Has the Theory of Economic Long Waves Ceased to Be Relevant?

The economic theory of "long waves" holds that economic growth has a 40-60 year cycle with the first half of the cycle, an "upward" wave of 20-30 years--a period of strong growth with recessions few and mild--followed by a "downward" wave that is the opposite, with growth weak and downturns frequent and severe for two to three decades until it is followed in its turn by a new upward wave beginning the next cycle.

First suggested in the 1920s by the Soviet economist Nikolai Kondratiev (indeed, long waves are often called "Kondratiev waves" in his honor) the idea is controversial in outline and detail (e.g. just what causes them), but nevertheless has numerous, noteworthy adherents across the spectrum of economic theory and ideology who have made considerable use of it in their work, from figures like Joseph Schumpeter on the right to a Michael Roberts on the left. This is, in part, because the theory seemed to be borne out by the events of mid-century. In hindsight the period from the turn of the century to World War I looks like an upward wave, the period of the '20s and '30s and '40s a downward wave, but then the period that followed it, the big post-war boom of the '50s and '60s another upward wave--which was followed by yet another downward wave absolutely no later than the '70s.

So far, so good--but the years since have been another matter. Assuming a downward wave in the '70s we ought to expect another upward wave in the '90s and certainly the early twenty-first century. Indeed, we might expect to have already run through a whole such wave and, just now, find ourselves in, entering or at least approaching another downward wave.

As it happens the U.S. did have a boom in the late '90s. However, in contrast with the wide expectations that this boom was the beginning of something lasting and epochal (remember how Clinton was going to pay down the national debt with that exploding tax revenue?), that boom petered out fast--and so did the associated seeds of growth, like labor productivity growth, which pretty much fell into the toilet in the twenty-first century, and stayed there. Meanwhile the same years were less than booming for the rest of the world--with the Soviet bloc's output collapse bottoming out, with Europe Eurosclerotic and Japan in its lost decade amid an Asia hard-hit by financial crisis, and the Third World generally struggling with the Commodity Depression, the aftereffects of the Volcker shock/debt crisis, and the new frustrations the decade brought (with the "Asian" crisis tipping Brazil over into default).

Of course, as the American boom waned the rest of the world did somewhat better--indeed, depending on which figures one consults--the 2002-2008 period saw some really impressive growth at the global level. But again this was short-lived, cut off by the 2007-2008 financial crisis, from which the world never really recovered before it got kicked while it was down again by pandemic, recession, war. (The numbers, as measured in any manner, have been lousy, but if one uses the Consumer Price Index rather than chained-dollar-based deflators to adjust the "current" figures for inflation then it seems we saw economic collapse in a large part of the world, partially obscured by China's still doing fairly well, but the Chinese miracle was slowing down too.)

The result is that as of the early 2020s, almost a half century after the downturn (commonly dated to 1973), there simply has been no long boom to speak of. Of course, some analysts remain optimistic, with Swiss financial giant UBS recently suggesting that the latter part of the decade, helped by business investment in digital technologies to enable them to keep operating during the pandemic that will work out to long efficiency gains, public investments in infrastructure and R & D, and a green energy boom, may mean better times ahead. Perhaps. Yet it has seemed to me that there has been more hype than substance in the talk of an automation boom (indeed, business investment seems to have mainly been about short-term crisis management--shoring up supply chains, stocking up on inventory, etc., while their success in "digitizing" remains arguable); government action remains a long way from really boom-starting levels (the Inflation Reduction Act, of which only part is devoted to green investment, devotes $400 billion or so to such matters over a decade, a comparative drop in the bucket); and while I remain optimistic about the potentials of renewable energy there is room for doubt that the investment we get in it will be anywhere near enough to make for a long upward movement.

In short, far from finding myself bullish about the prospect of a new long wave, I find myself remembering that the theory was a conclusion drawn from a very small sample (these cycles not generally traced further back than the late eighteenth century), which especially after the experience of the last half century can leave us the more doubtful that there was ever much to the theory to the begin with. However, I also find myself considering another possibility, namely that for that period of history such a cycle may have actually been operative--and that cycle since broken, perhaps permanently, along with the predictive value that it once seemed to possess.