I like Carl and respect what he has written in the past. As one of the founders of the Colorado Group he is well versed in the theory. While Carl is not very specific I do take exception on a few points.
1. I have read my Schumpeter, and in detail, several times. I have also read Smith, Marx, Samuelson, von Neumann and original source material on Juglar, Kondratyev and many others. Because I do not agree with someone’s work does not mean I do not understand or lack respect for it – it only means I see things differently. On the Colorado list I was constantly deriding others for their lack of attention on Schumpeter. I think just a brief review of my writings on the Colorado list will show this to be true.
2. Carl makes an excellent point of the Stock Market centric nature of many who joined the Colorado List or those making reference to the Long Wave for investment purposes. Again even the briefest review of what I wrote supports my view in the error of relying on stock market data for projections and history of the “Long Wave”. Examples are borne out in my
discussions with Mike Alexander and Roger Babson on the Colorado list where I constantly try to move away for the stock market for validation. Stocks are reflective of both the economy and investment preference. Other forms of investment work as proxies for liquidity and investment. A pure view of only stocks obscures these preference shifts. Real estate in the 1980s and direct bank investment in manufacturing in the early 1900s are only a couple of examples that skew stock market data.
3. Carl makes a point on innovation clusters and the difference in invention. Here I disagree. I do not see a cyclical nature to innovation or invention. Schumpeter wrote a great deal about innovation – incremental innovation in the down grade and new invention driving each up grade. He also made an important and commonly overlooked point about enabling innovation. Vulcanization, for example, was enabling technology first spawning the Bicycle boom of the 1890s and later supported the development of the automobile. Without vulcanization the auto boom would never have got off the ground. I will write later on more about this relationship.
4. Kuznet was a rival of Schumpeter and one, from what I can tell in Schumpeter’s writings, he was not too fond of. In the entire two volume work of Business Cycles I think Kuznet is mentioned only once in pasting and mostly to dismiss his work as superfluous. Berry did a bunch of work on Kuznet, of which I took exception and agreed with Schumpeter. I do not see the value in the Kuznet cycle and see little to validate it. As Schumpeter did one can make a case for all of Kuznet’s assumptions in the use of only three cycles – the Long Wave, the Juglar and the Kitchin.
5. Schumpeter was very clear in Business Cycles in defining the scope of his analysis. In fact, I think he spent the first few chapters just defining the scope of his work. He was only concerned with one aspect of cycles – if they exist in business. The conclusion of Business Cycles is yes indeed business cycles exist in business and are
probably a result of the interaction of business itself. Schumpeter never makes the conceptual leap of von Neumann in defining a math and the relationship of interaction. Along these lines there is a sub set of those writing about the Long Wave as if it is some natural phenomena outside human interaction. While Kondratyev viewed the causes as organic, he did not subscribe to numerology or astrology as many adherents of cycles do.
6. One has to place Schumpeter in his historical times. While Kondratyev may stand above time, Schumpeter certainly did not.
Schumpeter, as a great admirer of Kondratyev’s work, lacked Kondratyev’s independence. It is quite different working in St. Petersburg with a young staff of
inquiring minds from being trapped in the Puritanical strictures of academic Harvard. At the time Trinity was a major force of thought at Harvard. In the late 1930s when Schumpeter wrote business cycles – the accepted economic theory of the pervious period – had come under attack. Schumpeter amid the frenzy over Keynes was attempting to create one last and definitive shot over the bow for business cycle theory. It is typical for the best of a trend to be exploited to its utmost at the end of the trend. So be it with Schumpeter. When published Schumpeter took an academic hit for projecting the failure of Keynesian policy and to
project growth not returning until the 1950s. His projections went against the thinking of the time where Marxist Planned Economies and Keynesian stimulation were the rage. It was not until the mid 1970s when both Kondratyev and Schumpeter were rediscovered – well after their deaths. “Business Cycles” was republished in 1982.
Lets concentrate on the model if for no other reason that I do not want to be accused of lifting it from Schumpeter or anyone else. The Baranov Model is unique and a departure from standard economic thought and those writing about the “Long Wave”. It is solely my own and the result of work I have done over the past 35 years. It is not stock market centric.
On the Colorado list back in 1999 I proposed isolating the main components of the “Long Wave” to rejection and scorn of many. I made a couple of lists of key components and there was only one helpful reply. The model grows out of my concept of sign posts – again something not well accepted. My sign posts have been very accurate in projecting future events from the current low in interest rates, the
attack on the WTC, the close election between Gore and Bush, the evolution of the current global alliance, the current surprise increase in GDP and low inflation.
Sign posts suggests not a periodicity but a nexus of events driving a continuum. The difference is important in understanding the model. Kondratyev accepted the periodicity as an artifact of the process of interaction. Typical cycle theorists of his day saw the cycle as the driving force caused by some natural process such as the stars, sun spots or any other mystical phenomena. Schumpeter set out to dispel the notion and gain
credibility for the science of business cycles. In this Schumpeter failed miserably. The connection of cycles to mysticism has relegated the Kondratyev and Juglar to the history dustbin of loonies and prophets. Today when you say Kondratyev people hear “nutcase”. It is unfortunate and I had hoped with academic backing the Colorado List could help change this. Unfortunately lacking the vision or leadership it did not.
The model is constructed to show interaction. The placement of the components are not random. Each acts within the economy at all times. The Long Wave can be thought as an observer moving around the model. As the Long Wave “observer” moves around the model it highlights the importance of events. One can expand this to include different observers all traveling at different speeds. One could be a Juglar observer and another a Kitchin observer.
The Kuznet observer gets run over in a traffic jam. Indeed observers could be traveling around the model at the speed of light. It is the interaction of observers that produces the nodes and thus what we think of as Juglar and Kondratyev Cycles.
Every day someone somewhere has an excess of capital that allows for the exploitation of innovation. The financing of innovation produces displacement. The displacement forces social change. Social change accumulates to bring about geopolitical change. Every day all over the world governments are passing new laws to account for social change due to innovation. Since Kondratyev’s irreversible trend is cumulative the process gains more financial capital (wealth) thus driving the process forward.
And here is where I depart from the innovation and invention model of the Long Wave. I do not see innovation or invention as a cyclical In fact, I do not see the difference between the two. Just as my work is built on the backs of others before me all innovation is based on past knowledge – even past faulty knowledge. The atom bomb was an invention changing the course of the world. The principals of the bomb were built on the ideas of
the past. Without Newton, Maxwell, Bose or even the Greeks there would be no bomb. The impetus to create the bomb was driven by conflict and challenge. The innovations in thought occurred well before the actual invention. The end product was the result of many technologies. The funding was possible because of the large concentration of liquidity, the need to win the war and the dedication of many. Thus, it
was more the needs of the time than the ideas that brought the creation.
All inventions have similar a chain of events. The concepts of the internal combustion engine and the transistor were known before Benz or Shockley actually created one. Many were working at the same time in the same direction. At the time of invention of either of these two major breakthroughs to modern life and drivers of Long Wave Growth Periods few viewed them as important. Western Union turned down the Telephone, the
US gave away the technology of the Transistor and the Steam Engine was considered far more practical than Benz’s invention. So one at any point in time cannot say which technology is the future driver of the next boom. It is only in retrospect we then say “gee that Internal Combustion Engine was a pretty neat thing and look how much it affected society.”
This brings us back full circle to the model and the Kondratyev “observer”. If the “Observer” is traveling at Kondratyev speed of approximately 53.3 years per revolution, the “observer” will witness important and expected interactions. These interactions are sign posts driving future directions. If the observer waits for these interactions then it can see outcomes and judge any variation in the current cycle over previous one. Remember, without people there would be no economy! The interaction of people within the economy is what perpetuates the harmonics we observe as a cycle.
One more note on this. It is often thought because economics is not measured by pure mathematics it is a soft science. But from an interaction outcome perspective the choices of the participants at any point in the cycle are limited. Going against the crowd in rush hour can be fatal. People operate out of need and greed. Thus their actions in any situation are limited. Anyone having run any sizable organization understands how limited the boss is in making decisions. Even Bush after the
WTC attack was very limited in his decision making ability, not so much because of his own personal limitation, but because of the acceptability of the solutions as a result of the event.
Finally, I cannot leave this discussion without commenting on the impact and usefulness of the Baranov Model and the Long Wave for investment. Investment is about trends and evaluating risk. Both have to be on the side of the investor. Without the trend, there is no net profit. Ignoring risk puts one vulnerable to a sudden destruction of wealth thus wiping out the gains from the trend. Using the Long Wave in investment gives on an edge in isolating systemic risk and exploiting the trend.
When all is said and done I am not altruistic but a Greedy Capitalist. We are all looking out for our own self interest it is just some of us will not admit it. The study of markets and the economy is a study in the greed and self interests of humans.