For those of you who have studied economics or are studying economics at the moment, you may be familiar with the business cycle. I’d like to introduce you to the Kondratieff cycles. Developed by Nikolai Kondratieff, the Kondratieff cycles observes capitalist economies in periods spanning approximately 40 to 60 years. Within this time period, Kondratieff explores the expansion of a country’s economy, observed through strong economic growth, that occurs before the contraction of the economy, which commonly consists of economic decline, financial crises as well as social, political and environmental concerns. Whilst this sounds akin to a business cycle, business cycles only observe a few years while Kondratieff cycles observe a much longer time period. Throughout previous Kondratieff cycles we have seen that the main factors initiating the cycles are innovations in technology as well as significant shifts in industry.
In this article I would like to expand on how the Kondratieff theory works through the observation of the second Kondratieff cycle. The second cycle is considered to have begun in 1849, characterised by the invention of locomotive and steel production. The creation of the first steam train was tantamount in increasing occupational mobility through the expansion of the transport system and allowing countries to be much more interconnected. After witnessing its success many countries adopted this form of transport and after a couple of decades locomotives became extensively used. The surge and demand for this new transport led to increased job creation as well as increased employment. Employment opportunities spanned from building new rail lines, mining for ore to operating the locomotives. Not only did the transport industry exponentially grow but numerous other industries benefited as well. With the production of railways the demand for steel and iron increased, resulting in an expansion in these sectors. Moreover, as the locomotives were powered by steam, coal became a critical commodity therefore resulting in more coal mining jobs. With the steam train introducing a more efficient way of transport, trade also increased. Previously merchants and businesses were restricted to trading within their local markets, however steam engines allowed them to gain access to a much bigger market. As steam trains were faster and cheaper than previous methods used to transport goods, the goods themselves became cheaper and their availability increased. Additionally, the ease with which trade could happen allowed specialisation within the agricultural sector. Rather than harvesting a variety of crops, farmers could specialise in growing crops that were suited for the local climate; this previously would not have been common practice as it would take days for deliveries to come in. Some may even classify this as the start of globalisation or a moment in history that shaped globalisation today but we can go into that in another article. Furthermore, the newly gained accessibility to previously closed off regions provided access to more land for settlement and agriculture. While there was a big expansion of agricultural and mining industries, the expansion of the railway system also resulted in the presence of consumer-oriented industries. As distributing products to a wider audience became easier, businesses focused more on individuals rather than whole industries. I am sure it is evident that the invention of the locomotive caused exponential growth.
Undoubtedly, there was a great period of economic growth; however, as the Kondratieff theory proved, there was the economic decline that followed. In order to build so many railways there was of course a vast amount of investment. At first this was extremely beneficial as it sped up the process of building railways and allowed many to be created, though the extensive scale of investment resulted in over-saturation of the market. Too many railways were built with some serving their purposes fully but others were constructed in areas with low demand or high competition with other lines, resulting in the railways becoming unprofitable. After the initial period of rapid growth, there was a sharp decline in the construction of new railways, which led to a reduction in investment. This in turn led to a slowdown in economic growth. Not only was there less investment in railways, but also in the previously mentioned supporting industries such as the coal mining industry and the steel industry. The initially large volume of investments derived from heavy speculation regarding the railway industry and the high yield it would return. As the demand for railways decreased and they stopped being produced at such a large scale, companies did not make a return on the money they had invested and, because they had overestimated themselves financially, companies faced severe financial repercussions. A key financial event that occurred during this Kondratieff cycle was the Panic of 1873, which was a global financial crisis triggered by the collapse of the Vienna Stock Exchange. This incident was directly related to the failure of several major railroad companies. The severe debt that these companies were in caused panic in the US, resulting in people panic-selling their investments, ultimately leading to the failure of a number of banks and a period of economic decline known as the Longer Depression. Of course with the decrease in production of railroads, there was a drastic increase in unemployment, which further led to economic decline. Moreover, as stated, the period of growth in a Kondratieff cycle is often characterised by technological breakthroughs, but after railroads were produced and the technology behind them was properly established, there were only minor technological innovations; this contributed to economic stagnation. With the decline of the railroad industry came the end of the second Kondratieff cycle.
While introspectively looking at the economy we can see examples of the Kondratieff cycle, but there is not enough empirical data to fully prove or disprove this theory. That is not to dismiss it but rather open discussion as to what else can explain these common observations among all the Kondratieff cycles or how we can improve upon the current proposed theory.
Writer: Sanuya Johnpetter
Editor: Sanuya Johnpetter
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