WS Assessment - Kontratyev Dynamic Equilibrium

WSN'ers, et al:

For the past few weeks I’ve been signed on at Eric Von Baranov’s Kontratyev Conference exploring issues of the WS-longwave connection. Eric’s points are really quite interesting, although his model is somewhat different than what I’ve encountered with other long-cyclical and WS explanations. If you could review his material here and comment I would be grateful for your inputs. Questions I have concerning it: (1) your assessment of his cycle/not-a-cycle distinction? (2) your perspectives on the geopolitical and historical soc. implications of his model? (3) your critique concerning his basic theses vis-à-vis “dynamics”, “harmonics” in his model, the “statics” of cycles, progress and the reversible/irreversible trends, and his sociopolitical and historical observations in light of the Kontrayev Dynamic Equilibrium theory.

So I’d appreciate your responses on this material. In light of WST, what should we be making of the model’s driving ideas? … Thank you in advance for your insights.

(Luke R.), The Consilience Projects, www.topica.com/lists/consiliencep

The Kondratyev Theory

by Eric Von Baranov

(from http://www.kondratyev.com/reference/equilibrium.htm)

Overview

Before Kondratyev published his now famous paper on the "Long Waves of Economic Life" he published a paper on Dynamic Equilibrium. The paper published in 1921 was attached as a preamble to the 1925 "Long Waves" paper, but deleted before publication. History being what it is Kondratyev's theories on Equilibrium have been largely ignored.

Business Cycles

Business cycle theory was very much in vogue in the late 19th century and remained the primary economic theory until the implementation of Keynesian policies in the early 1930s. Indeed the names coming out of the period, Juglar, Kitchin, Kuznets and even Schumpeter were all business cycle theorists. Kondratyev made a departure from standard business cycles not because he failed to note periodicity, but because he questioned the cause of the periodicity.

A New Model

In researching the theory for over 30+ years it is apparent the popular interpretations of seasons or extended plateaus are at best misdirected. It matters little the "point on the wave" as the process of dynamic equilibrium is continuous. For years I have wrestled with the better model to explain Kondratyev's ideas. The typical wave formation is misleading and skewed to advance and decline.

One of the most confusing labels of the "Long Wave" theory is in calling the downgrade a secondary depression. In reality both the typical upgrade and the downgrade have their own unique characteristics neither of which are all good or all bad. The difference lies in the intensity of the various factors. Understanding these factors and their balance at different times gives a better overview of current events and increases accuracy.

In developing the model it was necessary to reduce events to their components. A model is never realty, but simply a format in which to order and discuss thoughts. Events such as Women Rights might not directly relate to economics or finance yet are still driven by economic conditions and opportunity. One cannot be separated from the other, but can have a varying impact on outcomes. Thus the interpretation becomes one of balance.

Model Structure

All of the events that impact an economy fall into one of four main categories with the associated sub categories. Instead of looking at "The Theory" as a wave it is viewed as a wheel - a square wheel to be sure but nevertheless a wheel. This interpretation better supports Kondratyev's separation of the reversible and irreversible trends. The irreversible trend is progressive building on accumulated knowledge. The reversible trend can then be visualized as a wheel running along the irreversible trend providing character and opportunity.

Financial. The base of the model is financial. The ability to value assets and wages is the key to an economy. In any economy, be it agricultural, industrial, manufacturing, mercantile or information, financial structures and markets provide an important base. Historically periodic disruptions to financial systems are acute and easily sorted out. Even after the destruction of war, where anarchy reigns, methods of valuation and a currency of exchange are easily defined. As with all components of the model financial systems evolve to meet the needs of society.

Innovation. Without innovation economic growth is bounded by the fluctuations of nature. From the first planting and cultivation of crops to the creation of computer chips innovation drives growth. Without innovation there is no economic growth. Innovation occurs through out the overall model but is most pronounced when financial opportunity is the greatest.

Social. Borrowing from Newton's Laws of Motion - for every action there is a reaction. Innovation creates displacement. Paralleling the growth though innovation is social conflict. Innovation brings wealth and freedom and thus demands upon society. As the displacement exceeds the capacity of innovation to increase wealth, limits to growth are reached.

Geopolitical. Economic growth is best supported by Geopolitical stability. As social pressures build from the displacement of innovation they spill over and force Geopolitical realignments. Wars and treaties play an integral part in producing balance and accommodating change from new innovation.

A Question of Balance

Probably the biggest misconception about Kondratyev's theory is the concept of a beginning and an end. What is suggested from Dynamic Equilibrium is an on going process. Such an approach more closely matches the real world. Yet one other piece must be added to the puzzle.

At times events come to completion and at others remain open ended. Open-ended issues need attention. The same principle applies to psychology. Avoiding conflict only serves to delay the inevitable and increase apprehension. Individual psychology collectively reflects on society.

The separation of any point in time into the four primary components allows for the measure of imbalance, the identification of trends and the evaluation of conflict. The events with the greatest conflict are also the events that create the most predictable harmonics.

External Artifacts

Walking around the model it is clear, while all four components are in play at all times, there is never a point where balance is achieved. Always one aspect of the model dominates. Such an interpretation is life-like as competition and humanity are a struggle for rewards. Any economic model not reflecting these aspects is less than honest and not reflective of the real world.

The process of compounding innovation creates both social conflict that accumulates over time and strains to the financial system attempting to accommodate new products into the price structure. As a result inflation is a by-product of new innovation. New innovation when first introduced has a small impact. As innovation spreads small displacements compound requiring refinements in design. New innovation also impacts resources leading to shortages further driving inflation.

As social issues dominate innovation is stifled. New innovation moves to incremental innovation correcting the errors of the past. The lag in new products and the increased competition in known markets leads to deflation.

The push of social change and the strategic advantage gained from innovation forces Geopolitical realignments first creating instability and eventually creating a new base for economic growth.

Summary

Dynamic Equilibrium provides a method for ordering historical events. The degree of closure determines harmonics exposing the timing of future events - politically, economically and socially. Instead of looking for a beginning and end the process transcends time allowing for evaluation of risk and opportunity on continual basis.

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From Kontratyev Conference (http://groups.yahoo.com/group/kondratyev/)

Message # 16829

The key to dynamics is the dynamic part. Cycles are static. One assumes limits and the revolution of a cycle around such limits. Kondratyev’s irreversible trend suggests just the opposite – things are progressive. Darwin said the same thing.

If the longer trend is progressive (kind of takes away from your 500 years theory) and adaptable then we have the perfect dynamic system. There is one point to reinforce this.

At one point in history one man’s prosperity was at the direct cost of another’s. Those at the top of the heap were supported by the slaves below. Slavery was not limited to what we here in the US fought a Civil War over. All forms of labor prior to Industrial Revolution were a form of slavery.

Marx noted this but failed to recognize the evolution of the manufacturing model. In fact, I am hard pressed to find anyone in the past recognizing the shift. As articulated by Marx the wealth of the corporate leaders displaced the monarchy of Europe. What was not well accounted for even by Adam Smith was the rise of the Middle class.

Now lets look at the difference in harmonics and cycles. As I noted above cycles assume rotation around some fix point. A harmonic is a result of vibrations nodeing out at some particular frequency. The frequency is arbitrary and can even shift by changing the shape or the size of the object.

In my dynamic model I address four components that are progressive. That is each feeds the other. Over the course of the “long wave” one area take precedence over another. Geopolitical becomes less important as a factor in the projection of events once the alliances solidify and provide stability for the Growth Period. The influence of the alliance remains and the stability promotes growth, but the interaction slows and thus the concern for watching closely for dramatic changes.

Further, the nodeing out is less important even if it is accurate. The timing can be used to back track and insure reliability in the model and can even be extrapolated to project future events. The point of these exercises are simply tricks of the trade and do not go to the heart of the theory. More important is the observation of events – what I call proxy events – there will be more on that later – because they allow one to track outcomes.

As I stated above harmonics can be affected by the shape and size of an object. It is quite possible and even probable the dynamic nature of the economy will eventually shift the harmonic altering the time frames. So far this has not happened and periodicity traces back well to 1066, which could be considered the start of modern society. One would argue Rome or Greece, but the Battle of Hastings and the change in Geopolitical organization led directly to the Industrial Revolution. Darby was not a coincident event occurring simultaneously worldwide.

The next point to consider is the dynamic model itself. It is not limited to a periodicity of 53.3 years. In fact, the interaction of the model is continuous. Innovation is constantly creating displacement, displacement constantly impacting social change, Geopolitical structures constantly challenged and new levels of finance created. Without the constant interaction there would be no dynamic nature to the economy to create the harmonic we view as cycles.

I hope in my explanation you can see the difference. One can say I am looking at a cycle from the inside while others are observing it from the outside, yet as Kondratyev expressed the periodicity is an artifact of the process not the controlling factor. The most important use of the Long Wave is a framework from which to filter and evaluate current events. Without such a filter one is lost in a sea of confusion.

Eric Von Baranov - CEO

The Kondratyev Theory Letters

Message # 16817

The archives of the Colorado list (www.longwaves.net)(Lk R) are full of discussions on the length of the long wave.

There is a basic problem with the concept of time. Very quickly with
only a small variation, the value of using a cycle goes to hell.
Multiple this variation over a few cycles and all that is left is noise.

Kondratyev was not a cycle guy. One has to understand his life and timesto get an idea of what he was attempting to isolate. His paper on Dynamic Economics lays out some of these concepts. After his research he expressed surprise at the narrow range of periodicity. Schumpeter followed up on Kondratyev's work in more detail and found a similar narrow range in both the long wave and shorter cycles.

Looking at Russian history Kondratyev would have had to been blind, stupid and senile to miss the Long Wave periodicity. I think one of the reasons he used US and European statistics was to see if more advanced economies would have the same characteristics. Besides, few in the academic world would have given Kondratyev much credibility had he stuck to Russia for documentation.

My ideas on harmonics are not new and really find their source from Kondrtatyev's work on dynamic economics. History is not going to repeat itself. People learn and adapt. The progressive nature of mankind is what Kondratyev labeled the irreversible trend. The reversible trend - Kondratyev's "long wave" - thus is bounded by the irreversible trend or physical limits. Any system bound by physical limits will set up harmonics. This is particularly true in mechanics but can easily be found in social science events as well.

If you look over Mike Alexander's stuff and that of others coming out of the Colorado group you will notice attempts to explain the Long Wave from statistics or the most popular - demographics. This approach is flawed. If one goes down the wrong path in life or makes the wrong assumptions when building a theory, then the outcomes will not be rewarding.

One of the reasons I constructed my new model of the Long Wave was to shift the attention away from cycles, which over the years have become tainted and discredited. A cycle implies a repetition of events - the counting of days in the market or the number of months from important highs and lows. These methods often introduce a fudge factor, which over a number of cycles will create an error large enough to prove anything. Close enough is not good enough for me and becomes difficult
to use for investment. Periods for events on the Long Wave should be isolated to a few weeks or several months at best. Such isolation isnot the point though. It is the progression of events and the outcome of interaction that is the most important.

Let me give you and example. A couple of years back before the Bush Presidency I began talking about a period of social repression paralleling the 1950's McCarty witch-hunt. At the time a number of people took me to task suggesting there was not an environment for such paranoia to arise. Today one can make an argument that smiling Joe has been reborn in the likes of John Ashcroft. I am sure some of this is liberal propaganda, but we do have a Patriot Act and are not far from asking people to take a loyalty oath. Of course events help drive trends.

Was the WTC Attack predictable? While I came close in December 2000 calling the year 2001 the year of the Am"Bush", the exact event was probably not. What was predictable is the massive shift in mood that has taken place almost like clockwork.

How is this arrived at? Had not the WTC Attack occurred some other event would have set the trend in motion. We tend to concentrate on the WTC Attack and involvement from the Middle East, yet Tim McVeigh was homegrown. The events that created Waco, Tim McVeigh and bin Laden all have the same source - a shift in Geopolitical alignment. The militia movement in the US was blowback from the loss of a common enemy with the fall of the Soviets and the opening of trade with Red China. Without a common enemy the opposing political forces in the US began eating their own.

Predominate Geopolitical alignments follow a periodicity that is
uncanny. They remain stable for about 25 years and then have a 25-year period of readjustment before solidifying again. Indeed this makes sense. The greatest economic growth occurs from political stability. The success of England in giving birth to the industrial revolution was aided by a narrow body of water. Being separated from the chaos of Europe gave England a strategic advantage allowing them to compound economic growth while attracting the best and brightest from the continent.

From 1949 until 1972 the US was the predominate world power. The world was split around two axes the US and Communism. Where Korea was a UN action at the start of the cycle Vietnam was a "go it alone" exercisewith US allies defiantly harboring deserters and draft dodgers. Economic power was distributed among the allies. The change shifted the world Geopolitical balance and started to form the alliance that is solidifying today.

With Red China, Japan, Australia, North America, Europe and Russia all aligned into one free trade zone it is no longer possible to mount a central army in opposition. This changes the nature of the world and that of opposition. Against such a force the only useful tool is terrorism. I suspect just as the Native Americans discovered 150 years ago such a fight is futile.

I could give many more examples but I am most interested in giving you the flavor. It is impossible to look stats on demographics, GDP and inflation and get the whole picture. Such stats are simply artifacts of the underlying phenomena. While they may be repeatable and help identify the interaction, they are not the cause.

Worse when looking at GDP or Interest Rates - a couple of the more reliable indicators - one is not looking at apples and apples. Monetary conditions change as do economies. Probably the worst measure of anything is inflation. What does one use as a standard - a loaf of bread? Is the loaf of bread you buy today the same as the one you bought in 1950? Is the use of bread the same? How does one then account for a hand held calculator or the computer you are using to read this e-mail? Is a computer more expensive or cheaper today than in 1950?

Eric Von Baranov - CEO

The Kondratyev Theory Letters

Message # 16804

... I have to refrain from commenting on most of what you write simply because I have nothing to add either way. I will, however, add some points about the “Long Wave” that I think are missed. There was a general discussion of the length and timing of the “Long Wave” on the Colorado list. Few agreed with my timing other than probably Dr. Drake. Even Dr. Drake did not buy into my concept of harmonics. Kondratyev when doing his research was surprised at the consistency of timing and was offended by being lumped in with other cycle theorists of the period. Kondratyev was far more interested in the interaction and saw the timing as a artifact.

Here is where my research departs that of most people interested in the “Long Wave”. I see the interaction or Dynamic Equilibrium as Kondratyev called it as creating a harmonic from cycle to cycle that increases in accuracy over time. There is some logic to this, which I do not have time to go into. What I do find is by assigning certain coordinates to events there tends to be nodes that fall within some very tight timeframes. My nominal on this is 53.3 years and taking things back to 1066 the nodes over many cycles appear with uncanny accuracy. I will have more on this as time goes on and I add more to the web site.

Eric Von Baranov - CEO

The Kondratyev Theory Letters