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Ophelia, Kondratiev and Monday Mornings

Posted on October 20, 2017 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Last Monday morning, I looked out the window and it was calm and sunny in the part of Ireland where I was. ‘What storm’? I mumbled.  A few hours later made all the difference. Economists are very good at explaining what happened. Lots of econometrics and fitted regression lines work wonders. We are less good at predicting what is going to happen and when. Weather forecasters can make good claim to science in their prognostications. The HIRLAM Numerical Weather Prediction (NWP) model at Met Eireann is very handy and generally very accurate for short-term forecasting in so far as weather forecasting applies on this changeable island to the North West of Europe.

Ophelia and Brian have come and gone and as we get up for work or other things this Monday morning not a few households are still without water, electricity, internet and broadband.  Loss of life and damage to property was a timely reminder that climate change is real and that human agency must be tackled. It is a problem of the commons in which polluting firms, polluting households and polluting countries have little incentive to do the right thing because the consequences are perceived to be in someone else’s back year (except they are not). The first mover challenge arises. Why should China or India or Ireland go further than others in reducing greenhouse emissions and taking the upfront cost or loss of business in some sectors if others do not follow suit?

The frequency, violence and medium-term unpredictability of such weather events is troubling. We simply don’t know when or what except that we can expect a lot more freak weather events, storms, flooding and follow-up repair work to deal with the damage. We can factor that into ‘fiscal space’ if the term still has any meaning or credibility after the storms of 2008-2013 and the weird gyrations in national accounts statistics in Ireland in 2015.

What is happening? Why? What next?

Might the Kondratiev Cycle offer a more useful metaphor than the weather in the North Atlantic? A Soviet economist in the 1920s, Nikolai Kondratiev theorised about long-term economic cycles or waves with alternating periods of stagnation (such as in the 1930s or in the late 1970s/early 1980s) and relatively high growth (such as in the golden years from 1946-1973 in Western Europe). The term ‘Kondratieff waves’ was coined by Joseph Schumpeter.  Economists are generally sceptical about such theories. Yet, the persistence of low productivity growth in the major economies over recent decades challenges economists.

The nature of global trade and inter-connectedness of global finance has changed dramatically. This is more than just about a lightening of regulation or the creation of a free market in capital and the entry of China into the global framework. It is about the inherently unstable, volatile and unpredictable nature of capitalist development in the first half of the 21st century. Decades of neo-Keynesianism and reformed capitalism did not abolish the business cycle. Like the weather, the business cycle has become more extreme. Just imagine the winter of 2010 in Ireland – snow for weeks in December, the arrival of the Troika, our children fleeing to the far-flung ends of the Commonwealth, cuts after cuts and no idea what 2011 might bring by way of further economic woe. Picture the Autumn of 2017 – employment booming, GDP gone through the roof, hotels in Killarney costing more than the poshest one in Berlin and living standards improving. Yes, many are still badly hurt and hurting and not least the homeless and those struggling to live or to pay rent and who have paid the price of planning, building, banking and deregulation folly of the noughties. But, the reversal in economic conditions since 2010 has been nothing short of dramatic just as the collapse of 2008-2010 was also dramatic, unexpected and traumatic (only a tiny minority of economists got it right more because if you keep saying it is 12 o’clock you will be right twice a day).

Kondratiev’s intuition was that global trading and industrial systems operate in very complex and dynamic environments subject to key drivers. The seeds of the bust and the long-term stagnation are sown in the preceding boom. From steam to railways to telephones to computers to automation the global economy moves in powerful waves. Not even the most self-enclosed political dynasties in Albania or North Korea resist the force of these waves. It is only a matter of time. Ironically, for Kondratiev (who, for his troubles, fell foul of the Stalinist dictatorship and died by firing squad in 1938), the Soviet Union collapsed rather suddenly in 1990 after a long wave of stagnation because the waves of information and comparative prosperity emanating from the west could not appease a population who knew the difference between living in the west and the east. That said, the subsequent experience of capitalist restoration in Russia and adjoining states including what was East Germany strongly indicates the limitations of capitalism in providing stability, freedom and progress. History is not over as Fukuyama claimed in the 1990s.

What we are left with is a world that is increasingly insecure and subject to sudden and massive shocks such as happened in 2008. The inept handling of the more recent crises by European Union institutions and leaders has only exacerbated the political crisis in Europe. There is a sense of déjà-vu in Europe for anyone familiar with its history in the first half of the 20th century. One thing, at least, is sure: the European Union in its current form and composition will not last. That has profound implications for the entire island of Ireland right now in ways that we cannot even begin to fully comprehend. A good way to prepare for the future is to do well what we can do today even if doing it will be seen to be the wrong thing subsequently. Better still is to do the right thing. But, how do we know until we see the impact? 

I close with a quotation from Paul Mason in 2015 book Postcapitalism (2015:242):

The modern equivalent of the long stagnation of late feudalism is the stalled fifth Kondratieff cycle, where instead of rapidly automating work out of existence, we are reduced to creating bullshit jobs on low pay, and many economies are stagnating.

Lets hope we can prove him wrong by better organising!

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