Business Cycles and Geography

Kondratiev Waves

The most famous depiction of business cycles is that of Kondratiev cycles, named after the Soviet economist Nikolai Kondratiev (1892–1938), who first identified them in the 1920s. Examining historical data on changes in output, wages, prices, and profits, Kondratiev hypothesized that industrial countries of the world experienced successive waves of growth and decline since the beginning of the Industrial Revolution. Based on the emergence of key technologies and industries, these long cycles have a periodicity of roughly 50 to 75 years’ duration. The reasons that underlie this duration of these waves reflect the long-term trends in the rate of capital formation and depreciation; as fixed capital investments reach the end of their useful economic life, the drag on productivity they create generates incentives to search for new technologies.

The first Kondratiev wave, at the dawn of the Industrial Revolution, arose on the heels of the textile industry and lasted from roughly 1770 to the 1820s, when the West was swept by a series of recessions, bankruptcies, and bank failures. The second wave, focused on railroads and the iron industry originated in the 1820s, peaked in the 1850s, and ended in the great round of consolidation in the 1880s and 1890s, particularly the depression of 1893, the second worst in world history. The third wave, associated with Fordist industries and mass production of goods such as automobiles, but also including electricity and chemicals, arose at the end of the 19th century, peaked around World War I, and collapsed suddenly during the Great Depression of the 1930s. The fourth Kondratiev, which was propelled by World War II, peaked in the 1960s, corresponded to the postwar wave of growth, and included major propulsive industries such as petrochemicals and aerospace; it ended with the petroshocks of the 1970s. Many believe that we live in the midst of a fifth wave, starting in the 1980s and centered on services and information technology.

Joseph Schumpeter, a famous German economist, explained Kondratiev's observation in terms of technical and organizational innovation. Schumpeter suggested that long waves of economic development are based on the diffusion of major technologies, such as railways and electric power. Throughout capitalist history, innovations have significantly bunched at certain points in time, often coinciding with periods of depression that accompany world economic crises. His very famous phrase “creative destruction” spoke of the birth of new forms of production and organization out of the ashes of the old, and has come to encapsulate capitalism's simultaneous enormous vitality and propensity to annihilate forms of social life.

...