A possible explanation for "long waves" - or at least the current
post-WW2 cycle - is increased global indebtedness. This means that
accumulation of financial capital due to all sorts of returns
(interest, dividends on stock, any other type of returns on
saved/invested money) gradually and in an accelerating tempo
(exponential curve) drives the gobal economy into a financially
polarized state of affairs, with a small number of rich agents on one
side (net creditors) and a large number of net debtors on the other.
These dynamics are a logical consequence of the mechanism of compound
returns.
The following are slightly edited excerpts from a paper I am working on.
Some of you have seen this earlier.
Trond Andresen
..
Indebtedness in the net debtor sector will increase, i.e. both firms
and households will be forced to use a steadily larger share of their
income for dividends, interest and repayments. Money stock in the net
debtor sector will decrease relatively. Liquid funds will increasingly
and unneccessarily ("unneccessarily", related to the role of money as
a prerequisite for the execution of real economic activity) be forced
to circulate via the net creditors, or interchanged between them, which
makes no difference seen from the net debtor sector.
The increase in general indebtedness and the relative decrease in net
debtor money stock will cause the net debtor sector to become
financially fragile or "brittle", a development which will lead to
problems in due time (see below).
The level of purely financial economic activity will grow in relation
to the level of economic activity in production and non-financial
services. We will consequently have a relative increase of employment
in - and share of GDP from - the financial sector.
......
Other types of cycles and other theories
A polarization-based theory for the longest type of macroeconomic cycle
has been described. What about shorter types of cycles, and what about
alternative explanations for the longest cycle?
Shorter-period business and other types of cycles may - to the degree
they exist - be explained by other mechanisms: The shortest
approximately 4-year business cycle by the time lag of inventory
build-up, the 7 - 11 years cycle by the time lag due to investment in
buildings and equipment, and an even longer cycle, the Kuznets, by even
more protracted investment in even more durable goods, and by
demographical changes connected to a long growth period (van Duijn
1983). The actual existence and dynamics of all those cycles
throughout the history of capitalism and in different countries is of
course subject to discussion. The longer the type of cycle is, the more
difficult it is to ascertain. But to the degree they exist, they have
one thing in common: They could only break a slow but relentess
polarization process, if net asset (debt) reduction due to
shorter-cycle recessions was so strong that polarization was lower
after a cycle than before. If not - and this seems to be the case in
the real world - any shorter- period cycle, regardless of explanation,
will only constitute an oscillation distorting, but not qualitatively
changing, the net asset growth path for the net creditor/rentier
class. Therefore it is not necessary for our purposes to go closely
into discussion on the existence of, and explanations for,
shorter-period cycles.
Now to the longest "Kondratieff" cycle. Solomou (1990) argues against the
existence of such cycles. To the extent that theorists believe that
such cycles exist, however, I have found three main explanations in the
literature, which all three are alternatives to the proposed
polarization theory:
- An innovation-oriented explanation says that technological
innovation comes in clusters during depressions due to the pressure to
be creative in such times, and the ensuing feedback effect of an
innovative climate engendering still more innovations. These
innovations then lay the ground for a new upswing. The start of the
downswing is related to markets being satiated with products based on
old technologies. Problems for firms then have to rise to a level that
lead them to terminate out-dated activities, and instead take the risk
of investing in new innovations. This is the theory of Mensch and
others, as described in (Delbeke 1981, van Duijn 1983).
- A long-term falling trend in the average rate of profit mainly
due to growth in capital intensity, explains the transition from boom
to recession to depression (Mandel 1981). The turn from depression
into renewed upswing is dependent upon neccessary exogenous "system
shocks" such as political upheavals, wars, revolutions. Mandel rejects
the innovation-oriented explanation for a new upswing.
- Bootstraps (the need to expand the capital goods sector to
produce more capital goods, not only consumption goods, in the upswing)
and time lags in the construction of industrial infrastructure result
in a very long term upswing. The large inertia of this process and the
longevity of capital goods later lead to overcapacity and crisis.
Computer simulations give a 50 year period for this cycle. This is the
theory of Forrester, as described in (Delbeke 1981, Moxnes 1988).
For the sake of discussion, let us abandon the topic of earlier long
waves, and focus only on the period after 1945 and until today, which
consists of a long upswing, culmination, recession, depression, i.e. we
have experienced most of some sort of long cycle on the world scale,
and are waiting for a new upswing. To me it seems that the
main problem in today's depressive phase is that the masses of the
world want to buy, but they do not have the cash to do it. The
producers of the world want desperately to sell, but customers with
money to spend are all too rare. The products are not out-dated or
unattractive, but would-be buyers lack cash. This is an argument
against a wave of new innovations solving the problem, as advocated by
Mensch. A revolutionary innovation, let us say the intensively
sought-for high capacity electric vehicle battery, will not lead to a
new upswing unless the burden of asset/debt-relationships are strongly
reduced, so that purchasing power and investment money are released
into the net debtor sector.
Concerning Mandel's exogenous shocks, the question is: Do they imply
large-scale cancellation of debt relationships? If so, his prerequisite
for a new upswing coincides with that of the polarization theory. But
he still emphasizes exogeneity, while the dynamics
(bancruptcy/insolvency epidemy) that lead out of depression - posited
by the polarization theory - are to a large degree endogenous.
Mandel explains the falling average rate of profit by growing capital
intensity. Imagine an economy where manufacturing technology is
relatively unchanged for a couple of decades. Following Mandel's
argument, this economy should then be exempt from the long wave
mechanism. Following the polarization theory, however, accumulation and
polarization will proceed as in other economies. The polarization
theory implies that even a static agrarian economy, with negligible
industrial and technological progress, may experience the long wave
phenomenon, as long as there is a money system and lenders/investors
earn dividends. The polarization theory and Mandel's theory are
therefore different. An additional point is that Mandel's use of the
average rate of profit indicator makes the polarization phenomenon
invisible.
Now to the theory of Forrester. Conditions in different parts of the
world regarding industrial and infrastructural development are widely
different, but the polarized
indebtedness/overproduction/underconsumption/unemployment state of
affairs exists nearly everywhere. Finance is internationally extremely
mobile and therefore tends to harmonize and synchronize the state of
economies worldwide, while the level and structure of industrial
production varies widely, cannot be changed rapidly and does not
develop synchronously. Therefore it seems plausible that the root
cause of today's largely depressive state of affairs can be traced to
imbalances of a financial, not a production-related, character.
....
An argument against the feasibility of polarization
An argument against the feasibility of a polarization process may be
put like this
"The process will dampen itself quite soon, since there will be very
few creditworthy borrowers at the other end. The outgoing cash flow to
be saved/financially invested for future dividends will have nowhere to
go".
When the process has run far enough and symptoms of crisis are widely
felt, this will be true . But firms have the option of increasing
prices to compensate for the fact that an increasing share of their
expenses are interest/dividends, especially in an atmosphere where some
level of inflation is seen as natural. Thus the burden is transferred
to other firms, households and to the public sector. A given firm will
therefore be creditworthy for the time being, and the polarization
process may continue.
Furthermore, lenders will consider the sort of collateral being
offered. If this seems satisfactory, loans will generally be given.
When real estate and other collateral values are deflated during a
later crisis, lenders of course are in for a surprise. But this is
easily ignored for the time being.
The crucial point is that the polarization process, in contrast to to a
business cycle, is very slow-moving in the long pre-crisis phase. It is
therefore easy to ignore. And even if some agents observe a slow
(macro) trend of generally increased indebtedness, this will not
influence their own (micro) behaviour, be they lenders or borrowers.
Only when there is a macro trend of steep increase in the incidence of
insolvencies, will we see a significant reluctance to lend and borrow.
When the economy has reached that state, however, general indebtedness
already is so high that an epidemic of insolvencies - a chain reaction
- is unavoidable, regardless of changes in the behaviour of agents.
Aside from this, agents have little choice. If they are in need of cash
they have to borrow. And - seen from the creditor side - the
corresponding outgoing cash flows from the net creditors are driven by
the ever-present demand for returns on assets.
.....
References
Delbeke, Jos, 1981, Recent Long-Wave Theories - A critical Survey,
Futures, August, pp 246 - 257.
van Duijn, J.J.,1983, The Long Wave in economic Life,
George Allen & Unwin, London.
Mandel, Ernest,1981, Explaining Long Waves of Capitalist Development,
Futures, August, pp 332 - 338.
Moxnes, Erling, 1988, Lange boelger i verdensoekonomien?
(in Norwegian, translates as "Long Waves in the World Economy?"),
Sosialoekonomen, no. 6, pp 16-23.
Solomou, Solomos, 1990, Phases of economic Growth 1850 - 1973
- Kondratieff Waves and Kuznets Swings
Cambridge University Press.
