pomeranz’s The Great Divergence. Then we turn to the emergence of the West’s sustained per capita growth that happened later in the nineteenth century. This leads to a discussion of population dynamics . . .

Of particular relevance, here, is their observation that economic and population growth must be considered together, where growth in GDP per capita of 1 to 1.5% per annum is not perceptible in the short term as improvement in well-being (we add, as opposed to short-term consumption stimulus led booms with busts to follow), but in the longer term it transforms the prosperity of those in following generations who reap the benefits of the sacrifice and investment that opened up the opportunities. As Lipsey et al comment:


A third reason why the power of growth is often underassessed is because the growth of 1 or 1.5 per cent per annum changes per capita GDP so slowly that people barely notice its variations from year to year and hence do not regard variations in growth rates (over their normal range) as a big force in their lives. But anyone who was taken back 50 or 100 years

[–> 170% to 340% increment in per capita income across 100 years, where of course we must further note that at say 1.5% growth per year of population, there would also be 4.4 times the population now being supported at the higher level, i.e. per capita growth is lower than gross growth in GDP once population is rising]

. . . would see the enormous power of such growth to alter living standards and to reduce the blight of poverty. [Lipsey et al, p. 9.]

For simple example, land used to plant solid timber trees

(I have mahogany in mind, a tree that given time can develop a trunk of 5 – 7 ft diameter, if reports of old growth Haitian trees from their mountains are true . . . I personally saw 5 – 6 ft diameter, 100 year old logs used as pilings then dug up as part of a road improvement project in Belize City in the 1980’s)

. . . could be used instead for short term cash crops instead but then in times to come we run out of good quality timber. That also holds for the temptation to over-harvest high quality old growth natural forests. That’s an almost simplistic example, but it makes a much bigger general point.

All of this is highly relevant to our current reflections on taking civilisation forward, exorcising the ghost of Malthus. END

PS: We started this series by looking at: metal winning through the FFC-Cambridge process, then looked more closely at Malthus vs energy technologies, as energy is a key driver. DV, next, on the idea of an open source driven industrial transformation relevant to solar system colonialisation. Recall, we need to be making 50-year investments in potential technology breakthroughs. All of the time.

9 Replies to “A note on technology-driven economic long waves (aka, the ghost of “Kondratiev” roars)

  1. 1
    kairosfocus says:

    Moving Civilisation forward, 3: A note on technology-driven economic long waves (aka, the ghost of “Kondratiev” roars)

  2. 2
    Ed George says:

    Good summary KF.

    I have always had a problem with the constant push for economic growth. Ecology has shown us that continuous growth is not possible. There are always ups and downs. All we can hope to achieve is to takes steps to soften the amplitude of the cycle, which also means putting limitations on unrestricted growth.

    Unfortunately our democratic system isn’t designed to look at the long term, which has a tendency to make the fluctuations worse.

  3. 3
    Latemarch says:

    EG said: “All we can hope to achieve is to takes steps to soften the amplitude of the cycle, which also means putting limitations on unrestricted growth.”
    Can you give an example where this ever worked?

  4. 4
    Ed George says:

    LM

    Can you give an example where this ever worked?

    Manipulating interest rates have been used to this effect. But a better question is whether there has ever been a case where continuous economic growth has ever occurred?

  5. 5
    Latemarch says:

    EG:
    As per the St. Louis Fed

    The Fed appears to have significant control over short-term interest rates and can move them in desired directions. However, longer-term interest rates are much harder to control, particularly for an extended period of time. If long-term rates matter most for investment decisions, spending on consumer durables and housing, then it is more difficult for the Fed to control these aspects of the economy over an extended period of time.

    The track record of interest rate control to temper growth is pretty spotty. The Fed just as often seems to throw us into recession as not.

    I’m not really arguing Ed. There have been some modestly managed economies that were reasonably successful but often the circumstances were often highly constrained and don’t scale up well. If we could smooth the bumps it would be great. I just don’t think that anyone is smart enough to do it. The EU is a perfect example of an attempted managed economy and it’s pitiful. As to your question of continuous economic growth. I can’t think of an example that always advanced without the attendant retreats. I’m not sure it can be done. Capitalism: the worst economic system except for all the others.

  6. 6
    kairosfocus says:

    EG & LM,

    Kindly, look at the Hayek, value-added triangle chart. This is an Austrian framework for seeing aspects of macroeconomics that tend to be veiled on Keynesian and related approaches.

    Pushing interest rates artificially without shifting the balance of consumption-investment preferences destabilises the value-added triangle. To promote the sort of very long term investments needed to get a steady stream of 50-year general purpose technologies, moderating the depth of long wave troughs, one would artificially depress i-rates. That pushes equilibrium in the loanable funds market R-wards as shown. With the same tastes/preferences, consumption rises, and on assumption we are originally at/near saturation on the Aggregate supply/demand framework, we go out into unsustainable territory. Artificially induced, malinvestment boom, unsustainable and tending to go over the cliff and crash. Hence, shocked, depressed economy . . . arguably, root of 2008 – 9 global great recession and lingering effects. Notice effects of housing market manipulations and of an energy price crunch with a spike to US$ 145/bbl and sustained levels in the $100 ballpark until about 2013 – 14.

    The point is, LM is right that we are nowhere near as smart as we imagine. And the St Louis Fed is right on the attempt to manipulate long term i-rates relevant to multi-decadal investments (think, mortgages etc and even the house-price investment that a College education clearly now is). The key point is, economics is downstream of culture and a tendency to consume rather than invest needs to be addressed, which speaks to families and to societies as a whole. We also obviously need to drastically reduce cost of access to college, pointing to online access pivoting on broadband Internet.

    I have borrowed a term from those who played with nukes in the early days, tickling the dragon’s tail.

    Instead, I have suggested an industrial policy on the model of the space race, towards preparing for solar system colonisation. Which, we just threw away 50 years on.

    In that context, I have pointed to a novel approach to winning key metals by molten salt electrolysis and to a new generation of nuke technology for energy. In that context, I have challenged the ghost of Malthus.

    Later, I want to follow up on an alternative similar to open source software.

    We need to rethink,

    KF

  7. 7
    kairosfocus says:

    Are we eating up the seed-corn of our civilisation, failing to invest adequately in the long-term, sustainable future?

  8. 8
    Ed George says:

    We know that unrestricted capitalism leads to all sorts of unacceptable social consequences (environmental degradation, seven day work weeks, child labour, unsafe working conditions, etc). Much of governments’ effort involve putting restrictions on capitalism. Things like labour laws, environmental regulations, health and safety standards, paid maternity leave, paid vacation, stat holidays, discrimination laws, etc. Some work well, others don’t. Unfortunately, regardless of how much thought is put into new legislation, they still amount to trial and error.

    But don’t get me wrong, trying something is always better than not trying. If something doesn’t work it can always be rolled back.

    Some believe that government regulation is almost always bad but I would like to draw your attention to a comparison between Canada and US with respect to banking. Banks in Canada are heavily regulated. During the 2008 recession, 465 US banks failed and the government paid out $700 billion in bailouts. No Canadian banks failed and there were no government bailouts, although there were some low interest loans, primarily to US owned car companies. In fact there have been no Canadian bank failures since before the Great Depression (with the exception of one that failed due to fraud). I might also point out that Canadian banks are not government owned or subsidized, and are highly profitable.

  9. 9
    kairosfocus says:

    EG, malinvestment booms going bust can be political or regulatory; arguably, that was a key factor in 2007 – 9. Similarly with the stagflation of the 1970’s and the triggering of the deep panic in the 1930’s — observe how for example manipulating money supply and/or interest rates can destabilise loanable funds markets and push economies into unsustainable territory waiting for a shock such as energy supply issues; similarly, ill advised tightening can “pluck” an economy into a shocked condition. We simply do not know enough to truly manage an economy and effect soft landings, hence the issue of tickling a dragon’s tail. The focal issue in the OP is different and something we need to ponder, fairly modest investments that help set up long term technology breakthroughs on the model of the Moon landing programme, where in the long run the future resource base for humanity is the solar system. This requires energy transformation, materials (and materials winning) transformation and conscious strategic capacity building and investment to open up the future rather than lock it off. As a classic, in 1405 – 33 the Chinese pioneered a fleet of up to 300 ocean spanning vessels and went as far as E Africa. But then Cheng Ho, a eunuch, died and the bureaucrats decided to dismantle what was achieved. When da Gama came around S Africa and sailed to India 70 years later with a tiny fleet of much less capable vessels, there was nothing to check his behaviour. A lesson. KF

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