The long waves in economic life.

Introduction

The idea that the dynamics of economic life in the capitalist social order is not of a simple and linear but rather of a complex and cyclical character is nowadays generally recognized. Since, however, has fallen far short of clarifying the nature and the types of these cyclical, wave-like movements.

When in economics we speak of cycles, we generally mean seven to eleven-year business cycles. Yet these seven to eleven-year movements are obviously not the only type of economic cycles. The dynamics of economic life is in reality more complicated. In addition to the above-mentioned cycles, which we shall agree to call 'intermediate', the existence of still shorter waves of about three and a half years' length has recently been shown to be probable.(2)

That is not all, however. There is, indeed, reason to assume the existence of long waves of an average length of about fifty years in the capitalist economy, a fact which still further complicates the problem of economic dynamics.

Method

[The second and third sections of Kondratieff's exposition may be summarized as follows: The succeeding study is to be confined solely to an inquiry into various problems connected with these long waves. Investigation here is made difficult by the fact that a very long period of observation is presupposed. We have, however, no data before the end of the eighteenth century and even the data that we do have are too scanty and not entirely reliable. Since the material relating to England and France is the most complete, it has formed the chief basis of this inquiry. The statistical methods used were simple when no secular trend was present in the series. If the series displayed a secular trend, as was the case among physical series, the first step was to divide the annual figures by the population, whenever this was logically possible, in order to allow for changes in territory. Then the secular trend was eliminated by the usual statistical methods applied to each series as a whole; and Kondratieff refers specifically to the methods presented by Dr Warren M. Persons in the Review of Economic Statistics in 1919 and 1920. The deviations from the secular trend were then smoothed by a nine-year moving average, in order to eliminate the seven to eleven-year business cycles, the short cycles, and random fluctuations possibly present.!

The wholesale price level

While the index of French prices goes back only to the end of the 1850s, the English and American indices date back to the close of the eighteenth century. In order not to overburden this study with figures, the statistical data are presented exclusively in the form of charts.(3)

The index numbers of prices plotted in Figure 4.1 have been neither smoothed nor treated in any other way. Nevertheless, a mere glance at the chart shows that the price level, despite all deviations and irregularities, exhibits a succession of long waves.

The upswing of the first long wave embraces the period from 1789 to 1814, i.e. 25 years; its decline begins in 1814 and ends in 1849, a period of 35 years. The cycle is therefore completed in 60 years.(4)

The rise of the second wave begins in 1849 and ends in 1873, lasting 24 years. The turning point, however, is not the same in the United States as in England and France; in the United States the peak occurs in the year 1866, but this is to be explained by the Civil War and casts no doubt on the unity of the picture which the course of the wave exhibits in the two continents. The decline of the second wave begins in 1873 and ends in 1896, a period of 23 years. The length of the second wave is 47 years.

The upward movement of the third wave begins in 1896 and ends in 1920, its duration being 24 years. The decline of the wave, according to all data, begins in 1920.

It is easily seen that the French prices after the close of the 1850s move generally parallel to the English and American prices. It is, therefore, very probable that this parallelism existed in the preceding period as well.

We conclude, therefore, that three great cycles are present in the movement of the price level during the period since the end of the 1780s, the last of which is only half completed. The waves are not of exactly the same length, their duration varying between 47 and 60 years. The first wave is the longest.

The rate of interest

The course of the interest rate can be seen most conveniently from the movement of the discount rate and the quotations of interest-bearing securities. Because the latter depend less on random fluctuations and reflect more accurately the influence of long-run factors, we use here only the quotations of state bonds.

Figure 4.2 shows the quotations of the French Rente(5) and of English Consols.(6) Both have a secular trend during the period of observation. The chart shows the deviations from the secular trend smoothed by means of a nine-year moving average.

The quotations of interest-bearing securities manifest, as is well known, a movement opposite to that of general business activity and of the interest rate. Therefore, if long waves are operative in the fluctuations of the interest rate, the movements of bond quotations must run in a direction counter to that of commodity prices. Just this is shown in Figure 4.2, which exhibits clearly the long waves in the movement of the quotations and consequently of the interest rate.

The chart starts only after the Napoleonic Wars, i.e. about the time that the first long wave of commodity prices had reached its peak; it does not cover the period of the upswing of the latter. Considering the data at hand, however, we may suppose that the quotations of state bonds took part in this movement also.

English Consols actually manifest a decidedly downward tendency between 1792 and 1813. Their …