Thirty years ago, my book The Age of illusions (1983) contained an exposition of the long waves in economic life, first identified by the Russian economist Nikolai Kondratieff during the 1920s. Kondratieff’s thesis was that long waves lasting approximately half a century each occur in the economic activity of capitalist economies. These waves have two main phases – an upswing, in which the level of activity is increasing, followed by a downswing, in which it is falling, with each phase lasting a generation.
Kondratieff did not explain why these long waves occur. However, his observation was developed by Joseph Schumpeter, particularly in his monumental tome on Business Cycles. Schumpeter’s case was that long waves are driven by innovation.
I believe that Schumpeter’s thesis does indeed accurately describe the process of capitalist development. What I termed the Space Age Kondratieff in The Age of Illusions extended from the late 1940s to approximately 1990. This was succeeded by the Internet Kondratieff – a global innovatory boom stimulated by the development of the worldwide web. The primary upswing of this long wave extended to the turn of the millennium, until the original dot.com bubble burst in 2000. It was succeeded by a secondary upswing, which came to a juddering halt with the international financial crisis of 2008/09.
We are now in the downswing phase of the current long wave, when the mountain of debt built up during the upswing – first to finance innovation, and then to fund speculation – has to be purged from the system. Either those who borrowed heavily during upswing will have to pay down their debts, or their lenders will have to write them off.
Either way, the impact is likely to be deflationary.
In Schumpeter’s analysis, the recessionary phase is not only necessary, but desirable. Corporate insolvencies are an inherent part of what Schumpeter termed “the gale of creative destruction” which drives capitalism forward.
Viewed in this context, the policies of quantitative easing adopted by central banks internationally are not merely unhelpful, they are damaging. Quantitative easing hampers the process of adjustment by providing cheap credit to enable insolvent institutions and businesses to stay afloat, by rolling over their loan obligations – “a rolling loan gathers no loss”, to misquote the old proverb.
The problem with this policy is that it can lead to a lost generation, as in Japan, where zombie companies are kept afloat on a sea of cheap credit, rather than being restructured, sold or liquidated. This means that resources of both labour and capital are tied up in insolvent firms,and are not redeployed to dynamic new enterprise. The result is likely to be economic stagnation.
The Bank of England’s confident forecasts of the benefits of its quantitative easing programme between 2009 and 2012 proved hopelessly optimistic. The concerns expressed by those of us who criticised the policy were entirely vindicated.
As I wrote on this site 2 years ago, on December 28 2012,
“If the Bank of England responds with yet more quantitative easing, my prediction is that it will have precisely the same effects as QE has had already – driving down real incomes, driving up inflation and sending the British economy back into stagflationary recession. However, if QE is consigned to the dustbin of history as it deserves to be, then, notwithstanding uncertainties in the Eurozone and the USA, there is a realistic prospect for recovery in the UK economy, although the recovery is likely to be weak.”
However, while QE has hopefully now been abandoned in the UK, it is still being promoted as a mechanism to stimulate recovery in the Eurozone. If the European Central Bank does deploy QE, it could be the last throw of the dice for a bankrupt policy.
The euro remains a structurally flawed currency, driven by a political agenda against the interests of the ordinary citizen whom European politicians are elected to serve. The forthcoming election in Greece will inject a further level of instability into the system.
My analysis on this site two years ago, in November 2012, has not been altered by the passage of time:
“My view remains that the most likely outlook – and perhaps the least bad option – is for the managed exit of Greece, with transitional assistance from the troika of the ECB, the IMF and the European Commission. But because of the amount of political and financial capital invested in the single currency, this is unlikely to happen next year (2013) or the year after (2014). There will be at least one more round of bailouts until it becomes obvious that the whole exercise is futile. So it might take between three and five years for the huge vested interests supporting the single currency to admit defeat. Under this scenario, the euro will start to disintegrate somewhere between 2015 and 2017.”