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Kondratieff

Kondratieff

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Quick Overview

The model describes a cycle of economic peaks and low points. Kondratieff subdivided this cycle into sub-cycles of 50 years proving that capitalism is recovering from its economic low points. This wave-like motion is called the Kondratieff wave.


Related models: AIDA Model7S ModelKnowledge TriangleINKSWOT AnalysisBalanced ScorecardFive ForcesBCG Matrix6W's of Corporate GrowthCRM;KondratieffCustomer PyramidProduct Life Cycle

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Background

Kondratieff waves (also known as long waves) are defined as the sinusoidal cycle in the modern capitalist world economy. Long waves exist for fifty to sixty years describing the alternating periods of high sectoral growth and slower growth. This economic cycle is more visible in international production rather than in individual national economies. In addition, it is more related to production volumes rather than prices.

Related models: AIDA Model7S ModelKnowledge TriangleINKSWOT AnalysisBalanced ScorecardFive ForcesBCG Matrix6W's of Corporate GrowthCRM;KondratieffCustomer PyramidProduct Life Cycle

The Russian economist Nikolai Kondratieff (1892-1938) was one of the first to spotlight these observations back in the 1920s. Kondratieff was born in a village called Goloejevskaja in Oblast Kostroma. In the early 1920s Kondratieff studied the relationship of waves in commodity prices and investing behaviour. He studied both the economic peak and low point. He realised that certain constant wave movements have existed for about 150 years.

His studies granted Kondratieff an influential position in Russian politics. In the late twenties, however, Kondratieff’s influence diminished strongly. In 1930 he was accused of being a member of allegedly a non-existing Peasants Labour Party. In August of the same year Stalin requested the first minister Molotov (yes, the name refers to those cocktails!) to execute Kondratieff.

Initially as a “Kulak professor” he was sentenced to eight years in prison. His health suffered from the bad conditions and yet he never stopped working. He wrote a letter to his wife telling her he had decided to prepare five new books. In fact, some of them were completed and published in Russian. On 17 September Kondratieff was done with. In a second trial he was sentenced to 10 years in prison and was denied contact with the outside world. Kondratieff was executed on the very same day by a firing squad. So he could have been spared the trial …

In 1987 Kondratieff was posthumously rehabilitated. 

In 1913 two Dutchmen, Jacob van Gelderen (1891-1940) and Salomon de Wolff (1878-1960), had previously mentioned the existence of cycles that lasted 50 to 60 years. Nevertheless, because both men were publishing work in Dutch only, it was not until recently that their ideas gained widespread attention.

 

The Model

The model describes a cycle of economic peaks and low points. Kondratieff subdivided this cycle into sub-cycles of 50 years proving that capitalism is recovering from its economic low points. This wave-like motion is called the Kondratieff wave.

Kondratieff again divided these sub-cycles into four periods which he referred to using the seasons’ names:

  • Spring: the construction phase, dominated by inflation. Money grows more strongly than production as a result of which the commodity price level rises.
  • Summer: the consolidation phase, dominated by stagflation. Production comes to a standstill or slows down with commodity prices going up.
  • Autumn: the stabilisation phase, dominated by disinflation. The latter means a decrease of the price rise. So inflation still exists however it is decreasing compared to the previous year.
  • Winter: the degradation phase, dominated by deflation. Deflation means money is increasing in value. This may sound positive but can be seriously damaging to the economy. Strong deflation means you can buy more with the same amount of money later on. So purchases are postponed.

As far as Kondratieff was concerned winter was the clean-up period, cutting the rotten spots off the economy. In fact economy is allowed to recover and welcome spring one more time. In winter inventions can be worked out giving innovations a fair chance. Unfortunately, war situations were usually the testing areas.

Some economists categorise the Kondratieff wave into two ‘seasons’:

  • Kondratieff autumn: a bull market
  • Kondratieff winter: a bear market.

 

The economists who accept this theory have not reached a clear agreement on the first and final years of each cycle. Also they have not agreed on the underlying causes of this phenomenon.

 

Most supporters of this theory, however, do agree to having five waves since the industrial revolution and the sixth one coming up in the future. These five cycles are the following:

  • 1771 – Industrial revolution
  • 1829 – The age of steam and railways
  • 1875 – The age of steel and electricity
  • 1908 – The age of oil and cars
  • 1971 – The information age.

 

According to this theory at the moment we are at the turning point of the fifth cycle.

 

How to use it

This is a rather difficult question to answer. So why not scrutinise the current cycle first, driven by information technology, but also by telecommunications and financial services.

 

At the moment we are said to be in the information and communication technology cycle, which followed after the breakthrough with the INTEL single chip microprocessor. The introduction of the first Personal Computer (PC): the ALTAIR, Bill Gates and Paul Allen founding Microsoft in 1975, and Steve Jobs and Paul Wozniak giving birth to Apple in 1976. In 1980 INTEL launched the 80286 chip for millions of PCs with Microsoft’s PC-DOS operating system. PCs were cloned and Microsoft made MS-DOS. Convenient programs such as spreadsheets and text processors were brought onto the market. The evolution went on. Apple launched the MacIntosh … the 3.5 inch floppy disks replaced the 5 inch floppies and character-oriented screens became graphical steered by a mouse. In 1993 the first properly working version was launched, and one year later the Pentium chip followed. In 1995 Microsoft presented Windows95. The USB (Universal Serial Bus) came on. From now on you can attach all sorts of things onto your PC. Apple was gasping for breath. Fortunately, the iMac turned out very successful. Apple lived on and the rest was history …. Is it?

 

The model provides insight into very long periods. Results are mainly focused on the past. After the information and communication cycle a new cycle presents itself. Where does this cycle consist of? If we knew then investing in this direction, in terms of knowledge, training, money, etc. would be a good choice. Particularly students who are about to start with their study programmes would love to have a glimpse of the contents and speed of the next cycle. Do we know anything about it?

 

Dolf van den Brink (former member of the ABN AMRO board) during an interview with management scope:

Where exactly are we on that wave?

“We are at the beginning of this century, so basically since 2000, in a typical satiation phase. In 2000 all indices started to drop, at least in the western world. The AEX was on 700 and is now on 300. This downward phase might last a long time. The previous one, back in the 1960s and 1970s, lasted from 1961 to 1981. I think we are now halfway through the shrinkage.”

 

What are the engines for the next cycle?

“Alternative energy: wind, sun and biomass. Healthcare too has huge dynamics. It seems to become the largest line of business in the world. In due time … Only not now, now everything is working against it.”

 

Perhaps it will help choose a study.

 

Best of luck on the long term…

 

Related models: 

-   AIDA Model

-   7S Model

-   Knowledge Triangle

-   INK

-   SWOT Analysis

-   Balanced Scorecard

-   Five Forces

-   BCG Matrix

-   6W's of Corporate Growth

-   CRM;Kondratieff

-   Customer Pyramid

-   Product Life Cycle

 

 

Sources:

-      Wikipedia