Prophet of innovation

Devangshu Datta

January 03, 2009

"The wind turns and returns according to its circuits, all the rivers run into the sea and
yet the sea is not full. Unto the place whence the waters came, there they shall return
again. And there is nothing new under the sun."
The preacher who came up with this most poetic description of cycles claimed to be
"King in Jerusalem" and is sometimes identified as Solomon, son of David and
Bathsheba. Of course, since Ecclesiastes passed on before the Israelites learnt of the zero,
he didn't follow through with any maths to back his assertion of circular repetition.
Several contemporaneous Hindu philosophers also contemplated cycles. They knew
about the zero. But they lacked interest and insight into the dismal science and history.
Instead, they focussed on cosmic destruction and recreation.
The pioneer at applying maths to cycle-theory was an atheist. Nikolai Kondratieff was the
Russian prototype of P C Mahalanobis. As director of the Soviet Institute for the Study of
Business Activity, he headed the band of fellow travellers who drafted the First Five Year
Plan.
In order to isolate the variables to be tweaked to stimulate growth, NK crunched a lot of
data (French, British, American, German) garnered from 1789 onwards. Unfortunately,
he exceeded his brief and came to uncomfortable conclusions, which he naively chose to
share in a 1926 essay on "Long Waves in Economic Life".
Stalin, who was not known to respect objectivity in academic (or other) matters, decided
that LWEL was a criticism of planning. Uncle Joe had the revisionist NK arrested and
sent off to the Gulag. In the late 1930s, as events were panning out along the lines NK
predicted, he was shot.
Kondratieff postulated that the global economy goes through very long cycles of
expansion and decompression. According to LWEL, a vast boom and bust cycle is
completed every 50 to 60 years.
There are four phases inside each long K-Cycle. Rather poetically, these are referred to as
"seasons". The first phase is beneficial inflation (spring), stagflationary recession
(summer), beneficial deflation (autumn), and depression (winter). NK looked at
admittedly scanty and unreliable data on trade, iron, coal, petroleum and gold production,
wages, bond yields, etc, over about 140 years.

NK massaged data to smooth out shorter cycles and adjust for colonial expansions, wars,
etc. He isolated three long cycles through 1789-1925 ranging between a minimum of 47
years and a maximum of 60 years.
NK's conclusions suggested a vast winter or depression sometime through 1930-1947. In
hindsight, it took place between 1929 and 1948. Following through, NK's cycles
suggested expansion, which did occur between 1948 and 1965, stagflation (1966-1982),
beneficial deflation (1983-2000) and finally, depression starting around 2001. Going by
his theories and empirical evidence, the winter could last from 9 to 16 years.
NK is not respectable though Shumpeter paid tribute by naming long cycles "K-Cycles"
in the seminal Theory of Economic Development. There is some evidence that suggests
his insights were genuine. (There is also data he ignored because it didn't fit.) The lack of
respectability means few attempts have been made to validate or disprove his theory
using more reliable modern data.
Are long cyclical depressions pre-ordained and inevitable? Ecclesiastes would say so and
the Hindu philosophers might concur. As an atheist who actually sought hard data,
Kondratieff would have denied predestination.
Well-timed global counter-cyclical measures may mitigate long depressions. His work
does raise red flags. However, any such measures would require unheard-of cooperation
between nations and it would have to start with stronger academic evidence. However, far
more than Nostradamus, Kondratieff should be hailed as a prophet. It seems that obscure
poetry has greater pop appeal than moving averages.