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The Kondratiev wave, also known as a K-wave or supercycle, is a hypothetical economic cycle in capitalist economies. These waves range from 40-60 years and are closely linked to the technology life cycle. The theory is credited to Soviet economist Nikolai Kondratiev, although other economists before and after Kondratiev have proposed similar ideas.
Kondratiev initially identified three phases within each cycle: expansion, stagnation, and recession. However, the more common approach today is to divide it into four phases, or ‘seasons,’ as follows:
Phase One (Spring): Social upheaval brought on by wealth, accumulation, and innovation, and the corresponding economic shifts trigger redefinitions of work and societal roles amongst participants.
Phase Two (Summer): Collective feelings of abundance and wealth lead to a change in attitude towards work, which decelerates economic growth.
Phase Three (Fall): Economic stagnation sparks a cycle of deflationary growth, which leads to protectionist policies that further devastate growth potential.
Phase Four (Winter): Severe economic depression exacerbates the wealth gap and ultimately results in the social fabric of society being torn apart. This vicious phase eventually results in widespread social change driven by innovation and corresponding technological shifts.
Most academic economists do not accept the theory. Even those who accept it disagree on things like wave triggers or beginning and conclusion points. In the eyes of its detractors, this level of imprecision invalidates the theory. They also claim Kondratiev waves do not attribute enough to human errors or misjudgements that have brought about many economic disasters throughout history. Finally, Kondratiev’s research itself is controversial, and critics have called it biased. The events used to draw his conclusions appear cherry-picked, and some critical data that could have affected these conclusions was left out.
Despite the criticisms, there is still plenty of intrigue amongst heterodox economists and cycle theorists. Most cycle theorists agree with the “Schumpeter-Freeman-Perez” paradigm, which outlines five waves since the industrial revolution in 1771.
The cycles include:
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If this theory holds, we are either on the cusp of a sixth wave or already in it. Kondratiev’s approach focuses heavily on interest rates and prices. Low rates and rising prices characterize the first phase (Spring), so it would make sense to assume we are in the first phase of a sixth wave based on our current economic environment. But that assumption is far from unanimous, even amongst those who subscribe to K-Wave theory. Many of these still believe we are amid a fifth-wave winter and that the worst is yet to come.
There lies the problem with the theory: far too much imprecision and room for interpretation. While it is interesting to ponder, and at first glance, there may even appear to be some merit; it’s hard to find any real-world use for the theory at this point. It’s not tradable from an investment perspective nor actionable from an economic perspective. Thus, it seems the theory will be destined to remain on the fringes unless it can be further refined down the road.