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Kondratieff Wave

Economic cycles that alternate between periods of high and low growth rates

What is Kondratieff Wave?

The Kondratieff Wave is a concept that was introduced during the Russian Communist era by a sociologist economist, Nikolai D. Kondratieff. The economist noticed that agricultural products and copper prices underwent long-term economic cycles that were believed to be as a result of technological innovation and periods of evolution.

Kondratieff first introduced the concept of long wave theory in his 1925 book, “The Major Economic Cycles.” Later in 1939, another economist, Joseph Schumpeter, suggested renaming the long waves to “Kondratieff Waves” in honor of the Russian economist’s work.

 

Kondratieff Wave

 

Economists estimate that the waves last for 40 to 60 years, with each cycle demonstrating alternative intervals of high and low growth rate. Since the 18th century, economists have identified five Kondratieff Waves, with the first wave occurring during the invention of the steam engine and lasting from 1780 to 1830.

The second cycle continued from 1830 up to 1880, and it resulted from the growth of the steel industry and the railroads. The third, fourth and fifth cycles lasted from 1880 to about 2005, and economists believe that the sixth cycle started in 2005.

 

Who was Nikolai Kondratieff?

Nikolai Kondratieff was a Russian economist who is best known for suggesting that capitalist economies experience long-term cycles of boom that are followed by a cycle of depression; the cycles are now referred to as “Kondratieff Waves” or “K-waves.” His initial professional work was focused in the areas of agricultural economics and the problem of food supplies.

Kondratieff tutored at the University of St. Petersburg and the Agricultural Academy of Peter The Great. He was also the founder and director of the Institute of Conjuncture in Moscow. While at the Institute of Conjuncture, the Russian economist authored various articles and books on long cycles. In 1922, he published “The World Economy and its Conjunctures During and After the War,” which marked the start of his writings about long cycles.

Kondratieff also authored “The Major Economic Cycles” in 1935 that expanded his view on the theory of major cycles. In the book, he contrasted the policies of Josef Stalin, former leader of the Soviet Union. It led to the economist’s arrest and imprisonment in 1930 for an eight-year sentence.

In 1938, Kondratieff was subjected to a second trial during Stalin’s Great Purge and sentenced to another ten years of incarceration. However, he was executed by a firing squad on the same day he was sentenced. In 1939, the wave’s cycles were renamed to “Kondratieff Waves” in his honor.

 

How Do Kondratieff Waves Work?

Kondratieff identified several long-term cycles that alternate between high growth and slow-growth economic cycles. The cycles were based on agricultural commodities and copper prices in European countries, where he observed periods of evolution and self-correction in the different economic activities that were carried out in the domestic economies. The cycles lasted 50 to 60 years, and they comprised various stages that were repetitive in nature. The cycles include:

 

1. First Cycle

The first cycle occurred from 1780 to 1830, and it was fueled by the invention of the steam engine and the growth of textile manufacturing.

 

2. Second Cycle

The second cycle lasted from 1830 to 1880, and it was triggered by the growth of the steel industry and the start of the railroad and Bessemer converter. The rail transport supported mass transport of both people and cargo, which led to rapid economic growth.

 

3. Third Cycle

The third cycle lasted from 1880 to 1930, and it was the first wave to be triggered by the practical application of scientific knowledge. It was the same time when Werner von Siemens discovered the electro-dynamic principle that made it possible to convert mechanical energy into electrical energy. The innovations in the chemical industry allowed for the mass production of commodities.

 

4. Fourth Cycle

The fourth cycle occurred from 1930 to 1970, and it was fueled by the growth of the petrochemical industry. The petrochemical industry’s growth also supported the growth of the auto market. The cycle ended when the Organization of Petroleum Exporting Countries (OPEC) increased the price of crude oil in the 1970s.

 

5. Fifth Cycle

The fifth cycle started in the 1970s, and it was triggered by computer-based information technology. The industrial society transitioned into an information society, which turned the world into a global village. In this cycle, the information technology sector became the main driver of economic growth. This cycle is said to have ended at the start of the 21st century.

 

6. Sixth Cycle

Most economists believe that we are in the sixth cycle and that it started around 2005. They also believe that this cycle will be fueled by healthcare. Economic growth will be triggered by improved productivity in handling healthcare issues.

 

Criticism of the Kondratieff Long Wave Theory

To date, a section of academic economists does not accept the long wave theory presented by Kondratieff. One of the reasons why some economists refuse to accept the theory is due to the lack of formal universal agreements on the start and end years of a wave cycle.

Although each cycle is said to last between 50 to 60 years, there is no definite period to mark the start of a new cycle, and it creates confusion on the exact period a cycle started or ended.

 

Related Readings

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Aggregate Supply and Demand
  • Guide to Commodity Trading
  • Economic Indicators
  • Keynesian Economic Theory

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