Innovation and kondratieff waves

Innovation is the true key to a more prosperous world. It is believed that global economic waves are virtually induced by innovations in a kind of cyclical motion.    

Kondratieff

In a longer time perspective, western world economy appears to show a sort of returning waves of prosperous economic upswings and deleterious economic down turns. This effect is discovered and described by amongst others Kondratieff [1]. He coupled the economic upswings to major innovation breakthroughs. During the upswing however, somehow the innovative power seems to diminish and only to return in its full potential in the bottom, the winter of the cycle, to start the following cycle.

In the figure below a schematic draft of the last four cycles is presented [5].

  

The Kondratieff wave appears to show four seasons: the spring, representing improvement, built up and construction; the summer: representing prosperity and consolidation; the autumn: representing a recession, the occurrence of a plateau or stabilisation phase and the winter representing a depression, a crisis, wherein severe liquidations occur.

Somehow it appears that we find ourselves in the winter of a Kondratieff cycle, which started according to most internet sources in 2000 with the burst of the internet bubble [1,2,3,4]. Some believe it may last until 2020, so some seven more years to come. Older articles predicted that the Kondratieff wave was to reach its winters end at around 2000. Others are more sceptical about the predictive power of the Kondratieff waves and its frequency. According to Rothbarth, the real business cycle is in no sense periodic, but is a continuing, wave-like motion that varies considerably in length and intensity.[7].

The question is, is this model of Kondratieff so sound? Well for the sake of fun, lets dig in some statistical history.

Alcohol consumption in the Netherlands

The first, very interesting and relative reliable historical statistical data over the timespan of most of the Kondratieff waves are figures on the per capita alcohol consumption in the Netherlands. The alcohol consumption is given by the following figure [8,9]:

Clearly a wave pattern can be distinguished. A first major dip in the consumption of alcohol can be seen around the year 1859, a second major dip in the per head consumption can be seen around approximately 1943. With some imagination, we can see three major peaks in the alcohol consumption, the first being around the year 1832, the second around the year 1890, the last, with more uncertainty since the peak, if any, is still in the making, around 1992. Here the peak and dip years are the ball park estimated mid points of the wave maxima and minima respectively.

From the deep and lasting dip around the 30ies and 40ies, it may be assumed that the alcohol consumption and the economy show a positive correlation. This means on average, with economic upswings, alcohol consumptie increases, with downturns the consumption decreases.

In the later Kondratieff models, for example as depicted below, the year 2000 appears to be the demarcation between autumn and winter. We appear to be somewhere half way wintertime and the true depression is only about to commence. This later Kondratieff model is constructed by I. Gordon of the longwave group, a Canadian financial research institution [12].

If we apply the later model to the alcohol consumption figures, the following combined image can be obtained. The datapoints in the blue field are taken as the exact seasonal turning points in the red wave model line:

Here only the last kondratieff wave seems to coincide with the Dutch alcohol consumption pretty well. With a little fantasy, the first wave somehow coincides somewhat with the consumption figures, though the second and third wave are not representing the historically collected statistical consumption figures.

Apparently, the predictive power of the kondratieff wave for alcohol consumption in the Netherlands is rather poor... 

(Un)employment in the Netherlands

Another very well documented figure is found in the unemployment statistics of the Netherlands. These figures are very likely to be directly coupled to the economic situation in the Netherlands. Since unemployment is supposedly inversely correlated to the economic upswing, the inverse of the unemployment is taken. This is the ratio between the total work force in the Netherlands and the number of unemployed people. This figure, a measurement for the employment varies between a number of about more than 120 and about less than 6 times as much people in the work force as the number of unemployed people. A high value of this indicator thus represents an economic high, whereas a low number represents an economic recession or even depression. These figures do show some wave like behaviour as well. If the Kondratieff low's and high's are inserted, the following combined figure can be obtained [11]:

Well, from this figure, it becomes clear that Kondratieff's model does not apply well to the Dutch (un)employment figures. It is likely, that in the Kondratieff spring and summer the employment should go up, in autumn and especially in winter employment would plummet. In the winter of the fourth wave (i.e. now), indeed employment is rapidly decreasing. For the rest, the Kondratieff  waves do not coincide well with the economic waves as represented by the employment figures.

Silver price in the Netherlands

Another figure to test the Kondratieff's theory is the -again very well documented- historical silver price development. In this figure, the silver price is expressed in guldens, a nowadays extinct currency, though over more than two centuries, the Euro represents only about eleven years. Thus, it makes more sense to recalculate the last eleven years to the gulden than to recalculate 200 years back in the history of the silver price to Euro. In the currency recalculation, a rate of exchange of 2,2 gulden per euro was used.

Since silver has actually been the material, our currency was made of until 1969 the long term development of the silver price was only due to debasement of the gulden, being a silver coin. Up to 1800 it contained 9,61 gram pure silver, from then until 1839 it contained 9,45 gram pure silver, from then until 1919 it contained 7,2 gram of silver, from then untill 1969 it contained only 4,68 gram of silver.  Hereafter, the silver price was decoupled from the gulden, being a mere nickel coin [14].

From the figure above, it can be concluded, that the silver price in the Netherlands does not coincide with the Kondratieff waves. Only the Kondratieff winter we are supposedly in at the moment, represents a strong increment in silver price.

Consequently, the three above statistically sound economic indicators from the Netherlands do not follow the Kondratieff waves at all. Is the Kondratieff theory wrong, well from these few statistical indicators, that conclusion appear to be too strong. The figures above do indicate however, that the Kondratieff model is not that sound as many do make believe....

[1] Essay A. Spits (2002),  http://libertarian.nl/wp/2002/09/de-kondratiev-cyclus/

[2] Essay A. Spits (2008) http://libertarian.nl/wp/2008/12/kondratiev-winter/

[3] Interview D. van den Brink, J. kooistra (06-01-2012)
      http://managementscope.nl/magazine/artikel/617-dolf-van-den-brink-kondratieff

[4] http://de.wikipedia.org/wiki/Kondratjew-Zyklus

[5] http://nl.wikipedia.org/wiki/Kondratieff-golf

[6] http://faculty.washington.edu/modelski/IPEKWAVE.html

[7] Article by M.N. Rothbart  http://www.lewrockwell.com/rothbard/rothbard44.html

[8] Tweehonderd jaar statistiek in tijdreeksen 1800–1999
      http://www.cbs.nl/NR/rdonlyres/7934A2DE-B87C-4CDF-8BC7-D34F02225620/0/200jaarstattijdreeksen.pdf

[9] Factsheet Alcoholconsumptie:
      http://stiva.nl/wp-content/uploads/downloads/2012/07/STIVA_factsheet-alcoholconsumptie_26jul121.pdf 

[10]  D. Lounsbury, Kondratiev Wave Theory Deflation and the Greater Depression http://www.deflationeconomy.com/kondratiev-wave.html

[11] Unemployment figures CBS:

http://statline.cbs.nl/StatWeb/publication/?VW=T&DM=SLNL&PA=71882ned&LA=NL

[12] The long wave analyst http://www.longwavegroup.com/principle/fourth_kondratieff_winter/fourth_kondratieff_winter.php 

[13] J. Luiten van Zanden e.a., The prices of the most important consumer goods, and indices of wages and the cost of living in the western part of the Netherlands, 1450-1800 http://www.iisg.nl/hpw/data.php#netherlands

[14] http://nl.wikipedia.org/wiki/Nederlandse_1_gulden