The economic long wave: Theory and evidence

Abstract

The economic crisis of the 1980s has revived interest in the economic long wave or Kondratiev cycle. Since 1975 the System Dynamics National Model has been the vehicle for the development of a dynamic, endogenous, integrated theory of the economic long wave. This paper describes the integrated theory that has now emerged from extensive analysis of the full National Model and from simple models.Simulations of the model are presented to show the wide range of empirical evidence accounted for by the model, including many of the symptoms of the present economic crisis.In particular, the theory suggests the long wave arises from the interaction of two fundamental facets of modern industrial economies. First, the existence of physical lags in the economy, information limitations, and bounded rationality in economic decisionmaking creates the potential for oscillatory behavior. For example, the physical lags in capital acquisition coupled with locally rational decision rules governing production and investment create the potential for highly damped fluctuations in capital investment with a period of roughly twenty years. In isolation, these oscillatory structures are stable and do not produce a long wave.However, a wide range of self-reinforcing processes exist which amplify the inherent oscillatory tendencies of the economy, leading to the long wave.A large number of these self-reinforcing processes have been identified.These processes involve many sectors of the economy including capital investment, labor markets and workforce participation, real interest rates, inflation, debt, savings and consumption, and international trade.The paper discusses the relative strengths of these mechanisms and the amplification of the long wave through their interactions. The linkages of the long wave theory to innovation, technological progress, social innovation, and political value change are discussed.

Technology-Sensitive Urban Typology

“…In his pioneering contribution on the phenomenon, Russian economist Nikolai Kondratiev (1926Kondratiev ( , translation of 1984 argued that roughly 55-year trough-to-trough waves (hence, Kondratiev waves; Berry, 1991a) are a fundamental characteristic of capitalist economies, each wave representing a radical regrouping of, and change in, society's productive forces. Subsequent investigation has confirmed that these regroupings represent the crystallization of new techno-economic paradigms in the aftermath of inflationary spirals/stagflation crises that combine at Kondratiev peaks (Sterman, 1986;Rosser, 1991, p. 138 ff. ;Berry, Kim, and Kim, 1993;Rosser and Rosser, 1994).…”

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“…Due to aircraft lead times and delayed recognition of over-capacities, the system starts to oscillate around the desired seat load factor. The basic mechanisms underlying these expansion and contraction movements are the same as those of the economic long wave in production systems (Sterman, 1986). …”

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“…This implies a requirement for institutionalized dynamic change of the active memory: To deal successfully with the future, much of past experience must eventually be removed from the active memory (but should remain retrievable and accessible in long-term storage), and structures must be "creatively" (and selectively) destroyed and renewed (Holling, 1986). This may lead to cyclic patterns (Bühl, 1990) as in Kondratieff cycles, where the capital stock is renewed periodically after 50 to 70 years (Sterman, 1986).…”