Kondratieff Wave

What Is Kondratieff Wave?

The Kondratieff Wave (K wave), lasting for a considerably long period, is an economic cycle marked by changes in commodity and other prices. Technological innovation is believed to be the reason for such changes. It is an economic phenomenon known to last for four to six decades typically.

The Kondratieff wave theory depicts changing commodity prices across different periods where prices become self-regulating from time to time. These waves are marked by alternating high and low growth rates, eventually depicting long periods of prosperity. Super Cycle, K Wave, Long Waves, or Surges are other names for this wave. Technological innovation or invention usually plays a key role in these periods. The Kondratieff Wave also called the Kondratiev Wave, is categorized as an unorthodox concept and tagged under Heterodox economics.

• The Kondratieff wave is a long-term economic cycle highlighting commodity price movement and showcasing long periods of prosperity.
• The theory was introduced by sociologist economist Nikolai D Kondratieff in 1925 during the Russian communist era and is named after him.
• From its inception, there have been six Kondratieff wave cycles observed by world economists and market analysts; each focused on a different sector for innovation.
• Over the years, the theory has received a reasonable number of followers. It has also been subject to criticism due to differing ideas and thought processes.

How Does Kondratieff Wave Work?

The Kondratieff wave is an economic cycle that depicts shifting market conditions, stocks, and commodity prices. Six cycles have been observed to date, with each phase lasting more than 40 to 60 years. The theory was given by sociologist economist Nikolai D. Kondratieff in 1925 and introduced in his book The Major Economic Cycles. In 1935, an Austrian economist, Joseph Schumpeter, proposed naming the cycle Kondratieff Waves in honor of the Russian economist.

Kondratieff based his theory on his study of European agricultural commodities and copper prices. He observed that evolution, technological advancement, and innovation play a key role in bringing a shift in the market. At the same time, market prices are prone to self-correction and change. The K waves have offered key insights and patterns through the years. Over the last 200 years, very few cycles have been as accurate as the super cycle. The Kondratieff wave is largely observed in capitalist economies and combines highs and lows with self-correction and development phases.

Kondratieff's native country rejected the theory and called it Heterodox economics, indicating it indirectly went against the traditional theories proposed by several renowned economists. In his study, Kondratieff researched, studied the data, and put forth the ideology that stated how there is a shift in the market and the economy every four to five decades. Kondratieff maintained that his economic cycle is a global capitalist phenomenon and can be observed in major economies such as the US, Germany, and the UK.

Past Cycles

There have been six Kondratieff waves of innovation since the 1780s.

#1 - The First Cycle − The Steam Engine Development

The wave lasted from 1780 to 1830, and the phase was influenced by the development of the steam engine and the expansion of the textile industry globally.

#2 - The Second Cycle − Steel Industry Inception

The second cycle began in 1830 and lasted for fifty years till 1880. The most important development in this period was the steel industry, along with the Bessemer converter that enabled the speedy handling of mechanical processes. The phase also witnessed a mass movement of goods and people by rail, facilitating economic growth.

#3 - The Third Cycle - Scientific Knowledge

The third cycle was observed from 1880 to 1930. This period saw practical inventions and applications inspired by scientific knowledge. Due to the rapid increase in electrical power supply, many advancements were registered in the chemical industry. Eventually, this led to the mass production of goods, and factories identified the benefits of economies of scale.

#4 - The Fourth Cycle - The Petrochemical Sector

The fourth cycle began in 1930 and ended in 1970. The fourth Kondratieff wave witnessed the growth of the petrochemical industry—the sector that contributed to improvements in the automobile industry. When the Organization of Petroleum Exporting Countries (OPEC) hiked crude oil prices in the 1970s, the fourth cycle ended and pushed the US into a recession.

#5 - The Fifth Cycle − Innovation of Computer Technology

Information technology and computer science ushered in the fifth cycle, which took the world economy by storm. People began using computers in their daily lives, quickly learning to operate them. This cycle is also called the shift from industrial society to information society.

#6 - The Sixth Cycle − Healthcare

This cycle is said to have started in 2005. Economists believe the world is currently operating in the sixth Kondratieff wave cycle. Healthcare and medical innovation seem to be the focus of this cycle.

Examples

Here are a few examples explaining the concept in detail.

Example #1

In 2016, one of the cycle's four phases, a Kondratieff winter, was confirmed. The K-cycle aligned perfectly with the dot.com bubble. Economists predicted that between 2016 and 2020, global economic activity would peak. They predicted the currency war would end, with the world poised for a significant reset. Gold was expected to perform better in the winter cycle.

Example #2

In 2021, when the initial stages of inflation stumped investors, and they were looking for answers, the Kondratieff wave was considered an inadequate explanation. Many believed they should completely reject the explanation of rising prices propounded by Kondratieff. Market researchers suggest that the only significant cycle is bank credit. It was also observed that no proof or statistical evidence of such a wave sweeping the economy in the first half of the 19th century existed.

Chart

SOURCE

The above chart shows the six different waves, from the first wave in 1780 to the sixth wave relevant to the current global market. The chart shows how different innovations from time to time influenced the global economy and how each cycle lasted for 40 to 50 years. From the invention of the steam engine to modern healthcare services today, the global economy has seen many revolutionary changes.

Criticism

Many thinkers and economists criticized the Kondratieff waves theory—it was dismissed. Below are some reasons for its outright rejection.

• The cycle has no clear beginning and end; no economist has accurately predicted it.
• Although each cycle lasts 40 to 50 years, there are still no clues or indications of when a new cycle will begin.
• The cycle is based on unclear information, which creates complexity and confusion.
• In many countries and small economies, the existence of such waves cannot be proven due to a lack of historical data.
• The theory observes patterns in mass statistics that are not present.
• Many scholars believe actual human errors during certain economic situations have not been considered at all. The theory assigns no responsibility to human behavior in different economic scenarios.
• A relevant controversy regarding the Kondratieff wave is that the research is biased because it considers only certain events and avoids others.
• Many believe the theory was only applicable and made sense in the pre-WWII era.

Frequently Asked Questions (FAQs)

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