between a crisis that continues for a few months, and a depression that contin-
ues for several years. It is necessary to adapt to the new situation, and hence to
reduce costs and volumes, while starting to rebuild the business and seek new
ways for its development. Projects are suspended, investment declines, demand
falls, prices (at least on revalued assets) are also falling, capitals are not invest-
ed, etc. Thus, there is a feedback loop: the longer the recessive period, the less
investment, and vice versa – the less investment, the longer the recession. Then
a new rise may start, but it will be of a different type (that is characteristic of
J-cycles in the downward phase). To maintain upward trend after a fairly pro-
longed stagnation and depression a society needs an appropriate big enough
momentum that cannot appear from nowhere (especially without the presence
of effective anti-crisis social innovations).

Thus, the question about the reasons for a certain duration of the A-phase
of a K-wave is largely related to the question of the causes of sudden lengthen-
ing of depressive phases of the crisis of J-cycles (at the end of the A-cluster of
those cycles). And this undoubtedly further demonstrates the close connection
between the K-waves and J-cycles.

It is also clear why during the B-phase the economy cannot gain earlier
momentum. Firstly, it takes time to develop counter-crisis measures. Secondly,
it is necessary to accumulate a sufficient amount of growth factors, including
breakthrough technological innovations. Thirdly, you need a push to change the
business strategy. Thus, a feedback loop gets established: weak expansions –
inactive strategy – lack of investment – no impulses for a strong recovery –
weak expansions, and so on. And this feedback loop may operate for a quite
long period of time.

7. THE DIMENSION OF THE WORLD SYSTEM

Modernization and World-System Socioeconomic Crises

Tensions of intensive modernization; relationship of the K-wave
A-phases to semi-peripheral economic and social crises, as well as
wars of certain types

During upswings of the K-wave peripheral and semi-peripheral economic and
political crises occur more frequently. Recall that already Kondratieff (1935:
111) noted that ‘it is during the period of the rise of the long waves, i.e., during
the period of high tension in the expansion of economic forces, that, as a rule,
the most disastrous and extensive wars and revolutions occur’.

This point requires further explanation. One should take into consideration
that: a) semi-peripheral modernizing countries tend to borrow social innova-
tions rather fast; b) but often they do not have a sufficient basis for the ‘diges-
tion’ of such innovations (and social innovation can be for them altogether al-
ien). The result is what can be called ‘crises of modernization’, not only ex-
pressed in economic crises, but also in revolutions and even wars.<fnref n="52" /> The Asian crisis of 1997 was largely such a modernization crisis. Revolutions of the early 20th century can also be considered as such crises.

As for the wars, of course, not all, but some of them may well be attributed to a reaction to the rapid modernization, as well as manifestations of the restructuring of the World System. In particular, major wars were connected with the formation of large nation-states in Europe in the 1850s–1870s (Italy, Germany). The war factor will be discussed in more detail below.

**World-System Crises and Obstacles for the Emergence of the World-System Innovations. World-System Innovations and their Delays**

The increase in the World System modernization (combined with technological and social innovations) leads to the expansion and reconfiguration of the World System, that after some time creates the need for a change in relations within the World System. If the latter is delayed, then crises emerge, and those crises cannot be overcome within individual countries and through individual social innovations. In this case, the World System confronts a series of deep crises (as was observed in the period between 1914 and 1945).

Thus, the development of the World System and modification of K-waves are closely interdependent. Accordingly, some phase of K-waves appears as special, as to exit from the crisis at some stage of the K-wave world-system solutions are necessary, and such innovations may be delayed. In particular, during the third wave (1890–1940s) one could observe a profound transformation of the World System, so the crises of its downswing acquired a military-political form and generally were the most profound.

Already in the early 20th century the World System encompassed, in fact, the entire Globe. The innovations at the level of individual countries were not sufficient (partly because of very strong protectionism, military and colonial rivalries). There were also very different political regimes. Hence, the further development required new world-systemic innovations in relations between the countries. However, at the level of the world-system the old ways of solving conflicts and problems were still operating and new ones did not yet succeed easily. As a result, the restructuring of the World System proceeded in the old military and revolutionary way.

Only after the World War II, it became apparent that it is necessary to look for new innovative solutions at the World System level. But there was no immediate feedback since there was no generally accepted model or supranational

<footnote n="52">⁵² They become even more dangerous if coincide with rapid population growth that is so characteristic of the period of the escape from the Malthusian trap (for more details on the modernization crises see Korotayev, Zinkina, Kobzeva et al. 2011; Korotayev, Khaltourina, Malkov et al. 2010; Korotayev, Khaltourina, Kobzeva et al. 2011; Grinin, Korotayev, and Malkov 2009, 2010; Grinin 2010a, 2011b).</footnote>
bodies, and there were large differences between metropolises and colonies. As a result, some countries tried to counteract the crisis phenomena that are characteristic for the World System as its whole in their own ways. At some stage there was a major contradiction: on the one hand, the interactions became very strong and more interdependent, and on the other – clashes between participants became sharper, some development models and social innovations (that were used by some states) were dangerous to others. As a result, the crisis became more and more acute. Ultimately, the World-System contradictions escalated into the huge World War II. Only in this way the world community finally managed to establish the leading model of development and common patterns of behavior in world markets at least in the main part of the World System, and in some major countries – to conduct the necessary social changes that are important for economic development around the world. In this, war gradually ceased to be the leading form of reconstruction of the World System.

Today the situation is rather similar to the one observed in the early 20th century. A serious reconfiguration of the World System is forthcoming, which implies a number of significant world-system innovations in the near future. However, the nature of those innovations is not clear yet. This may lead to the prolongation of depressive processes and aggravation of crisis phenomena (needless to mention that the military forms of the search for such innovations should be excluded nowadays).

**How does the K-Wave Synchronicity in the World System
Emerge?**

To some extent, it reminds growth-generating mechanism in national economies, where growth points emerge, and those growth points – if they are powerful – pull the whole economy. On the other hand, we observe here the emergence of such states that act as locomotives creating momentum for all. To a certain extent this is reflected in the theory of leading sectors and leading economies in the application to the World System (Modelski 1987; Modelski and Thompson 1996; Thompson 1990, 2000; Rasler and Thompson 1994; Rennstich 2002). The leading sector leads a respective national economy, whereas the respective leading economy leads the world economy. It is important that new counter-crisis technologies emerge, which are also gradually adopted; finally the states develop some common solutions that may evolve into the World System solutions. Downswing signals are transmitted in a similar way.

Mechanism of relatively rapid momentum transfer from certain World System zones to its other areas is determined by the mechanisms of the World System economic relations: rising/falling world trade (including the effect of changes in import/export duties); movement of global capital (and the formation of its new centers); currency (gold) fluctuations; export/import of technology (patents); international agreements; fluctuations in the prices of raw
materials, fuel, food and other commodities. (see examples in Grinin 2011a, 2013b; Korotayev, Zinkina, Bogevolnov, and Malkov 2011). Regardless of whether that was due to growth in certain countries, these mechanisms may well be changing development trends in the World System periphery or semi-periphery, if they have been already changed in the World System core.

If we take the transmission of impulses from the leading countries to the less developed or less actively developing ones throughout the K-wave, the connection with the J-cycles becomes more visible. During the period of one J-cycle (7–11 years) advantages of new technologies, organizational arrangements, and other achievements (that have appeared in the leading country or countries) become more obvious. The second cycle starts with great intensity the modernization of a large number of countries. The third cycle extends modernization, but at this level there are already difficulties associated with the complexity of sharing as well as a fall in the rate of profit, and – very important – especially in the transformation of institutions and relationships both within individual countries and across the World System.

## 8. GENERAL CHARACTERISTICS OF K-WAVE EVOLUTION, FACTORS, MECHANISMS, AND INDICATORS

### How and Why do the Main K-Wave Dynamics Indicators Change?

#### *General direction of changes*

We have examined how K-waves and J-cycles interact. Let us now see how and why the main K-wave dynamics indicators change.

As has already been mentioned above, Kondratieff himself and many researchers after him believed that the main indicators of the upswing/downswing dynamics within the K-waves are associated with directions of price trends. But in recent decades this role is rather played by the relative GDP growth rate dynamics (Mandel 1975, 1980; see also Kuczynski 1980; Bieshaar and Klein-knecht 1984; Kleinknecht 1987; Poletaev and Saveljeva 1993). Some researchers use other indicators, including class struggle indices.

This inconsistency adds complexity to the measurement of K-waves: how can we talk about the long process of K-wave alteration, if the figures are different, and sometimes contradicting each other? K-waves in the price dynamics have the most recognized empirical support (see, e.g., Gordon 1978: 24; Van Ewijk 1982; Cleary and Hobbs 1983; Berry 1991, etc.). But the logic of K-waves in price dynamics disappeared after the World War II, as then period prices tend to rise even during downswing phases.<fnref n="53" />

At this stage, the attempts to detect K-wave dynamics in the global GDP (and similar indicators) have yielded rather conflicting results. In particular, empirical tests of some researchers did not confirm the presence of K-waves in the world industrial dynamics (see, e.g., van der Zwan 1980: 192–197; Chase-

<footnote n="53">⁵³ However, it is possible that it will remain, if we measure the current prices in the prices of gold.</footnote>
Dunn and Grimes 1995: 407–409). One of the main reasons is, of course, insuf-
ficient data on the pace of economic growth in earlier periods. But more im-
portantly, that the data that do exist, cannot demonstrate the existence of global
long-wave oscillations until the middle of the 19th century (see, *e.g.*, Poletaev
and Saveljeva 1993: 221; Korotayev and Tsirel 2010a). We can assume that
this is not accidental, as rising prices and GDP growth can develop in certain
periods in different directions (see our analysis of the causes of price trends and
changing trends in the increases/decreases of the profit rates below). Similarly,
there are some doubts that K-waves can be traced in the dynamics of global
GDP in the period up to 1870, though in this period they had been apparently
present in the economic macrodynamics of the West (Korotayev and Tsirel
2010a, 2010b, 2010c; Grinin and Korotayev 2010b: 240).

Nevertheless, our analysis of the dynamics of K-waves for over two hun-
dred years suggests that within this apparent incompatibility one may still trace
some organic link, if we assume that the factors that define K-wave phases
change (at least, according to their importance) in a natural way. K-waves
change their manifestations in connection with the development of industrial
production, as well as with the expansion of the World System and the World
System links. In addition, the role of the state grows. It is worth noting that
J. J. van Duijn puts forward a very plausible hypothesis, stating that long waves
in economic growth emerged in the second half of 19th century, replacing long
waves in price movements (van Duijn 1983: 91).

If we accept the idea of natural changes in the K-wave factors, it allows
us to move to an organic synthesis of all the major theories explaining
K-waves through monetary, technological, investment, external and military
factors. Note that during the A-phase of the 1st K-wave the upward trend in
prices was mostly caused by the war (in fact, it lasted for more than two
decades - from 1792 to 1815) and the continental blockade policy. But then
we observe a gradual transition from exogenous factors generating long
waves to endogenous trends related to innovation, large investments and the
alteration of technological paradigms.

This also accounts for contradictions of the upswing and downswing phas-
es of the 1st K-wave connected with the transition from one type of reasons
determine price fluctuations, to another – namely the replacement of purely
external factors with a symbiosis of internal factors associated with the growth
of labor productivity with external factors. This may explain the meaning of a
rather strange initial assertion when the phase associated with endless Napole-
onic wars is declared upward, and the next phase (associated with the industrial
revolution, [see Grinin 2007a], the most powerful economic restructuring and a
huge increase in productivity) is declared to be downward.

But of course, such a change of the driving forces of long-term trends
could not be either rapid or complete. During the downward phase of the first
K-wave changes were really severe in only one country (Great Britain), but this could not change completely the trend towards lower prices in Europe, which was also caused by a very rapid increase in labor productivity, reducing production costs of manufactured products. But already the next K-wave was caused not only by external factors (wars and expansion of gold production), but also by a change in the global trading system (the transition to the principles of free trade). This eliminated the narrowness of foreign markets and led to powerful investments in many different countries. We also note the emergence of a more complex system of industry (heavy and light) and the creation of new transport as well as information and communication technologies (railroads and telegraph).

On the one hand, the transition to the 2nd K-wave A-phase precisely in the early 1850 was to a certain extent a contingency since it coincided with the discovery of gold deposits in California and Australia, which gave a powerful upward momentum. If we take the period between 1814 and 1847, then we would not have been surprised if this phase had started, say, in 1842 and a long upswing had begun. This upswing actually started and, in particular, due to expectations of demand on the part of the Chinese market, so that there was even an acute shortage of workers (see, e.g., Tugan-Baranovsky 2008 [1913]: 122), but the famine of 1845-1846 suspended it.<fnref n="54" /> And during this time opportunities for new growth had improved.

*Note that the rise provides sufficiently large reserves to become really long if it is accompanied by the expansion of the World System's core (and, hence, semi-periphery's catch-up).*

It seems that the price changes as the main K-wave indicator started to be replaced by the fluctuations in economic growth rates sometime in the early 20th century. This, in particular, is reflected in the competition of Britain and Germany. Finally, this became clear after the World War I and the postwar crisis of 1920, and it is no accident that in the period preceding the Great Depression, prices barely rose (see Grinin and Korotayev 2010b: 123-125; Haberler 2008: 9-10, 28 for more detail), which even was a cause of some forecast errors. Such a radical change in the oscillation factors coincided (but not coincidentally): a) with an almost complete expansion of the World System; b) with the change of its leader; c) the weakening of the gold standard; and d) the fact that the industry, including the heavy industry, began to play a decisive role in the pace and direction of economic growth.

*Change of the role of the state*

During the 19th century the role of the state changed significantly: it stops being neutral, as states become more and more interested in high economic growth rates (some states showed interest in the development of trade and industry quite

<footnote n="54">⁵⁴ This is evidenced, e.g., by the following fact: in 1845-1847 the share of food in the British import grew from 3 % to 50 % (Trakhtenberg 1963: 155).</footnote>
long ago, in particular, parliamentary commissions in England analyzed reasons
for the decline of industry during the 1825 crisis, see e.g., Tugan-Baranovsky
2008 [1913]). Prior to this, states at best cared for maintaining stability of the
currency and government securities, and partly for the construction of communi-
cations. We should also note the state's role in the development of military tech-
nology and military orders. Starting from the Great Depression the economic
growth became one of the main concerns of the state.

<figure><img src="image_12.png" /><figcaption>**Fig. 10.** Correlation between Kondratieff waves and Juglar cycles.
Version 1</figcaption></figure>
<figure><img src="image_13.png" /><figcaption>**Fig. 11.** Correlation between Kondratieff waves and Juglar cycles.
Version 2</figcaption></figure>

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2

From Kuznets Theory to a New Global
Governance, Using a Mathematical
Concept of Relations between
Wealth-Creating Kuznets Cycles
and a Kondratieff-Inspired System
of Management

Philippe Jourdon

**Abstract**

Debates concerning the significance of economic cycles proposed by Kuznets, Kondratieff, and Tugan-Baranovsky are helping to shape a unifying economic theory, one that also borrows concepts, ideas, and models from neo-Marxist, monetarist, and other neo-classical schools of thought. These theories of economic cycles reveal a structure of the economy which gives perspective to both economic statics and dynamics. Specifically, Kuznets cycles will aid in the assessment of a permanent new leadership in the global economy, while Kondratieff cycles, by pointing to the existence of long periods of crisis, will make explicit an understanding of how to recover from these long periods of crises. In combination, these insights will provide a top-down model of governance, one of which will include both global and institutional objectives. In order to allow for an empirical and theoretical convergence in using such a method we also have to learn from European economic thought before the division into economics and econometrics in the 1930s.

**Keywords:** Kuznets swings, Kondratieff waves, global governance, monetarism, Marxism, crises, economics, econometrics.

In a book, French essayist Alain Minc describes the economists as ‘prophets of happiness’ (Minc 2004). It is true that this discipline emerged among Scottish moralists such as Adam Smith (1999 [1759]) and David Hume (1946 [1740]) during the Era of British and French Enlightenment, as well as among the lawyers of the gentle trade, and is supposed to spread happiness and harmony among people, as David Ricardo (1817) stated. This science also developed an early focus on dimensions related to the social contract (Locke 1985, quoted by Berthoud 1988; Locke 1979, quoted by Giacometti 1984; Dang 1997; Hobbes

Kondratieff Waves: Juglar - Kuznets - Kondratieff 2014 96-119
1651; Rousseau 1963 [1762]; Turgot 1970, quoted by Giacometti 1984). And at the same time the West kept under wraps an older source of this focus in Spain as a consequence of religious thought and the concept of attrition due to the contributions of the School of Salamanca.<fnref n="1" />, <fnref n="2" />, <fnref n="3" /> These Atlantic pathways were

<footnote n="1">¹ Tortajada (1991) provides a good discussion of the contribution of the School of Salamanca to the creation of economic science in Western Europe. As any human science, it draws initially its arguments from law, and also from the culture of the very religious late Middle Ages Era. As was shown by Bergson (2008 [1932]) in his *Les deux sources de la morale et de la religion*, at the time of the triumph of sociology in France and of the separation of powers between the state and the Church, we look back centuries and see the source of religious thought in the creation of Economics (School of Salamanca). Also, it is worthwhile to remember that the source of moral philosophy came from Scotland, a century or two after the first sources of inspiration from Salamanca. What might appear today as a rather boring phenomenon is very important to clarify the beginnings of the capitalist system. It is perhaps in order to no longer remember, or even deliberately conceal the source of religious thought, that economists have undertaken to relate their mathematical discipline to natural science. Around the time of the general equilibrium theory of Léon Walras (1874), they tried and rejected as much as possible the historically constituted discipline and logical links with the humanities. But still, the sources of Scholastic religious thought related to the education system in the Middle Ages (de Roover 1971; Sierra-Bravo 1975) can contribute to analyzing or decomposing the mechanisms of contracts (especially those involving trade and commerce rather than the organization of manufacture or large industries).</footnote>

<footnote n="2">² The interest rate was generated in response to scholarly considerations of time, society, wandering merchants, calculations owners, and tribulations diplomats working for states or for the Church of Rome. The interest rate was 'created' as opposed to the practiced hitherto current rate of usury. And this major legal innovation was probably marked by the desire to weigh 'souls', and to save a maximum [we mean an economic function whose result should be maximized; the result is produced through time and human effort and is a combination of a qualitative part saving one's soul and a quantitative part improving level of life for one's children placed in the future (and the third 'capitalistic formula' which relies on personal organization in order to keep in balance these two parts is kept secret and mainly private and also possibly belonging to a national social model and other community projects); by convention, we will state that the combination will be evaluated quantitatively – so through maximization function – because there is an accumulative process of hope and well-being over time and centuries which is constitutive of the initial concept born in the late Middle Ages] on earth through finance [of course, the link with our former explanation 'maximize what?' is: finance can be defined as commerce made on promises], and therefore the Western economy and capitalist economy! [In a sense the 'legal' part of such a project was not authorized to appear clearly connected with its intellectual and spiritual sources, because the one part of that naturally belongs to religion and the other part belongs to moral sciences, and all in all history of the underlying 'link' (if we can really speak of a 'link' which is not obvious as it would be an unconscious and psychoanalytical one) was the long historical walk by the Western World towards the secularization process]. The influence of the School of Salamanca in the law prior to the birth and development of the capitalist system – first historically being a merchant capitalism – was a coherently packaged legal corpus. With the concept of 'balance of pleasure and pains', it led the way to the doctrine of 'fair price' (Gomez-Camacho 1985; Lapidus 1982; de Molina 1981 [1593]), well before the utilitarianism.</footnote>

<footnote n="3">³ But such a concept understood in the sense that the Spanish had in mind arrived too early on the scene to be put into the law. It is notable that this allowed time for the Church in Spain to think in depth about the question of social poverty (de Vitoria 1928, 1934, 1933–1935). Centuries later, Schumpeter and Keynes both felt that it was necessary to think about the relationship between law and economics before laying the foundations of macroeconomics (Keynes 1932; Schumpeter</footnote>
crossed by a tension at the outset.⁴,⁵ The Scottish and Spanish funding pathways had one day to confront a more continental approach, making the social subject not polemic, but the main focus of research. The School of Vienna *et al.* eventually confronted the challenge of a social perspective in economics, notably via the research program of the value of human action (von Mises 1985 [1949]), and also the Social Liberals in Frankfort (Eucken 1989 [1940], 2004 [1952]), Marx (1983) as early as in the 19th century, as well as thinkers of cycles, such as Lachmann (1937, 1938, 1939, 1940, 1943, quoted by Longuet 1999) in Austria,⁶ Tugan-Baranovsky (1894–1904, quoted by Makasheva 1993) in Ukraine, Chuprov (1889, quoted by Makasheva 1993) in Russia, *etc*.

It took some time before the founders of the economic cyclical theory started this specific debate in a historically troubled period (see Kleinknecht and van der Panne 2006) was between the Russian Kondratieff and Ukrainian Kuznets. But, paradoxically, given the scope of the topic, and the dominant economy, since 1945 the main representatives of this debate have been Ameri-

<footnote>1954; see also Dempsey 1948; Lapidus 1987; Melitz 1971). After Keynes and Schumpeter, the 20th century macroeconomics was more interested in the industrial sector than in merchants or grossers.

⁴ The French and the English of the same period were less influenced than their Spanish counterparts in their thought by religion and by the Catholic Church. They followed their own original paths and initiated separate calculations. They had in common, however, the sources of social consensus. They mainly appreciated (in England and Scotland), or quite exclusively accepted (in France) such a social consensus. It consisted initially in the definition positioned between moral sciences and religion on the basis of reflection concerning human understanding (Locke 1979). Here we may detect the historical foundations for a solid economic theory the Spanish at that time on the concept of ‘fair price’! Macroeconomic theory has less to do with the definition of currency or even of what macroeconomics is: it is much more concerned with actual recommendations in respect of the macroeconomic theory, which, generally speaking, can barely solve its perspective issues with other sciences, with linguistic and sometimes with national conventions put it in legal terms.

⁵ One could include here also the use of restrictive preconditions – once ‘reasonable’ equations have been accepted about anticipations. In particular, the number of circuits in question will be rather limited in practice for reasons of policy effectiveness due to their quantitative nature. The credit channel may appear to rely more on national conventions – although they evolve extremely fast – than on channel currency officially unique to the institution. During the sixteenth and seventeenth centuries the English and Scottish claimed that the price of currency was a consequence of convention… All other prices would result more due to contracts than due to convention: basically, there would be commercial contracts. According to Locke (see Berthoud 1988; Dang 1997), the average human being uses currency as a marker of their ownership which links in an open game morality, money and property, which in turn is expected to deliver a ‘natural price’ for money. For the French economist Turgot, money would instead be more an opportunity for each individual in a society to express feelings related to social life (Giacometti 1984; Turgot 1970 [1769]).

⁶ After the National Revolutions took place in 1848, Longuet (1999) argues that Lachmann had thought about the major economic fluctuations that are often linked to major historical shocks, whereas the ideas of Keynes would have been more suitable for the relatively average magnitude of fluctuations in the context of an already stabilized financial institution.</footnote>
can scholars including Kuznets himself who chose to immigrate to the United States. This scientific debate has become relatively diverted from its initial path. The theory of economic cycles has become one of the main paths of economic heterodoxy, providing much evidence of a sociological construction of economic institutions since year 1000 in the World and in Europe (Polanyi 1984), which ultimately implies integration of this phenomena of dependence in the modelling of economics (Kalecki 1987).

That initially masked the debate which have resurfaced in an unexpected way – while some researchers (Diebolt et al.) have called it the ‘the Loch Ness Monster’ (Diebolt 2002: 11–16). I also suppose that the concept of economic cycles rears its ugly head from time to time like the Loch Ness Monster. At the same time in the 19th century the existence of economic cycles did not receive due attention. It was considered a strange object of research, which is a characteristic of the phenomenon of national economic development and how economic development is associated with such economic institutions as international trade, or the establishment of central banks, or education, in the cycles of human life. Hence, the first vague indication appeared arising from the ‘cycle of trade and business’, that put us on the path of commercial or financial insurance techniques of merchants. This can affect companies – which rarely brag (about their own information systems and/or the founding source of their capital) – and also affected the analytical framework of the national model, which guided the long path leading to social progress, before financial globalization is tempted to take over.

The objective of sustainable capitalistic foundations (both legal ones and purely financial ones) of companies is to integrate the phenomenon of a ten-year cycle because the typical ‘business cycles’ last ten years on average. At the end of that period of time, companies need to maintain the confidence of their stake holders (employees, banks, advisors) to find the right words to describe the cloud of side effects (legal risk, risk of bankruptcy, business interruption, loss of business, etc.), all in order to protect their business with care and discretion, in case they should suddenly face unexpected losses. For instance, if a company gets bankrupt at the end of a business cycle, the company may be bought at a discount price by a competitor, but when times are difficult, chances to survive the next crisis not only depend on the quality and performance of the manufacturing process, but also on the quality and performance of management of the company, which consists in the detail perception of the potentially dangerous defaults of vision of links between legal robustness of the structure, commercial environment of the company, and economic cycles. Specifying legal interests of the stakeholders gives more chance to buy some competitors at a low price, and to detect accurately when to be advised to show legal aggressiveness towards such competitors and with appropriate corporate communication, legal communication, trying to provide the impression that it would
not be a crisis communication. This cycle is basically a market cycle and the
beginning of the term between seven and eleven years for the stock exchange
and certainly a bit longer, twelve or thirteen years perhaps, for real estate, from
which the actors – helped by their analysts – will try to establish assumptions of
expectations of significantly greater complication and involving a longer period
of time, which will integrate various modes of rationality (administrative, stra-
tegic, political, economic, etc.). At the same time, the myth of the ‘end of civi-
lization’ begins from the late 19th century, with its foreseeable consequences
embedded in the vocabulary of economics.

These debates show more and more: the image of the ‘Great Depression’ or
‘Great Depression, End of the Century’ ... ‘The evil of the century’ as repre-
sented by poets, physicians, and sociologists which occurred a century after the
first Great Depression was observed in Europe dated by most historians to the
period 1873–1896. The genius of the late twentieth century coming a century
later and speaking at the outset of the ‘crisis of civilization’ (Amin 1980, 1988,
1991; Morin 1977, 1980, 1986, 1991, 2001; Modelski 1983) which is side by
side with dependence (military, financial and economic dependence of South
America on the United States America, and again a very comparable situation is
coming soon for the European Union with respect to the United States of Amer-
ica) (Cardoso 1977; Herrmann and Tausch 2001; Tausch 1986, 1989, 1993,
1997a, 1997b, 1998a, 1998b, 2002, 2003, 2004a, 2004b, 2006a, 2006b), and
this is observed in a context of rising risks (Beck 1986, 2001). This implies the
need for new analytical frameworks (institutional economics, theories of regu-
lation, multiple statistical analysis submitting their criteria to varied relation-
ships with their games and challenges) in order to lay a solid basis for a new
beginning, a new system which is richer, more globalized, more financialized,
and also crippled with multiple risks, now more or less properly taken into ac-
count and supported, by the national states, their technical institutions, and the
EU28. The delay for such a project, that betrays these anxieties (Ayres 2006:
55–71; Mensch 2006: 80–90; de Greene 2006: 10–21), would not be fatal to the
extent that we speak of a future system that will be very readily expanded in
complexity and size compared to the old system. So, beware of the risk of
‘a geopolitical tsunami!’ (e.g., the old prediction of geopolitologists that ‘no
country is allowed to take total control of resources in Eurasia’ would be placed
in default; as a consequence of such a traumatic event, a nuclear strategic nego-
tiation would be bound to start between the United States of America, Russia,
Iran, other regional political powers; and at the end the European Project would
find it difficult to master one’s own developmental timetable, and would expe-
rience various difficulties to correctly cope with the questions related to one’s
very identity [What does ‘Europe’ mean? How can a European social project
and a European social model be founded and defended?]). Now we should not
continue to speak of ‘the possibility of risks’, we ought to face their arising all together (Beck 1986, 200).

In light of the possibility of financial collapse, we will focus on the contri-
bution of a Nobel Prize Winner in Economics (in 1971), Professor Simon Kuz-
nets, with special reference to the famous academic dispute (see Kleinknecht
and van der Panne 2006: 118–125, quoting Kuznets 1940) between him (Kuz-
nets 1930: 10) and Joseph Schumpeter (1939), but from the perspective of time
some eighty years after the famous dispute.

Since the first observations and empirical statistics of the phenomenon of
cycles (Parvus 1901; Tugan-Baranovsky 1894), we rather see that the phenom-
enon of a ‘strange attractor’ of this uncontrolled theory which is used as the
starting time of the Great Depression (1929–1953) provides an explanation of
this mass phenomenon, both theoretically and statistically. Kuznets believes
that one type of cycles exists for sure, one with an 18-year period. He estimates
other possible lengths ranging from about 12 up to 30 years. But he suspects the
other cycle, a Kondratieff cycle of 54 years, cannot be proved to exist, consid-
ering the state of science (both empirically and theoretically) at the eve of the
second part of the 20th century. We will show that both approaches – of Kuznets
and Kondratieff – are not inherently contradictory, since the essence of the first
one shows leadership in the creation of wealth, while the second one indicates
the needed direction of the guidance of this phenomenon.

1. Theory

A. Yesterday

As Kuznets wrote (Kuznets 1940: 267) about the Kondratieff cycle theory:

To establish the existence of cycles ... one must first demonstrate that we
take here fluctuations which occur lasting approximately regular, simul-
taneously with the movements representing various important aspects of
economic life ... and secondly, there should be an indication that external
factors or features of the economic system would be sufficient to account
for these recurrent fluctuations. As the old framework of analysis of eco-
nomic life will be in effect, the concept of such a cycle could be accept-
ed without questioning the cohesion of economic life in general ... If the
second condition, theoretically, is not met, we cannot establish a link be-
tween the findings on empirical observations concerning a certain type
of cycles ... with the broader context of existing knowledge. Neither of
these two conditions has never been satisfactorily completed in terms
of Kondratieff cycles ... The prevalence of cycles of fifty years has not
been demonstrated in the volumes of production or employment, or more
in the physical commercial part, ... no satisfactory theory has been of-
fered to explain these swings of 50 years that are supposed to return.
The future winner of the 1971 Nobel Prize in Economics, Kuznets, when he created the NBER in Chicago, which over the following 50 years was the most prominent Institute in the World to apply methods in National Accountancy Systems, really developed all bridges between the basic legal private companies' accountancy and the way to measure the broad equilibrium measurement tools of national accounts, was honest and quite tough – in other words, still conceptually rigorous – in such a global acceptance on the theory stated by Kondratieff. In fact measuring national balances and account is a sophisticated art, which supposes first the indication of how we measure a profit or a deficit in foreign commercial exchanges. It is certainly not an easy task, for it implies giving accurate expert advice on all aspects treating of the foreign commercial trade including some sophisticated legal and other conceptual aspects. Which is the more difficult to build – or, when built, to deconstruct, because time has changed and organizations have changed – might be the bridges in human team work and technical, accountant and legal organizations. Kuznets said in 1940 it was impossible to say if Kondratieff's theory was true or false. As a consequence it would have proved impossible at that time to build a legal, administrative and accountancy system on it. But 80 years after this important dispute, we ought to remember that Kondratieff, just as Kuznets and Slutsky, was among the founders of the International Econometrics Society. And if the length of the announced Kondratieff cycle appeared to be too long, so as to build administrative bridges on its premises, one of the main reasons is that the World System was not so open as it is today, so it would have not been realistic to manage the World System directly. And any administrative system was more dependent on legal historic national traditions than on a true scientific basement, as Slutsky proved that often fallacious regressions can be identified in place of a cycle that is 54-years long. That is why we can reasonably think that everybody used the Kondratieff theory, but they preferred not to recognize it. From, say, 1945 to 2015, we can reasonably think that mainly due to the worldwide tax evasion of the MNCs and avoiding of different legal, accountancy and administrative traditions, the Kondratieff theory was a collateral victim of a sort of ‘Loch Ness Monster effect’, and world economic organizations used its reputation to promote ‘semi-fallacious-regressions’ and was as close as possible to the place where one could invest industrially and make money but without being the first to pay cash! God Save the Loch Ness Monster then... by all means!

## B. Today

With respect to Kondratieff's theory, it was recognized first by those who consider innovation as the main source of growth (e.g., Schumpeter 1939), growth which is motivated by the Kondratieff cycles, with scheduling depending on a pendulum effect. This position is more motivated by pedagogy than by true
pure researches in economics; it is rigorous but would seem to evade the more
complex aspects of an open World Society and World Economy that failed to
exist at this time. Schumpeter's approach appears to be quite mechanical in its
effects. Nowadays a number of psychological aspects in an open World should
absolutely be brought into consideration in addition to a more complete expla-
nation and should be a key to build the needed bridges on the theoretical side of
the scientific trial. At the same time, when on the administrative tools' side of
things, we should start from the new world situation and again confront tech-
nical points from both Kuznets and Kondratieff, including this time the new
possible necessary condition to eliminate interpretations inspired by 'fallacious
regressions'. After doing so, the next step is taken by Mensch (1979) who al-
ways assigns the role of innovation as the main causal factor explaining growth.
However, by saying that innovation occurs constantly, whether during the peri-
ods of rapid growth or during the periods of 'depression' when growth is slow-
ing, Mensch believes that new thinking could one day help overcome the inevi-
table long depressive phenomena.

New education also helps to skillfully mask indirect economic functions (e.g., cultural or media-intermediated) of society: for example, hegemony (the explanation of long waves by political factors like hegemony), the World System (the center overlooking the suburbs), training and organizational planning issues, etc. This 'recovery' (trying to justify an ideological position by putting forward the so-called 'central function' of the global economy or the occidental society) may manifest the domination of the newest, upcoming or recently occurring factors, possibly including the factor represented by the economic system itself, the factors of another completely different nature (economic policy); and this influence can lead to two important practical consequences for the formalization of the research. There may be displacement of this research program by another research program, especially in political science. However, this risk seems rather limited, because we live in the age of interdisciplinary research. So, we allow ourselves to address these aspects, because it is a way for us both to report the presence and the existence of complexity and to describe a normal way to address this complexity and scientific processing. However, this issue is important in econometrics. We cannot just say that since econometrics has grown massively, since roughly the 1970s when it was used first to conduct tests to compare theories and classify them in order to advise economic policies, now those who use econometric results would need a new historical narrative accepted by all in order to validate the methods and the use of statistics. These methods should work simultaneously on theory (which may include input from what history teaches us facts like this that can teach us the history of ideas), and also on methodology, which also opens new epistemological questions, which do not necessarily arise as a possibility of prior reflection, but may also arise (to reflect new insights in response to the use of statistical
tests and the results made) during and parallel to ongoing research. This is the
guarantee of a search process based on solid foundations and in a cultural con-
text of the 21st century in which we prefer to postulate open-mindedness.
We must then report the consequences of this on 'the maintenance' of econo-
metric systems. Traditionally, if we perform statistical tests in order to test these
theories, this methodology emphasizes the analysis of statistics based on styl-
ized facts, then some forecasts and finishes with a review of decent policy im-
plications in terms of recommendations. Gold is always a cause of problems
that an econometrician cannot always deal with.

Theoretical choices are then of great importance. We chose to focus on the
following assumption of the existence of long monetary cycles (Jourdon 2010a,
2010b). These long monetary cycles are motivated, insured, and re-insured by
Management Systems of Property Rights, which in each new cycle indeed con-
tribute a new social project. Each new key currency in comparison to the suc-
ceeding one constitutes and attributes to support such a social project. The end
of the Kondratieff cycle is always characterized by a loss of coherence, the
practical consequences of which are manifested through foreclosure effects felt
by all stakeholders in solidarity with the World System. Here we see, with the
end of the long cycle of the currency called US dollar, which is both a national
currency for the USA and a support for developing commercial, financial and
monetary exchanges all over the planet, and also a cause of the phenomenon of
tax evictions, tax and social competition in Europe, and increasingly sophisti-
cated financial technologies to avoid taxes. These include refuge in tax havens
whose number continues to grow, refuge in sectors such as real estate shelters,
refuge in the energy business which suggests geopolitical shocks and a difficult
transition to another long cycle. As a consequence, we may evoke financial
wealth grabbing along with private information or innovations which were also
deprived of small businesses by multinational companies in order to pay less
tax. (As for 'private information', let us on the political side of things, mention
the strange attitude of a talented French politician, Mr. François Hollande, who
officially took over as first secretary of the French Party, Parti Socialiste, for
eleven years in succession, but on a day-to-day basis seemed to orally intervene
as if he had been not his first secretary, but his official porta-voice [is there a
'hidden imam' in French Parti Socialiste?...]; if we rather speak of business,
private information means the brutal market for top executives in the 1980s and
more clearly in the 1990s, which became a world market, so these high pres-
sured executives accepted their jobs in exchange for generous bonuses, because
the value-chain had become worldwide without people being properly informed
of that; after this hidden turning point occurred, 'private information' means in
the spirit of Institutional Economics that there were a lot of asymmetries of
information, for strategic reasons and also for protection of the citizens and
sometimes a global fight against terrorism). Ultimately, the social consequences
such as indebtedness and loss of access to bank credit will be overwhelmed. In particular, we agree with the analysis (Mensch 2006) saying that a long depression is not necessarily inevitable. These phenomena can be juxtaposed with nondestructive forms of social and even economic – or political – innovations such as participatory democracy (Jourdon and Tausch 2009), sustainable development (Chistilin 2006: 100–108), the Dialogue of Civilizations, Global Democratization, and Global Development. But this only confirms one thing, that the development must be globally administered.

That is why we believe the debate between Kuznets and Kondratieff must now take a completely different form. Kuznets said that Kuznets cycles existed anywhere except in China. It was the era of confrontation between two political models which also politically defended their economic efficiencies: the U.S. capitalists and the Soviet Union of Real Socialism. But even other Communist powers of that time were opposed to these two approaches, the industrial and planning approach towards the future of the USSR (1917–1991), on the one hand, and the Chinese approach (1949–2014), on the other hand. This also applies to China emerging from underdevelopment implying the necessity of walking on two legs, those legs being agriculture and industry. However, almost all the theories in the economics of development are based on a structuralist reading of the economy with the core areas and sectors more or less industrialized as well as with established infrastructure and finally with a domestic or informal economy. Kondratieff's theory is also sectorial, according to the teaching of Schumpeter, regarding his concept of ‘creative destruction’. But his structuralism is different in nature; statistical structure seems to create a prism through which one should pass to read a secondary reality. If we adopt today a comprehensive approach to development without separating the developed and developing countries, we should be able to compare the views in order to adopt the perspective of the Dialogue of Civilizations. Clearly then, China's point of view of its civilization appears in many respects to be a Civilization of Commerce, as this has always been. This point of view can cause service wealth creation for the world. Kuznets cycles in their life cycles coincide with periods of transport and also with periods of construction. These interfering processes in their internal functioning (the construction industry is a kind of working draft form of these interfering processes, as each project is a new company that must first sell service logic and simultaneously manage industrially the issues of timeliness, quality, and cost control; transportation is, thanks to new forms of energy, a new source of the revival of each long cycle, but this new source also implies hidden costs with respect to the service of economic organization) contain some features of a globally regulated economy and society.

**Transport.** In the early history of the modern economy, the elasticity of the market was calculated from distances, which created the costs of transportation. Even the interest rate reckoned by bankers (Chilosi and Volckart 2009) at the
nerve center of Europe (Rhine, Swiss German, Czechoslovakia) were based on
the travel distance to reach potential customers, both physically and through
information channels, and now at the age of information and communication
revolution the transport issue arises increasingly in two directions at once,
physically and intangibly. The result of this will affect the movement of money
to manage portfolio, and also raises issues of transportation of people. All this
complexity invites us to compare the transportation system to the nervous sys-
tem of the economy. Provided that transportation is a highly important constitu-
ent of the fixed costs of organizations, and because of the importance of those
organizations, they must be properly insured!

**Construction.** This is the primary distinction between ecology (home management) and economy (trade management in both professional and private areas). So, it would appear to be the first element of heritage that underpins much of the overall security of the economic system. Therefore, it is to be compared to 'the backbone of the economy'.

The discovery of the Kuznets cycles and their importance clearly confirms
the importance of these two sectors for the health of the economy. As the
French proverb says: 'Quand le bâtiment va tout va!' (When the building goes
all goes!). Of course, this is not inconsistent with the fact that China can be
an engine of wealth creation around the world through trade. Factors guiding
the creation of wealth in China's direction may come from structuring sectors
such as construction, transportation, logistics, advertising, marketing, trade.
Maybe we can dare to assume today that the Kuznets cycle, around 1940, was
not very noticeable in China, which was fighting to get out of underdevelop-
ment. However, today when the world is changed, as Aristotle would say:
'The truth is in the middle'. There would exist Kuznets cycles, as well perhaps
in China. Even in 'l'Empire du milieu' there would exist Kuznets cycles.
The symbol of rationality, 'four directions', would exist in the place where eve-
rything can be sold for money (including children wrapped in carpet, little pros-
titute girls, goods issued from counterfeiting).

**2. Methodology. Epistemology**

A. Yesterday

For Kuznets, inequality is understood to be represented by an inversed U-curve.
At the beginning of its development inequality grows quickly, because entre-
preneurs playing a pioneering role are likely to get rich much faster than the
rest of the population. In the second period, when society became more struc-
tured, it was consequently better managed. As a result, it may well pay more in
wages and benefits associated with social protection mechanisms that must
accompany them. Income gaps between all the agents are reduced through the
increase of the mass of properly treated employees. Today, many countries
emerging out of the Third World show more dynamism – both economic and
demographic – than industrialized countries that hardly continue to retain their technological edge. We can then say the problem should now be addressed at the global level. Is there an inverted U-shaped inequality [ ↗ ] acting globally? If yes, then how is it possible to manage? The theory of Kuznets shows the path of hope – the increase of wealth – and then hope that these resources would be better administered, managed, shared ... but unfortunately, how this can be accomplished in the very long term or in the part of the World System that has become very complex and currently subject to a series of serious crises – financial, food, energy, geopolitics, social, and so on...

The second approach developed by Kuznets seems rather to give us a direction that will address the phenomenon of wealth creation. But this does not seem to offer technical alternatives to avert risks that could accompany that phenomenon of wealth creation. Unlike Keynes (1969: 112–152), Kuznets assumes that when a country's GNP increases, the propensity for consumption by agents as long as earnings, increases even more. This leads us to believe that the increase in the propensity to consume more than the rate at which income grows is also accompanied by a growth of the size of inequalities that are likely to occur in phase with the growth of income when in times of crisis the center of the world economy (debt, crises closer to the center of the global system as the financial crisis in 2007 and the subprime crisis the following year) is hurt. These changes in growth would not find solutions without a new system of administration. But given the unconscious factors at play<fnref n="7" />, is not it necessary then to focus attention on finding the causes of the phenomenon from the beginning?

## B. Today

It is about time and constructing calendar that the actions of different agents can coordinate. The only Nobel Prize in Economics who has spent his entire academic career in France, Maurice Allais, was once severely criticized for its introduction of the mathematics in economic models in France. As in many countries, in France the teaching of economics was a teaching in method and critical thinking by getting in touch with moral philosophy, law and economics itself. The whole of economics was so minimally mathematized. As an example, even the *General Theory of Employment, Interest and Money* (Keynes

<footnote n="7">⁷ If the lower turning point can be easily calculated, assuming that one has even been able to determine if it was a problem of price or quantity of the image ...from the 'Loch Ness Monster of economic theory' proposed by C. Diebolt [2002: 11–16] sometimes appear to be sound!; we mean 'lower turning point' implying that in the mathematical space associated with our theory there certainly exists a lower turning point associated with a 'price' interpretation of the studied situation, and an upper turning point associated with a 'quantity' interpretation; or, on a purely mathematical point of view, it may be an upper turning point linked with a 'price' interpretation and a lower turning point linked with a 'quantity' interpretation; in fact, it all depends on the mathematical design of the space we are confronted with. In any case the final synthesis between 'price' and 'quantity' interpretation will be concerned with the nature a global 'tax' design.</footnote>
1969) does not include a single equation. Consequently, it seems that building an economic system of equations as complex as those of Astrophysics would not pose difficulties if only two criteria are at the same time also met in the strictest possible way. These criteria are as follows.

**The question of timing.** Tell us where it is: What is the space-time math- ematical global design we are working in, in our model? Where are we today in the process of deduction of the predictions made by the World System Theo- ries? Usually, the hegemonic power (since 1945, it has been the United States of America) generates the master calendar. This gives the hegemonic power a monetary authority to fix the price of money and control the actions of most agents and how those agents are coordinated. The rejection of economics or its mathematization is often the rejection of the possible consequences of the sense of control by the ‘Big Brother’ imagined by George Orwell (1994). Time is likely to be a conditioning parameter for understanding the course of the series we are studying (by ‘series’ we mean a series of events linked to the World Sys- tem theories, e.g., in Goldstein (2006) they are sparrings, war, inflation,<fnref n="8" /> stabil- ity, sparrings again which begin a brand new cycle, etc.); and, at the same time, for those who reject the power that goes with it, it is possible to consider it – even if it is a parameter and not a single variable – as a discrete parameter, and it goes without saying that we would not limit the need to clarify the existence in the equations. The economy then runs the risk of slipping into a non- computational or even informal way of being. Sometimes by circumstances of extremely cold conjuncture, awareness of the mystical dimension of time emerges, and it will relate more readily to the ‘time of the universe’, that of nature or cosmological equations, better than that of ‘World Time’, that is of constructed actions and society started by humans, then we might be led to re- ject the international currency and all that goes with it.

**The issue of self-beliefs.** Hence, our second criterion: our recommend- ations must also be able to apply the equations in a space that is institutionally recognized in the economic system, a space where self-belief in human beings is respected. These beliefs are of religious or humanistic essence, or even athe- istic as long as they relate to a provable moral paradigm... one with beliefs, with preferences (these often come second in contradiction with the materials) and with strategies (these are the result of the ‘precipitation’ of chemical inter-

<footnote n="8">⁸ Works by Goldstein are particularly interesting to show how analyses can be in depth developed from an econometric point of view. Goldstein (2006: 137–144; 139, table) shows a general presentation of his theory with four phases: expansion, war, stagnation, rebirth. Goldstein shows an analytical presentation by including the turning points, which as a result produce six transition phases: price, innovation, real wage, production, investment, war (Goldstein 1988: 257–274; 259, table); and also a dynamic presentation of one's theory including eight poles each one with each other moved by attraction and repulsion mechanisms: war severity, social memory of war, nation- al capabilities distribution, prices, real wages, production growth, capital investment, innovation (Ibid.: 274–278; 275, table).</footnote>
actions between the first two, even by including the strategies themselves, which are constantly forming, reforming, and changing as a result of collective action or individual actions). If we should consider autonomy of the person in relation to the individual games, there would be no problems using 'astrophysical equations', provided that one knows 'where we are'. Therefore, we would also know the origin, the repository from which we begin to measure and study the series of events, with the intent of trying to clarify the 'nature' of the events described.

### 3. 'Econométrie' vs. 'Econometrics'

#### A. Yesterday

Since the 1970s, 'économie' has developed. It was used to compare schools of thought in economics and political economy in particular in order to look at the consequences of applying their recommendations. Thus, the natural development of the model was to go with the consequences of policies based on the application of the model. In doing so, this would subject the model to appropriate testing. We will always model the consequences of some possible decisions and at the same time understand the consequences to the model, and do so as if the underlying cause was necessarily known and controlled. The idea here is to add the scientific tools of statistics to clarify discussions about representations of reality and their possible actions. The objective here, clearly, is to avoid falling into pure ideology.

The second major reason for the massive development of the use of statistics, except the development of the technological tools themselves, with the creation of econometric software, was the growing complexity of an economy that has become multifunctional and multi-purpose. Many companies have tended to create their own 'system', whether of information or decisions. With regard to multinational firms, they tend to make the behavior of the macroeconomy contradict the opinion of the creators (Galbraith 1989 [1967]) of macroeconomic theory. The macro-open economy that has begun to develop over the last decade of the twentieth century does force the development of the analytical tools of econometrics, which were ever altered in order to mathematically predict the consequences of the combined effects of several factors acting simultaneously.

However, logically, when one considers the future consequences of potential decisions still to be taken, it may often happen that one approaches or has the impression of being closer to the discovery and understanding of the causes. Sometimes one may have the impression of discovering a fundamental underlying cause, or, the ultimate cause, in analyzing reality. Therefore it was pedagogically useful to distinguish 'économie' (the French most common word) and 'économétrique' ('econometrics' captures both French concepts). The first expressive concept acts as a general theory of statistics applied to the study of
a phenomenon which can easily measure profitability with respect to its finan-
cial, productive, and physical aspects, and link these to a representation of po-
litical economics which is known to be fairly well expected in terms associated
with moral philosophy. With regard to the second concept, on the contrary, giv-
en the intertwined phenomena, the approach here is to screen the risk of calcu-
lating profitability. One example of this very frequently confronted difficulty
may be when material productivity contradicts with financial rentability: in
such a case the management should screen the risk, for instance, if the differen-
tial between productivity and rentability is low leveled, the management may
present the end of exercise accounts in a way that would put light on a particu-
lar aspect of the company's strategy, which in turn would repay full consistency
of the company's main activity. If the differential is medium-leveled, probably
some specific measures in the tax policy or account policy of the company
should be easy to enhance. Then if the differential is high-leveled (due to the
rapid change in technology, or some cyclic or contra-cyclic behaviors of
the prices which rapidly vary and are particularly in purely commercial activity
in which the presentation of things is so important), it is necessary for econo-
mists to try to plan precisely how to model the changes between the 'trend' and
the 'cycle', and when changes occur, what part is for financial aspects and what
is for productive aspects, and maybe the remaining aspects - primarily unstated
in the model - being for human specificities (part of the shared history of the
team) ... and for other miscellaneous factors. The second example is when it is
difficult to define, which activity of the company is the main one (when it is a
multi-activity company), then the filter or computer screen may calculate prof-
itability incorrectly, because the support of the calculations, that is the product,
is not so clearly established in this case; it would be highly preferable to start
studying the profitability of the company by the 'observed-risk-aspect' than by
the 'predicted-profitability' aspect, in order to have in mind an order-list of pri-
orities in decisions (but probably in some sectors, particularly connected with
public markets, other aspects should come into play, because these markets
cannot be really 'transparent', and it is possible that in such cases it would be
preferable to partly 'hide' the decision-making process instead of having an
order-list... because the decision-making process is supposed in such cases to be
'public' ... so that there is no one sole decision-maker...). These reflections
identify the point at which the tools for screening risk can be applied (it helps to
be systematic): 1) to avoid taking useless risk; 2) to have a method to confront
the 'risks-aspects' and purely 'profitability aspects'; 3) to adapt and even con-
stantly improve the company's strategic processes and make the company feel
more rational in regard to its corporate identity. However, we hope to go further
in understanding the ultimate cause, thanks to the improved visibility of reality
that gives us a proven ability to filter the risk and overcome the obstacle that is
part of reality. In theory, of course, this must allow us to go further in understanding the ultimate cause.

## B. Today

Wolff (1993: 233–246) pointed out already that any statistical theory begins by accepting the more or less affirmed existence of a series of events associated with cyclic economic behavior (of a market, of natural disasters, financial cyclically observed minor or major bumbles, booms, crashes...). This decision of acceptance can be achieved in a ‘search for the frequency’ of a style of research in comparison with a landmark event which always recurs with some frequency. It can also be understood as a ‘residuals-diversion’ style of approach of an existing series. So, if one understands that a deterministic series of events is a factor of the system, that is a root of mathematical explanation, one can then hope to reconstruct the inferential function and constitute a ‘residue’, even if sometimes the latter appears as an undesired initial consequence. Then, by mathematically integrating the residue, one can hope to reconstruct a vision, a more concrete model, which is consistent with reality and a scientific theory.

Many researchers have recently put their focus on spectral analysis methods in order to deduct a genesis-type logic in the very detail of the ‘root-residue’ – and to link the aspects of the residue with the aspects of frequency – all the more importantly since it appeared to be probably the only solution to treat a very long series in time. But these methods imply that you use a lot of complex technical details in the mathematical treatment of the series. So, currently, spectral analysis as it was has the potential for confusion. Spectral analysis acts on the frequency of observed events under scrutiny, assuming that the phenomena, which are presumably found, ought to correspond to the existence of a ‘memory’ of the entire system. However, if these phenomena are found through this filter actually to be comparable in form, but possibly different in nature and structure, then we could not only acquire more ‘memory’ to serve the entire system, but also increase the risk of misinterpretation! In biology we know the example of plants that, viewed from outside, seem to belong to the same family, although they are genetically very different and cannot interbreed, unlike other plants, which look very different, belong to the same family, and are interfertile.

These new methods do not suffice to explain a phenomenon like that of Kondratieff cycles, which manage to create a ‘structure’ by subsequently serving as a statistically grounded ‘filter’ for scientific interpretations. By construction through four different types of parameters, this theory resurrects an old mathematical mystery at the very foundation of the building of some famous civilization – the ‘four elements’ of the Greeks ... a base that becomes five in Chinese. For a Chinese in addition to air, water, earth and fire, he would immediately add wood, which allows even more factors to act on the living nature of
things and the ability to act generally as paid humans. The transition from four
to five aspects in the spirit of fostering better actions may be, however, concep-
tually not easy to reach – beyond any description other than switching to a dy-
namic, inclusive (and potentially itself included) paradigm for the social sci-
ences. In the other direction, to find a semblance of unity, a drop from four to
three aspects could be little easier: allowing us to achieve that ‘squaring the
circle’? The practical solution adopted by many researchers could be ‘calculat-
ing a direction’ for the ‘creation of wealth’ ... and reasoning based on three ele-
ments of ‘direction’ ... in failing to not concern the ‘meaning’ to be intended to
be the systematic ‘fourth’ element. This fourth element acting as a horizon of
research would be devised to give meaning to the first three. It could well stabi-
lize the whole system.

In fact, when the system with four elements would change from a passive
state to an active state, it could discern the existence of a fifth vector. This vec-
tor will represent the action whose effect is produced by a single vector system,
and that effect will be to expand the size of the entire system. The reverse oper-
ation is also possible: the fourth parameter can be ‘inhibited’ by the entire sys-
tem, sometimes due to simple ‘statistical noise’ made about this vector by the
overall system, because such a faulty understanding of its members emerged of
the ins and outs of the system. In this case only three vectors will be clearly
visible... as the carrier of meaning would be hidden. Probably, that is why Kuz-
nets was more recognized in the West than Kondratieff is: this method calcu-
lates directions of profit, regardless of when it comes to address the tax dimen-
sion of things – including globally.

***

Thus, for our part, we prepared an *Economic History of Europe* showing the
progressive income collected by *homo monetarius* since 1800, a *Monetary His-
tory of Europe* (Jourdon 2009a) showing the concerns of the Central Bank in
securing and diversification of the income of the *homo monetarius* within the
World System since 1800. Our theory: it should partially rewrite the history of
money to reflect this new agent, *homo monetarius*. Our theory should address
the following: 1) make decisions allowing it to diversify and take financial
risks; 2) increase sense that a new political philosophy ought to be designed;
3) perform information transfer with the environment and with a monetary
character of this information so as to better ensure the system. The next mone-
tary Long Cycle (1992–2090) is the cycle of the new key currency, the euro
(Jourdon 2011a, 2011b). It follows the respective cycles of pound sterling
(1848–1945) and the dollar (1917–2015). The EU euro will specify its reserva-
tions vis-à-vis the system embodied by the US dollar (1980–2020), becoming
the first reserve currency in the world while bearing the debt-load of the World
System (2015–2055), then weaken, decline, and pass the baton to another key
currency (2050–2090). The EU euro brings with it a new social project: the balance between private property, social property, and self-property, thus following the projects of the US dollar (a balance between private ownership and social ownership) and the UK sterling pound (liberalism in defense of private property). The works of Kuznets, as that of Kondratieff, remarkably fit into our perspective. They enrich it. If the Kuznets cycles show wealth creation, and those of Kondratieff the best way that is humanly imaginable to administer them, how to think about the borders between sectors, countries ... in order to enhance coordination. An approach of semi-monetary long cycles (Jourdon 2008: 95–122; 2009b: 13–26) or monetary rethink could help both series of cycles – Kuznets and Kondratieff – find new paths of convergence.

Clearly, the long cycle of the US dollar does not take completely into account the potential for lasting justice. On the contrary, the miracle of the last fifteen years is that, from a more technical point of view, the holders of economic interest accurately managed their investments, while moving them towards new growth-areas in order to reduce taxable income; this strategy was successful... And, at the same time, these holders of economic interest contributed (e.g., the American magnate Warren Buffett, who holds one of the most prominent hedge funds in the World, is regularly contributing to the public by readdressing more than 80 % of his gains, according to the French Newspaper *L'Expansion*; the second richest captain of industry in the World, the American citizen Bill Gates, generously funds a number of causes in the Third World). If we consider these facts and arguments from the perspective of history, we could put it in parallel with the opinion-influencing public behavior of such British personalities as Lord Keynes and more recently Tony Blair ... Being a leader in international monetary negotiations, Keynes was as important a personality in probability reasoning in economics (in which he used to be a generalist). Tony Blair, being an initiator of actions in the Gulf War, was highly criticized for that in Continental Europe, but being a leader, he also had to assume his position and role in front of history. So from an ethical point of view, I suppose, the Gulf War is not a case where we could try to assert his, if any at all, moral duplicity. We only say that the long process of post-modernity with collateral effects on sex and gender, on finance and tax, and on social and societal characteristics seems, according to us, to deliver one important lesson, that finance is not the villain in international professional relations, but any attempt to regulate it – certainly needed – would mean to put it into historical and global perspective first before discussing any further detail. To this statement on the more general point of view that there is a current consensus on a relative stabilization – perhaps, the calm before the storm... in political discourse, we observed these effects in Europe: the so-called ‘the single thought’ approach (1990–2005) within which the right and the left defended the same values for tightly managing the EU macroeconomics, which seems a remarka-
bly empty historical *doxa* with respect to positions asserted on a separate origi-
nal social project (or maybe on the very contrary notion that it may have been a
more than a perfect legal arborescent architecture which resulted as a conse-
quence of its very logical construction in both ‘as if empty content’ and ‘as if
empty box-of-social-and-societal-values’). More than ever, Kuznets and Kon-
dratieff become inseparable in their paradise of Great Economists: the world
today, which is 50 % democratized (Modelski 2006) and 50 % monetized
(Jourdon 2010b), requires prudent management, but also some innovative
method to bridge unpredictable differences.

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# Long-Wave Economic Cycles: The Contributions of Kondratieff, Kuznets, Schumpeter, Kalecki, Goodwin, Kaldor, and Minsky<fnref n="1" />

Lucas Bernard, Aleksandr V. Gevorkyan, Tom Palley, and Willi Semmler

## Abstract

The current work highlights the empirical and epistemological contributions made by economists regarding the cyclical nature of economic and social development. We examine the main mechanisms of economic cycles involving different time scales, with a particular focus on long wave theory. Long wave theories include Kondratieff's theory of cycles in production and relative prices; Kuznets' theory of cycles arising from infrastructure investments; Schumpeter's theory of cycles due to waves of technological innovation; Keynes-Kaldor-Kalecki demand and investment oriented theories of cycles; Goodwin's theory of cyclical growth based on employment and wage share dynamics; and Minsky's financial instability hypothesis whereby capitalist economies show a genetic propensity to boom-bust cycles. The paper also discusses the methodological and empirical challenges involved in detecting long duration cycles.

**Keywords:** production cycles, infrastructure cycles, accelerator – multiplier mechanism, innovation cycles, Goodwin cycles, Keynes–Kaldor cycles, Samuelson–accelerator-multiplier cycles, Kalecki cycles, Minsky asset price-leveraging cycles, spectral analysis, wavelet analysis.

All things come in seasons – *Heraclitus*
One can never step into the same river twice – *Heraclitus*

## 1. Introduction

After a thirty year period of relative tranquility in the world economy – the so-called period of ‘great moderation’ – the U.S. economy suffered a financial

<footnote n="1">¹ We would like to thank Arkady Gevorkyan and Aleksandra Kotlyar for excellent research assistance in writing this paper. We also want to thank the organizers and participants of the Kuznets conference in Kiev, May 2011, for helpful discussions and suggestions. Discussions with various colleagues from the New School for Social Research and the University of Bielefeld, as well as with Peter Flaschel, James Ramsey, and Mauro and Marco Gallegati are gratefully acknowledged.</footnote>
meltdown in 2008 that triggered the ‘great recession’. These events have motivated new interest in theories that can explain long periods of expansion that end suddenly with deep recessions. One approach, which has been intellectually unfashionable for many years, is the theory of long economic waves.

This paper examines the empirical and epistemological contributions made by economists regarding the cyclical nature of economic and social development. The paper discusses the main mechanisms of economic cycles involving different time scales, with a particular focus on long wave theory. As part of this survey, the paper shows the continuing relevance of the theoretical constructs developed by Nikolai Kondratieff (also, Kondratiev, Кондратьев) and Simon Kuznets (Кузнец), both for modern macroeconomics and for assessing possible future scenarios. The paper also shows the difficulty of modeling long wave analysis as it poses significant challenges to the equilibrium method which dominates shorter period economic analysis.

Empirical economists and economic historians have voiced diverse views on economic cycles. On the one hand, there seems to be good evidence for business cycles based on a shorter time scale, and the endogenous dynamics of shorter cycles appear to be clear and distinct. On the other hand, long wave cycles are more controversial, involve different theoretical mechanisms, and are harder to verify empirically – in part because data is inevitably more limited owing to the reduced frequency of such cycles. Several different theories of the long wave exist. These include Kondratieff's theory of cycles in production and relative prices; Kuznets' theory of cycles arising from infrastructure investments; Schumpeter's theory of cycles due to waves of technological innovation; Keynes–Kaldor–Kalecki demand and investment oriented theories of cycles; Goodwin's theory of cyclical growth based on employment and wage share dynamics; and Minsky's financial instability hypothesis whereby capitalist economies show a genetic propensity to boom-bust cycles.

Business cycles of shorter duration can be explained by inherent mechanisms that generate cyclical fluctuations in economic activity. However, the mechanical view of long waves is more problematic and challenging. We discuss both those challenges and a recently ‘discovered’ evidence regarding components of long duration cycles. The notion of a financially based long wave Minsky super-cycle, which has been largely overlooked by contemporary economist, appears to have become more relevant in the wake of the financial crisis and the end of the ‘Great Moderation’.

The paper is organized as follows. Section 2 examines the long wave theories of Kondratieff and Kuznets. Section 3 builds on the preceding discussion and analyzes varying time scales and mechanisms of economic cycles prevalent in economic theory. Section 4 examines a Minsky-type of long-period cycles. Section 5 discusses the methodological and empirical challenges involved in
detecting economic cycles, particularly those of long duration. Section 6 con-
cludes the paper.

**2. The Legacy of Kondratieff and Kuznets**

**2.1. Kondratieff and theory of long waves**

Writing in the early 1920s Nikolai Kondratieff advanced the idea of the proba-
ble existence of long wave cycles in capitalist economies lasting roughly be-
tween 48 and 60 years. Within that, there is a period of accumulation of materi-
al wealth as productive forces move to a newer, higher, level of development.
But at a certain point there commences a decline in economic activity, only to
re-start growing again later (Kondratieff 2004 [1922]). This mechanism has
been dubbed, in economic literature, as Kondratieff cycles.

It should be noted that prior to Kondratieff, some empirical efforts on sys-
tematizing the cyclicality of economic crises was carried out by van Gelderen
(1913), Buniatian (1915), and de Wolff (1924), which Kondratieff admits to in
his publications (see end note in Kondratieff 1935). Though Kondratieff's ideas
were not well accepted by the official Soviet economics he insisted on his main
argument and in short time followed up with more rigorous publications. Only
few English language translations were available at the time (most notably,
Kondratieff 1935). Nevertheless, the potency of his ideas was recognized
quickly entering the work of subsequent economists (e.g., Schumpeter 2007
[1934]; Kuznets 1971; Rostow 1975; and others) as we review in the next
section.

The gist of Kondratieff's argument came from his empirical analysis of the
macroeconomic performance of the USA, England, France, and Germany be-
tween 1790 and 1920. The economist looked at the wholesale price levels, in-
terest rate, production and consumption of coal and pig iron, production of lead
for each economy and price movements (Kondratieff 1935). Using a peculiar
statistical method – de-trending the data first and then using an averaging tech-
nique of nine years to eliminate the trend as well as shorter waves of Kitchin
(Kitchin 1923) type – Kondratieff suggested a regularity of ups and downs in
the data on a long time scale. Within that there were intermediate waves along
with long waves. As a result, Kondratieff stated that economic process was
a process of continuous development. Among possible explanations to the long
wave cycles Kondratieff mentions: a) changes in technology; b) wars and revo-
lutions; c) appearance of new countries on the world map; and d) fluctuations in
production of gold (Kondratieff 1935, 2002).

All four appear as valid external shocks in pushing any particular economy
or the world economy into a downward or upward cycle path. However, after
careful analysis it became evident that external factors could not be the sole
determinants of shocks in economic transformation. The missing part is the
accumulation of preceding events, and the development of economic – but also
social, and political – relationships over long cycles that may help to en-
dogenize the external factors.

Fig. 1a illustrates an approximation of Kondratieff's original timeline of long wave cycles. Kondratieff's original estimation was based on a commodity prices index for the USA, England, and France in his work of 1935 (see Kondratieff 1935). Subsequently, with popularization of Kondratieff's views, extensions to the original analysis, roughly following the 40–60 years rule, began to appear.

<figure><img src="image_14.png" /><figcaption>**Fig. 1a.** Long waves cycles illustration</figcaption></figure>

*Source:* authors' approximation based on Kondratieff (1935).

One of the first to catch on the logic was Schumpeter (1939) who pointed out the distinction between short (Kitchin cycles of 3–4 years), medium (Juglar cycles of 9–10 years),<fnref n="2" /> and long (Kondratieff cycles of 54–60 years) cycles in his analysis of economic development. We discuss some of them below.

As to mechanisms, Kondratieff already pointed to a large-scale accumula-
tion of innovative activity, that is inventions and processes modifications that
required fifty or more years before complete insertion, absorption in the pro-
duction method. The role of innovation, implied in Kondratieff's analysis, is
captured by the internal dynamic tendencies described in detail in Schumpeter's
*The Theory of Economic Development* (Schumpeter 2007 [1934]). In turn, Garvy
(1943) subjects Kondratieff's proposition to sharp criticism from positions of
Soviet economists and from the point of view of Western economics. Paradoxi-
cally, in either case the conclusion appears to be that Kondratieff was too hasty
in assigning the term ‘cycle’ to his propositions, as those do not correspond to
the internal evolutionary dynamics following some mechanism of cycles.

<footnote n="2">² See Juglar 1862.</footnote>
There was a difference however in the Western economists' views and their contemporary Soviet counterparts. From the Western economist point of view, articulated by Garvy (Ibid.), there was no sufficient statistical evidence to warrant any regularity, that is cyclicality, to Kondratieff's analysis. The Soviet economists writing around the time of Kondratieff's original publications and shortly after (e.g., Studensky, Oparin, Pervushin, Bogdanov, Sukhanov and others, see Garvy 1943 for concise discussion and references) rejected the term 'cycle' in reference to the capitalist production mode since that implied some type of capitalist system's perpetuity. At the time that was in direct opposition with the socialist beliefs of gradual phasing out of the capitalist economy into its next logical stage of socialism, as was implied by then dominant interpretation of Marx's *Capital* (2003 [1867]). These beliefs in rapid phased successions picked up from simplistic interpretations would feed into initial enthusiasm around shock therapy reforms in post-socialist economies in the early 1990s (Gevorkyan 2011).

Recently, researchers working within Kondratieff's original methodological scope have attempted to extend their analysis across the twentieth century with focus on predictive capabilities of such work into the nearest future. Some find the ongoing economic deterioration in the world economy fitting calculations of the Fifth Long Wave of the Kondratieff cycle (e.g., Korotayev and Tsirel 2010; Kondratieff 2002; Akaev 2009; and others), some of them using spectral analysis. A re-validation of the very four exogenous shocks (technology, wars, shifts in boundaries, and value of gold) so carefully documented and refuted by Kondratieff himself took place in some of those papers. Exogenous shocks are surely important 'occurrences', yet, the internal dynamics in the evolution of economic relationships over a long time period and staging economic development must be considered as well. We address this in further detail below, using more modern empirical methods.

## 2.2. Kuznets' novel analysis of development

Simon Kuznets received the Nobel Prize in Economics in 1971 for his empirical analysis of economic growth, where he identified a new era of 'modern economic growth'. Like Kondratieff, Kuznets relied on empirical analysis and statistical data in his pioneering research. Absorbing his findings on historical development of the industrial nations with initially abstract categories of the national income decomposition, Kuznets developed a concept of long swings, though disputed, now referred to as Kuznets cycles or Kuznets swings (e.g., Korotayev and Tsirel 2010).

The Kuznets swings' period is ranged between 15–25 years and initially connected by Kuznets with demographic cycles. In that analysis, the economist observed and quantified the cyclicality of production and prices, linking with immigrant population flows and construction cycles. Researchers have attempted to connect these cycles with investments in fixed capital or infrastructure investments (see Ibid. for literature review). Focusing on developed economies of North America and Western Europe, Kuznets computed national income
from late 1860 forward with structural breakdowns by industry and final products. He also provided measures of income distribution between rich and poor population groups.

Kuznets unveiled the deficiency of constrained theoretical work built on simplified assumptions. He was critical of capital and labor as the sole factors sufficient for economic growth. Instead analysis must encompass information on technology, population and labor force skills, trade, markets, and government structure. Kuznets carried his analysis further in developing measures of national income through categories of consumption, savings, and investment (e.g., Kuznets 1949, 1937, 1934, 1936, etc.), eventually leading to a system of national income accounting.

It should also be noted that while working on the problem of income inequality, Kuznets was one of the first to look at economic growth measurements in the developing world (e.g., Kuznets 1971, 1966, and 1955). His well-known inverted U-shaped curve measuring inequality on the y-axis and economic development, expressed as change in GNP on the x-axis was an intellectual breakthrough of the time (see Fig. 1b). The conclusion is that while the economy remains in agricultural stage income inequality among different groups within the economy is low. As the national economy embarks on the process of industrialization inequality rises over time, then it falls again.

<figure><img src="image_15.png" /><figcaption>**Fig. 1b.** Kuznets curve</figcaption></figure>

This describes the experience of developed economies in Western Europe and North America, that is the initial phases of industrialization cause sharp rises in inequality. Upon reaching a critical saturation point, inequality subsides while economic growth continues. This happens through the emergence of a ‘middle class’, improved education facilities, health care, and governance. It is interesting to note that further structural change and the shifting of resources to services and the financial sector, may increase inequality again, as, for example, is
seen in the U.S. economy since the 1980s. It may be argued that this somewhat correlates to a popular analysis in development economics on the transition mechanisms from traditional to modern industrial sectors.

A variant of the Kuznets curve is also utilized in the analysis of environ-
mental problems. This application suggests an immediate deterioration in air
quality and intensification of environmental problems at the initial industrializ-
ing stages until spreading affluence and emergence of middle class introduces
legislative and other controls on hazardous production (WB 1992; Grossman
and Krueger 1995 and more recently Stern 2004). Elsewhere, these implied
predictions of fading inequality offered a strong intellectual foundation for the
mentioned reforms of the early 1990s in Eastern Europe and the former Soviet
Union (Gevorkyan 2011). In studies of sequencing of market liberalization re-
forms and limitations of the state in the economy there were omitted the nega-
tive externalities of shock therapy policies. Yet, in the early 1990s, the promise
of immediate market reforms and potential access to greater income opportuni-
ties did not materialize at the height of the reforms. In fact, income inequality
problems still remain relevant and critical on policymakers' agendas two dec-
ades since the 'transition'. The absence of the universal tendency of declining
income inequality raises a question of how one measures economic develop-
ment and what time-frame to consider is 'sufficient' to measure the rise of
'welfare' over time.

Finally, Kuznets (1973) brings up six key characteristics of modern eco-
nomic growth, based on methodology consistent with national income account-
ing and historical analysis of economic development: 1) increase in per capita
growth and population in developed economies; 2) increasing productivity
rates; 3) increasing rate of structural transformation; 4) rising urbanization and
secularization; 5) spread of technology and infrastructure improvements (com-
munications); 6) limits to wide-scale spread of economic growth and benefits.
Therefore despite seeming improvements, Kuznets noted persistence of dispro-
portionate economic growth worldwide and apparently some broader measures
of welfare.

Broadly speaking, such persistence of long wave-like tendencies on a glob-
al scale, a feature of contemporary industrial and financial globalization, sup-
ports the concept of redefined fundamental uncertainty (Gevorkyan and Ge-
vorkyan 2012). Here the uncertainty of the direction, length, and capability of
the post-great recession's potential recovery remains unclear. The lesser-
developed economies (aka emerging markets) are worst affected in such cir-
cumstances, as the speculative foreign capital exits and industrial capacity re-
mains inadequate on global competitive scale with absent technological ad-
vance.

Common between the work of both Kondratieff and Kuznets was the moti-
vation to define the mechanisms of economic growth and development, and
systematize core tendencies driving the transformational momentum. That in
turn connects directly to the earlier discussion on cyclicality in development.

**3. Time Scales and Mechanisms of Economic Cycles**

As mentioned, the work of Kondratieff and Kuznets fostered a systematic approach to modern understanding of long economic swings. Numerous authors have further proposed not only different mechanisms underlying cycles but also cycles on different time scales. An early theory of cycles was put forward by Robert Owen in 1817, who stressed wealth inequality and poverty, originating in industrialization, yielding under-consumption as a reason for economic crises. Sismondi, in the middle of the 19th century took a similar view and developed a theory of periodic crises due to under-consumption. This led to the discussion of the ‘general glut’ theory of the 19th century, which Marx and other classical economists also extensively contributed to.

More specifically, a mechanism of cycles on a shorter times scale, of
8–10 years duration, was developed by Juglar (Juglar cycles), resulting, as he
saw it, from the waves in fixed investment. Later, Kitchin, in the 1920s, intro-
duced an inventory cycle of 3–5 years. Later an important contribution was
made by Schumpeter (1939), who referred to the ‘bunching’ of innovations and
their diffusion as a cause for long waves in economic activity.

Roughly at the same time, Samuelson (1939), influenced by the Spiethof accelerator and the Keynesian multiplier principle, developed the first mathematically-oriented cycle theory using difference equations.<fnref n="3" /> Others, such as Rostow (1975), had proposed the theory of stages of growth. Simultaneous with Samuelson, Kalecki (1937) developed his theory of investment implementation cycles where he saw significant delays between investment decisions and investment implementations, formally introducing differential delay systems as tool for studying cycles.

Kaldor (1940), rooted in Keynesian theory, developed his famous nonlinear investment-saving cycles, which took into account aggregate demand. Later, Goodwin (1967) proposed a model of growth cycles, which took into account classical growth theory, but was based on unemployment-wage share dynamics, since the overall growth rate, as well as productivity growth, are kept constant in the long run. We will first discuss cycle theories on a longer time scale and then move to the Goodwin and Keynes-Kaldor cycles. We also briefly include a discussion of Kalecki's cycle theory (1971) and how it might relate to Kondratieff.

**3.1. The Kondratieff long swings**

The above review raises a few critical questions that need proper evaluation.
For example, it is difficult to detect clear mechanisms in the Kondratieff cycles

<footnote n="3">³ A review of the mechanisms of cycles on a shorter time scale is given in Semmler (1986).</footnote>
(e.g., as sketched in Fig. 1a above). If anything is working here as a mechanism, it must be some exhaustion of endogenous and exogenous factors: in the long upswing prices are rising, interest rates rise and wages rise, raw materials and non-renewable resources may be exhausted, causing to drive up prices and wages. New technologies are discovered in periods of long down swings, which come to be used in a new upswing. New resources are discovered, such as iron ore, coal, gold and other metals, which Kondratieff argues to be endogenously expanded through new discoveries but both technology and resources will finally be exhausted too: resource and product prices rise, deposits at saving banks rise, but also interest rates and wages rise and a downturn begins. There is a struggle for markets and resources. New countries are opened up. There are market limits, such export limits, which restrict further expansions, as Kondratieff data on French exports show. Then, in the long downswing, prices fall, wages fall, interest rates fall, plenty of resources and unused production capacity push prices down, and unemployment reduces wages. Overall, there are some mechanisms indicated in Kondratieff, but not specifically modeled.

## 3.2. The Kuznets long swings

Further, Kuznets theory of development and fluctuations can be seen as an interesting intersection of two traditions in the economics of his time. On the one hand, he was interested in cyclical movements in numerous time series data, such as volume of all types of production and prices, seasonal and secular movements in industry income and national income and its components, long swings in economic activities, and business cycle analysis. On the other hand, he saw development as a time irreversible process of industry and national income development, which evolves in stages of economic growth, with plenty of structural changes. Each stage may have its particular saving rate, consumption patterns, unevenness and disequilibrium as well as income inequality. As described above, inequality first rises with industrialization and later declines. Kuznets conceptual framework can be seen as a mixture of cycle theories, referring to the accelerator principle for infrastructure investments, and a theory of stages of economic growth that were similar to those pursued by Rostow (1975). A similar view on stages of growth, that taken by Kuznets and Rostow, is also pursued by Greiner, Semmler and Gong (2005). Overall, Kuznets was ambiguous whether there are regular mechanisms generating cycles. He conjec-tured that cycles may be in the economic data solely as a result of certain his-torical 'occurrences'.

## 3.3. The Schumpeter innovation cycles

Schumpeter's concept of competition deviates from the neoclassical conception in some essential aspects. First, competition is not limited to price or quantity adjustments. It is described as an evolutionary process, as a process of 'creative
destruction'. The engines of this development are capitalist enterprises. 'Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary ... The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumer's goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates' (Schumpeter 1970: 83). The incentives for developing these types of technical change originate in transient surplus profits. What is taken as given in neoclassical general equilibrium analysis as parametric data, when the price and quantity adjustments occur is the explicandum in Schumpeter: process innovation, product innovation, new forms of organization of the firm and new forms of financial control.

Second, Schumpeter stresses that competition is not necessarily an equili-
brating force. When referring to the existence of entrepreneurial firms and their
rivalry, Schumpeter maintains that ‘there is in fact no determinate equilibrium
at all and the possibility presents itself that there may be an endless sequence of
moves and counter-moves, an indefinite state of warfare between firms’ (Ibid.:
79). Moreover, competition as an evolutionary process takes place through
time, in discrete steps. For example, he writes, ‘Now the first thing we discover
in working out the propositions that thus relate quantities belonging to different
points in time is the fact that, once equilibrium has been destroyed by some
disturbances, the process of establishing a new one is not so sure and prompt
and economical as the old theory of perfect competition made it out to be, and
the possibility that the very struggle for adjustment might lead such system
farther away instead of nearer to a new equilibrium. This will happen in most
cases unless the disturbance is small’ (Ibid.: 103). Indeed, in Schumpeter it is
the product and process innovation, undertaken by the entrepreneur, which
brings the economic system out of equilibrium, resulting in long waves and
business cycles. Moreover, he even does not seem to be very interested in
a theory of centers of gravitation for market forces as developed by the classical
economists.

Third, in Schumpeter, competition is an evolutionary process, one of rival-
ry between firms motivated by the search for surplus profit. He calls this sur-
plus profit the transient ‘monopoly profit’ of new processes and new products,
‘Thus, it is true that there is or may be an element of genuine monopoly gain in
those entrepreneurial profits which are the prizes offered by capitalist society to
the successful innovator. But the quantitative importance of that element, its
volatile nature and its function in the process in which it emerges put it in
a class by itself’ (Ibid.: 102). ‘The transient surplus profit does not appear as
deviation from the perfectly competitive state of the economy and as a waste in
the allocation of resources, but as a reward for the innovator and a gain for the
capitalist society. On the contrary, the perfectly competitive economy, where
every market agent behaves in the same way under the condition of parametrically given external conditions seems to imply a waste of resources ... working in the conditions of capitalist evolution, the perfect competitive arrangement displays wastes of its own. The firm of the type that is compatible with perfect competition is in many cases inferior in internal, especially technological, efficiency. If it is, then it wastes opportunities' (Schumpeter 1970: 106). Thus, in Schumpeter's view, the entrepreneurial firms are powerful engines of progress and 'in particular of the long-run expansion of total output' (Ibid.).

Following Schumpeter's footsteps, the literature after Schumpeter has distinguished between radical and incremental innovation. The major waves of radical innovations, which were followed by the diffusion of this new technology and incremental innovations are.<fnref n="4" />

* The water-powered mechanization of the industry of the 18th and early 19th century;

* The steam-powered mechanization of the industry and transport of the middle of the 19th century (rail ways, steam engines, machine tools);

* The electrification of industry, transport and homes at the end of the 19th century;

* Motorization of industrial production, transport, civil economy and the war machinery (from ~1914 onward);

* Computerization and information technology from the 1960s and 1970s onward.

According to Schumpeter's oriented long wave theories, each of those radical innovations did not only create long waves in economic development, but each of those long waves were driven by different technology, originated in different countries and then diffused world wide.

### 3.4. The Samuelson accelerator-multiplier cycles

A model of medium-time scale is the one created by Samuelson (1939). The basic construction is as follows: consumer spending (via increased sales by firms) accelerates investment; output changes results in income changes through the multiplier, which, in turn, again stimulates sales, that is consumer spending.

The multiplier-accelerator model of Samuelson (Ibid.) can produce cycles. Take $C_t$ = consumption, $I_t$ = investment, $Y_t$ = income, $C_0$ = autonomous consumption, $I_0$ = autonomous investment, and $G = C_0 + I_0$; $I = S = sY$, therefore

the multiplier is: $Y = \frac{1}{s}$. Use:

$$C_t = C_0 + \alpha Y_{t-1}, \quad (1)$$

<footnote n="4">⁴ For details see Reati and Toporowski (2004).</footnote>
$$I_t = I_0 + \beta (Y_{t-1} - Y_{t-2}), \qquad (2)$$

$$Y_t = C_t + I_t. \qquad (3)$$

Substituting (1) and (2) into (3) gives

$$Y_t = C_0 + \alpha Y_{t-1} + I_0 + \beta Y_{t-1} - \beta Y_{t-2},$$

$$G = C_0 + I_0,$$

$$Y_t = G + (\alpha + \beta) Y_{t-1} - \beta Y_{t-2}.$$

The standard form of a second order linear difference equation is:

$$Y_t - (\alpha - \beta) Y_{t-1} + \beta Y_{t-2} = G, \qquad (4)$$

which is stable or unstable depending on the size of $\beta$. Moreover, one can have contracting or expanding cycles depending on whether there exist imaginary parts of the eigenvalues (see Figs 2a – 2d).

When we replace income by profit flows $R_t$, one can turn the above into a kind of Kalecki model such as: $I_{t+1} = A + \alpha R_t + b(R_t - R_{t-1})$. If one writes for

$s_p R_t = I_t$, $R_t = \frac{I_t}{s_p}$, we get a similar second order difference equation:

$$I_{t+1} = A + \frac{(a+b)}{s_p} I_t + \frac{b}{s_p} I_{t-1}, \qquad (5)$$

which again can be stable or unstable and it can produce unidirectional change or oscillations. The Kalecki model is further studied in Sub-section 3.7.

<figure><img src="image_16.png" /><figcaption>(a)</figcaption></figure>

<figure><img src="image_17.png" /><figcaption>(b)</figcaption></figure>

<figure><img src="image_18.png" /><figcaption>(c)</figcaption></figure>

<figure><img src="image_19.png" /><figcaption>(d)</figcaption></figure>

<caption>**Figs 2a – 2d.** Stable and unstable development and oscillations</caption>

### 3.5. The Goodwin growth and income distribution cycles

Other types of cycles that have been discussed, particularly in the Post War II period, where Goodwin's growth cycle theory that postulates an interaction of employment and wage share. It looked like a business cycle model when it was
first proposed but, in fact, empirically it seems to operate also on a medium time scale.<fnref n="5" />

Goodwin (1967) postulates cycles driven by growth and income distribution. Low growth, generated by low profits and investment, generates unemployment, which in turn limits wage growth as compared to productivity. This gives rise to lowering the wage share: low wage share means high profit share and slowly rising investment, which reaches a turning point as employment and wage growth make the wage share rising and the profit share falling. By utilizing nonlinear differential equations, originally developed by Lotka and Volterra for the models of interacting populations, we can rewrite the Goodwin model of wage-employment dynamics as follows:

$$\begin{aligned} \dot{x} &= P(x, y) = (a - by)x \\ \dot{y} &= Q(x, y) = (cx - d)y, \end{aligned}$$

or as

$$\begin{aligned} \frac{\dot{x}}{x} &= a - by \\ \frac{\dot{y}}{y} &= cx - d \end{aligned},$$

where $\dot{x}$ represents the time rate of change of the ratio of the employed to the total labor force and $\dot{y}$ is the change of the wage share. Both variables depend on the level of $x$ and the constants $a, b, c, d > 0$. The coefficient, $a$, denotes the trend of employment if all income is reinvested ($y = 0$) and $d$ is the fall in real wage if ($x = 0$). The symbol $by$ denotes the influence of the wage share on the employment ratio, and $cx$ the positive influence of employment on the wage share. Due to this interaction of the variables the employment ratio is prevented from rising and the wage share from falling without limits.

For a growth model with trends as represented by Goodwin, the coefficients can be interpreted as follows: $a = b - (m + n)$ where $b$ is the output/capital ratio ($Y/K$), $m$ is the growth rate of productivity and $n$ is the growth rate of the labor force. All of those are taken as constants. Assuming a linear-

ized wage function (for instance, $\frac{\dot{w}}{w} = -e + cx$) and with $m$ the growth rate of productivity as before, we obtain for the growth rate of the wage share the term

$$\frac{\dot{y}}{y} = \frac{\dot{w}}{w} - m, \text{ with } m = d - e. \text{ Thus, the second pair of differential equations can be written as:}$$

$$\frac{\dot{x}}{x} = b(1 - y) - (m + n),$$

<footnote n="5">⁵ For details of the subsequent dynamic modeling see Semmler 1986.</footnote>
$$ \frac{\dot{y}}{y} = cx - (e + m), $$

which is indeed equivalent to the first equation of the (above) system, except that it is written in terms of growth rates. The core of the last system shows that the change of the employment ratio depends on the profit share $(1 - y)$ and that the change of the wage share depends on the employment ratio. This form has been used to explain the fluctuation of the employment ratio and the fluctuation of the industrial reserve army in Marx (Marx 2003 [1867]: ch. 23; see Goodwin 1967). The basic structure of this model represents the interacting variables of the employment ratio and wage share as dynamically connected.

The last system has two equilibria: $(0, 0)$ and $(\frac{d}{c}, \frac{a}{b})$. The linear approximation of the system is with $\xi_1, \xi_2$ as small deviations from the equilibrium values

$$ \begin{pmatrix} \dot{\xi}_1 \\ \dot{\xi}_2 \end{pmatrix} = \begin{bmatrix} J_{11} & J_{12} \\ J_{21} & J_{22} \end{bmatrix} \begin{pmatrix} \xi_1 \\ \xi_2 \end{pmatrix}. $$

The calculation of the Jacobian for the first linear approximation gives for the equilibrium $(\frac{d}{c}, \frac{a}{b})$

$$ J = \begin{bmatrix} 0 & -bd/c \\ ca/b & 0 \end{bmatrix}. $$

The real parts of the eigenvalues are zero and the linear approximation of the equilibrium point represents the dynamical structure of a center (Hirsch and Smale 1974: 258). With real parts of the eigenvalues zero, the linear approximation of the system through the Jacobian does not allow conclusions regarding the behavior of the dynamical system in the neighborhood of the equilibrium. Yet, as can be shown, by constructing a Liapunov function for the above system, which is constant in motion and hence has time derivatives $\dot{V} = 0$, the wage share-employment dynamics results in closed solution curves (Ibid.; Flaschel and Semmler 1987).

The closed trajectories of the system are, however, only closed curves and the wage share-employment dynamics does not allow for persistent cycles, such as limit cycles (Hirsch and Smale 1974: 262; Flaschel 1984). In addition (see Flaschel and Semmler 1987), the dynamical system is structurally unstable, since small perturbations can lead to additional interaction of the variables $(J_{11}$ or $J_{22}$ can become nonzero). This leads to a qualitatively different dynamical behavior of the system, hence it can become totally stable or unstable. Un-
der certain conditions the above system can also become globally asymptotically stable. This can occur if the conditions for Olech's theorem are fulfilled (see Flaschel 1984).

Equivalent results are obtained when in place of a linear wage function a nonlinear wage function is substituted in the system (see Velupillai 1979). The wage share-employment dynamics worked out originally by Goodwin for a model of cyclical growth and then applied by him to explain an endogenously created unemployment of labor depict a growing economy, whereas often models of nonlinear oscillations refer only to a stationary economy.

Since the change of the wage share and the change of labor market institutions such as bargaining and other protective legislature are slow, this model of economic cycles, however, does not really model business cycles but rather medium run cycles. On the other hand, for a theory of longer cycles the dynamical interaction of other important variables over time (such as waves of innovations, changes of capital/output ratio, productivity, relative prices and interest rates) as well as demand factors are neglected.

### 3.6. The Keynes-Kaldor demand driven cycles

The demand factors are considered in the next section presented here. The Keynes-Kaldor model seems to operate on a shorter time scale. It essentially refers to the role of demand, defined by the relation of investment and savings. In his article, Kaldor (1940) proposed such a shorter scale cycle model, a nonlinear model of business cycles, which after that has been reformulated in the light of mathematical advances in the theory of nonlinear oscillations, which take into account demand changes (Kaldor 1940, 1971; Chang and Smyth 1971; Semmler 1986).

Kaldor relies on a geometric presentation of a business cycle model which depends on a nonlinear relation between income changes and capital stock changes and which seems to generate self-sustained cycles without rigid specifications for the coefficients, time lags and initial shocks. The geometric presentation of his model of persistent business cycles due to the dynamic interaction between income changes and accumulation and dissolution of capital indeed also includes the possibility of limit cycles, that is asymptotically stable cycles regardless of the initial shocks and time lags.

His ideas are also formulated for a stationary economic system and can be represented by nonlinear differential equations in the following way (Chang and Smyth 1971):

$$ \begin{aligned} \dot{Y} &= \alpha(I(Y, K) - S(Y, K)), \\ \dot{K} &= I(Y, K), \end{aligned} $$

where $\alpha$ is a reaction coefficient, $\dot{Y}$ the rate of change of income, $\dot{K}$ the rate of change of the capital stock, $I$ = investment and $S$ = saving as functions of
the level of income and capital stock. According to the assumptions underlying the model, there is a unique singular point (Ibid.: 40). This type of Keynesian-Kaldorian model can give rise to persistent cycles (see Semmler 1986), it does not model the specific role of growth and income distribution, as Goodwin has stressed. Yet it stresses the role of endogenously changing demand. The linear approximation is:

$$ \begin{pmatrix} \dot{\xi}_1 \\ \dot{\xi}_2 \end{pmatrix} = \begin{bmatrix} J_{11} & J_{12} \\ J_{21} & J_{22} \end{bmatrix} \begin{pmatrix} \xi_1 \\ \xi_2 \end{pmatrix}, $$

where the Jacobian is

$$ \frac{\partial(\dot{Y}, \dot{K})}{\partial(Y, K)} = \begin{bmatrix} \alpha(I_Y - S_Y) & \alpha(I_K - S_K) \\ I_Y & I_K \end{bmatrix}, $$

where $(I_K - S_K) > 0$, since $I_K < S_K < 0$ and $I_Y > 0$ (Chang and Smyth 1971: 41). The determinant is $(I_Y S_K - S_Y I_K)$, which is positive because for the existence of a unique singular point it is assumed that $(I_Y S_K < S_Y I_K)$. The element, $J_{22} = I_K$, is always negative. The linear approximation with the Jacobian represents at its core the investment-income dynamics according to which the change of income depends negatively on the level of the capital stock $J_{12}$ and the change of capital stock depends positively on the level of income $J_{21}$, but there is a negative feedback effect from the level of capital stock to the change of capital stock and an ambiguous feedback effect from the level of income to the change of income $J_{11}$. This will be explained subsequently.

Analyzing the singular point one can conclude that the equilibrium is a focus or a node and that the equilibrium is stable or unstable accordingly as $\alpha(I_Y - S_Y) + I_K > (<)0$. This singular point also allows for a limit cycle, since the necessary condition for a limit cycle is that the dynamic system has an index of a closed orbit, equal to 1 (Minorsky 1962: 79). This excludes a saddle point as a singular point (see Ibid.: 77). Moreover, the most interesting point in this dynamic system is the ambiguous element $J_{11}$. According to Kaldor's graphical presentation, it is assumed (see Kaldor 1940: 184) that

(1) $I_Y > S_Y$ for a normal level of income;

(2) $I_Y < S_Y$ for abnormally high or abnormal lowly levels of income; and

(3) the stationary state equilibrium has a normal level of income.
<figure><img src="image_20.png" /><figcaption>**Fig. 3.** Kaldor graph on nonlinear investment and saving functions</figcaption></figure>

This might be illustrated by Fig. 3 with Y being the level of output, which shows that the normal level of Y is unstable and the extreme values of Y are stable. Mathematically this means that the trace $J_{11} + J_{22}$ changes signs during cycles. This is the negative criterion of Bendixson (Minorsky 1962: 82) for limit cycles, that is if the trace $J_{11} + J_{22}$ does not change signs, persistent cycles – limit cycles – cannot exist (see also Guckenheimer and Holms 1983: 44). As proven by Chang and Smyth (1971: section V), there indeed exists the possibility of stable cycles, limit cycles, under the assumption proposed by Kaldor.

However, the three conditions as formulated above and originally formulated by Kaldor (1940: 1984) are not necessary for the existence of cycles. What is actually necessary for cycles is only that $I_Y > S_Y$ (i.e. that $J_{11}$ switches signs) at some level of Y. Moreover, the singular point at the normal level of Y does not have to be unstable as a necessary condition for a limit cycle. The critical point can be stable (see Minorsky 1962: 75). In addition there also is the possibility that the system is globally asymptotically stable. This is the case if: $\alpha(I_Y - S_Y) + I_K < 0$ and $(S_Y I_K < I_Y S_K)$ everywhere.

The global asymptotic stability under these conditions follows from Olech's theorem (see Ito 1978: 312).

Evaluating Keynes–Kaldor's model of a demand driven business cycles one can say that Kaldor's formulation of an income-investment dynamics brought some advances regarding a theory of endogenously produced business cycles, especially formulations of the theory of cycles in terms of a theory of nonlinear oscillations (see also Kaldor 1971) one can extend this to include a formulation concerning the dynamics in employment and wage share which was originally more visible in classical models that referred to the profit-investment dynamics.
### 3.7. The Kalecki profit and investment cycles

To draw some similarities to the Kondratieff long wave theory, we can follow Kalecki (1971) and replace the income, $Y$, by profit flows $\Pi^6$ and allow for $J_{11}=\alpha(I_{\Pi}-S_{\Pi})$ to change its sign during the cycle. In some sense the role of profit, wages and income distribution – as in the Goodwin model – can be allowed to come in here.

In general it could be assumed that:

(Case 1) $\frac{\partial I}{\partial \Pi} > \frac{\partial S}{\partial \Pi}$, for profit income in an interval such as $\Pi_1 < \Pi < \Pi_2$

(see Fig. 4). This may be due to a previous decrease in capital stock, production and employment which entail low construction cost for plants, low material and resource cost and low wage costs (relative to productivity), high profits and low interest rates and easy access to credit. These factors then may give rise to an expectation of rising profits on investments.

On the other hand, in other regions we can have:

(Case 2) $\frac{\partial I}{\partial \Pi} < \frac{\partial S}{\partial \Pi}$, with two clarifying conditions:

(a) for $\Pi > \Pi_2$ due to capacity limits, rising construction cost for plants and rising material and wage cost (relative to productivity), exhaustion of exhaustible resources, rising interest rates and but falling actual and expected profits. Profits and expected profits may fall due to the rise of those costs and wages – that cannot be passed on – in the long upswing. This looks similar to a mechanism that Kondratieff has indicated to eventually occur in his long upswing (see Sections 2.1 and 3.1).

(b) for $\Pi < \Pi_1$ in a recessionary or slow recovery period, where firms invest in financial funds instead of in real capital (Minsky 1983) but due to the economic conditions in a recessionary period, the rate of change of saving in response to falling profits tend to drop faster than the rate of change of investment. Wage share may have been rising previously, and profit share falling but here investment is still not dropping completely to zero. This resembles the Kondratieff scenario of a long downswing and recessionary or stagnation period.

Though the economic intuition appears the same in our above stylized business cycle dynamics and the Kondratieff long waves phases, the time scales are probably different ones: one is a shorter one and the other a longer one, but the mechanisms may be the same. Yet, for a longer time scale much of the economic structure and relationships are likely to change.

<footnote n="6">⁶ This conversion seems permissible as long as there are no savings out of workers income and thus workers income is completely spent for consumption. This is what Kalecki assumes.</footnote>
In the history of economic thought the change of sign for $J_{11}$ during the economic cycle was verbally anticipated by many writers on the study of capitalist dynamics (Kalecki 1971: 123; Kaldor 1940: 184) and can be regarded as essential for a theory of fluctuations in economic development. Mathematically $J_{11} + J_{22}$ must change signs in order to generate self-sustained cycles. If $J_{11}$ and $J_{22}$ were zero, $J_{12}$ and $J_{21}$ alone would determine the profit-investment dynamics. There would only be structurally unstable harmonic oscillations. The negative signs of $J_{12}$ and $J_{22}$ exert a retarding influence on accumulation, and $J_{21}$ represents an accelerating force on capital accumulation, whereas $J_{11}$ exerts a retarding influence in the boom period and an accelerating impact on profit and accumulation in the later phase of the recession.

Intuitively, the existence of self-sustained cycles can be seen in Fig. 4 from the fact that the trajectories of $\Pi(t)$ and $K(t)$ are bounded in absolute values and the profit-investment dynamics follow certain directions in the plane. Roughly speaking, for large enough $\Pi(t)$, $\dot{\Pi}$ turns negative and for large enough $K(t)$, $\dot{K}$ turns negative and vice versa. Geometrically, this is illustrated by Fig. 4.

<figure><img src="image_21.png" /><figcaption>Fig. 4. Phase diagram</figcaption></figure>

For $\dot{\Pi}=0$ we get the slope

$$ \frac{dK}{d\Pi} = \frac{S_{\Pi} - I_{\Pi}}{I_{K} - S_{K}} \leq 0, $$
and for $\dot{K}=0$ the slope is

$$ \frac{dK}{d\Pi} = -\frac{I_{\Pi}}{I_{K}} > 0. $$

Thus, in the plane of the Fig. 4 there are four quadrants. For reasons of simplicity we have assumed a linear investment function in Fig. 4. The system has a unique solution at $\Pi^*$ and $K^*$ since the curve $\dot{K}=0$ has a steeper slope than $\dot{\Pi}=0$ when the latter is upward sloping in a certain region. This follows from the assumption in the model.<fnref n="7" /> The determinant of the Jacobian of the dynamical system above is $\alpha(S_K I_{\Pi} - S_{\Pi} I_K) > 0$. The singular point is a focus or a node and is stable or unstable accordingly as $\alpha(I_{\Pi} - S_{\Pi}) + I_K \le 0$. A saddle is excluded, and the singular point has index 1 as necessary condition for a self-sustained cycle (Minorsky 1962: 176). (The singular point does not have to be unstable as Kaldor originally assumed; see Kaldor 1940: 182.) The existence of a self-sustained cycle follows intuitively from the analysis of the vector fields in the different regions, which correspond roughly to stages of economic cycles.<fnref n="8" />

For region I, which expresses the dynamics of a recovery period, $K(t)$ is below the $\dot{K}=0$ curve and $\Pi(t)$ is below the $\dot{\Pi}=0$ curve; the decline in capital stock and its effect on profit (i.e. the effects of Cases 1 and 2) as well as other changes in economic conditions in a recessionary period will generate a positive rate of change of profit (since $I_{\Pi} > S_{\Pi}$ in region I, see also Case 1). Therefore, in region I we will find $\dot{\Pi} > 0$ and $\dot{K} > 0$.

The increase of profits and investments after a recessionary period will lead to rising $K(t)$, but through the effect of Cases 1 and 2 (i.e. the negative effect of growth of capital stock on profits) the growth rate of $\Pi$ will become negative. Thus, in region II, indicating a boom period, we have $\dot{\Pi} < 0$ and $\dot{K} > 0$. Hence, the arrows in Fig. 4, indicating the direction of the vector field of $\Pi$ and $K$, will start bending inward (see Case 2a which leads to $I_{\Pi} < S_{\Pi}$). With capital stock rising and $\dot{\Pi} < 0$ due to a magnitude of capital stock greater than its stationary value $K^*$, the capital stock must eventually decline (i.e.

<footnote n="7">⁷ The curve $\dot{\Pi}=0$ is downward or upward sloping when $S_{\Pi} > I_{\Pi}$ (or $S_{\Pi} < I_{\Pi}$). By assuming that for a certain region $\Pi_1 < \Pi^* < \Pi_2$, $\dot{\Pi}=0$ is upward sloping and $\dot{K}=0$ also has a positive but steeper slope, it follows that there is only one unique equilibrium point. For similar assumptions concerning an income/investment model, see Chang and Smyth (1971: 40).</footnote>

<footnote n="8">⁸ A proof using the Poincare-Bendixson theorem is given in Semmler (1986).</footnote>
through the effect of Case 2). We also have $\dot{\Pi}<0$ due to $I_{\Pi}<S_{\Pi}$ at the beginning of a downswing period (capital may be accumulated more as money capital than as real capital).

In region III, indicating a downswing period, through the influence of $\dot{\Pi}<0$ on $K(t)$, $K(t)$ also starts declining; thus $\dot{\Pi}<0$ and $\dot{K}<0$. Hence, for $\Pi(t)<\Pi^*$ and $K(t)<K^*$ the vector field is pointing inward. A decline of capital stock below $K^*$ in region IV, the recessionary period, however, eventually causes profits to rise. The recessionary period may slowly then turn into a recovery period, indicated by region I. This, of course, assumes again that eventually $\dot{\Pi}>0$. The investment of financial funds turns into investment in real capital, thus investment out of profit tends to become greater than savings out of profit. The recessionary period (with wage increase below productivity, low material and capital cost, low interest rates and easy access to credit as well as a decline in capital stock and thus rising profit expectation<fnref n="9" /> must have its impact on $\dot{\Pi}$, for otherwise the recessionary period will endure.

Therefore, under the economic conditions stated in Cases 1, 2a, and 2b the profit-investment dynamics creates its own cycles by which profit, investment and thus output and employment cannot exceed certain boundaries. The dynamic system is self-correcting and fluctuates within limits: for large enough $K(t)$ is $\dot{K}<0$ and for large enough $\Pi(t)$ is $\dot{\Pi}<0$. A similar argument holds for small enough $K(t)$ and $\Pi(t)$. Thus, whereas the system with Cases 1 and 2 becomes stable at its outer boundaries (indicated by the negative sign of $J_{11}+J_{22}$), it cannot converge towards equilibrium, since the equilibrium is unstable (indicated by the positive sign of $J_{11}+J_{22}$). Therefore, the dynamics of the system will result in cycles (see Semmler 1986). These self-sustained cycles, resulting from the profit-investment dynamics, can be regarded as close to classical dynamics and conceptions and the original Kalecki model and reflects to a certain extent also the dynamics of output, income, resource cost, price level, wage and bank deposit and interest rate dynamics of the Kondratieff long wave theory. Though for such a cycle on long time scale many structural changes may occur that could significantly change the mechanisms and economic relationship over the cycle.

<footnote n="9">⁹ In a monetary economy, a very important factor effecting the change of signs in $J_{11}$ seems to be the financial condition of firms and the banking system (see Minsky 1983).</footnote>
4. The Minsky Financially Driven Basic Cycle and Super-Cycle

Next we discuss a Minsky long cycle: a financially-based approach to the long wave theory. Long cycles have historically been interpreted as an interaction of real forces with cost and prices. Kondratieff cycles emphasize secular changes in production and prices; Kuznets cycles are associated with economic development and infrastructure accumulation; Schumpeterian cycles are the result of waves of technological innovation; while Goodwin cycles are based on changes in the functional distribution of income arising from changed bargaining power conditions in a period of high growth rates and Keynesian theories express demand factors.

The work of Hyman Minsky provides an explicitly financially driven theory of business cycles. Minsky's own writings were largely devoted to exposition of a short-run cycle and a very long-run analysis of stages of development of capitalism. The short-run analysis is illustrated in two articles (Minsky 1957, 1959) that present a financially driven model of the business cycle based on the multiplier-accelerator mechanism with floors and ceilings. A later formalization is the Delli Gatti *et al.*'s work (1994) in which the underlying dynamic mechanism is increasing leveraging of profit flows, which roughly captures Minsky's (1992a) hedge-speculative-Ponzi finance transition dynamic that is at the heart of his famous financial instability hypothesis. The very long-run analysis of stages of capitalism's development is illustrated in Minsky's (1992b) essay on 'Schumpeter and Finance'. These stages of development perspective have been further elaborated by Whalen (1999) and Wray (2009).

Recently, Palley (2010, 2011) has argued Minsky's (1992a) financial instability hypothesis also involves a theory of long cycles. This long cycle explains why financial capitalism is prone to periodic crises and it provides a financially grounded approach to understanding long wave economics.

A long cycles perspective provides a middle ground between short cycle analysis and stages of development analysis. Such a perspective was substantially developed by Minsky in a paper co-authored with Piero Ferri (Ferri and Minsky 1992). However, unfortunately, Minsky entirely omitted it in his essay (Minsky 1992a) summarizing his financial instability hypothesis, leaving the relation between the short and long cycle undeveloped.

Minsky's financial instability hypothesis maintains that capitalist financial systems have an inbuilt proclivity to financial instability that tends to emerge in periods of economic tranquility. Minsky's framework is one of evolutionary instability and it can be thought of as resting on two different cyclical processes (Palley 2010, 2011). The first is a short cycle and can be labeled the 'Minsky
basic cycle'. The second is a long cycle that can be labeled the 'Minsky super cycle'.

The Minsky basic cycle has been the dominant focus of interest among those (mostly Post Keynesians) who have sought to incorporate Minsky's ideas into macroeconomics and it provides an explanation of the standard business cycle. The basic cycle is driven by evolving patterns of financing arrangements and it captures the phenomenon of emerging financial fragility in business and household balance sheets. The cycle (see Fig. 5) begins with 'hedge finance' when borrowers' expected revenues are sufficient to repay interest and loan principal. It then passes on to 'speculative finance' when revenues only cover interest, and the cycle ends with 'Ponzi finance' when borrowers' revenues are insufficient to cover interest payments and they rely on capital gains to meet their obligations.

<figure><img src="image_22.png" /><figcaption>**Fig. 5.** Minsky financing practices</figcaption></figure>

The Minsky basic cycle embodies a psychologically based theory of the busi-
ness cycle. Agents become progressively more optimistic in tranquil periods,
which manifest itself in increasingly optimistic valuations of assets and associ-
ated actual and expected revenue streams, and willingness to take on increasing
risk in belief that the good times are here forever. This optimistic psychology
affects credit volume via the behavior of both borrowers and lenders – not just
one side of the market. That is critical because it means market discipline be-
comes progressively diminished. Leveraging is increased but the usual text
book scenario of corporate finance, whereby higher leverage results in higher
risk premia, is not visible in the cost of credit. Instead, credit remains cheap and
plentiful because of these psychological developments.

Our empirical analysis in Section 5.4 illustrates this credit dynamic for the
recent long financial cycle beginning in the 1990s. Initially, it was a real cycle
driven by information technology (IT). This IT bubble burst around 2000/2001.
However, expansion resumed, owing to Minsky's financial cycle of over-
optimism, high leverage, underestimation of risk, and expansion of new finan-
cial practices. The data show a high degree of leveraging during this period, an
optimistic view of profit expectations, low risk premia, low credit spreads, and
few credit constraints. Thus, contrary to corporate finance textbooks, the mar-
ket generated high leveraging with low risk premia.
This process of increasing optimism, rising credit expansion and low risk perception is evident in the tendency of business cycle expansions to foster talking about the ‘death of the business cycle’. In the USA, the 1990s experienced much ‘talk’ of a ‘new economy’ which was supposed to have killed the business cycle by inaugurating a period of permanently accelerated productivity growth. That was followed, in the 2000s, by ‘talk’ of the ‘Great Moderation’ which claimed central banks had tamed the business cycle through improved monetary policy based on improved theoretical understanding of the economy. It is precisely this ‘talk’ which provides prima facie evidence of the operation of the basic Minsky cycle.

Moreover, not only does the increasing optimism driving the basic cycle afflict borrowers and lenders, it also afflicts regulators and policymakers. That means market discipline is weakened both internally (weakened lender discipline) and externally (weakened regulator and policymaker discipline). For instance, Federal Reserve Chairman Ben Bernanke (2004) openly declared himself a believer in the Great Moderation hypothesis.

The basic Minsky cycle is present in every business cycle and explains the observed tendency toward increased leverage and increased balance sheet fragility over the course of standard business cycles. However, it is complemented by the Minsky super cycle, that works over a longer time scale of several business cycles. This long-cycle rests on a process that transforms business institutions, decision-making conventions, and the structures of market governance including regulation. Minsky (Ferri and Minsky 1992) labeled these structures ‘thwarting institutions’ because they are critical to holding at bay the intrinsic instability of capitalist economies. The process of erosion and transformation of thwarting institutions takes several basic cycles, creating a long phase cycle relative to the basic cycle.

The basic cycle and long-cycle operate simultaneously so that the process of institutional erosion and transformation continues during each basic cycle. However, the economy only undergoes a full-blown financial crisis that threatens its survivability when the long-cycle has had time to erode the economy's thwarting institutions. This explains why full-scale financial crises are relatively rare. In-between these crises, the economy experiences more limited financial boom-bust cycles. Once the economy is in a full-scale crisis, it enters a period of renewal characterized by thwarting institutions, with new laws and regulations established and governing institutions empowered. That happened during the Great Depression of the 1930s and it is happening again, following the financial crisis of 2008.

Analytically, the Minsky long-cycle can be thought of as allowing more and more financial risk into the system via the twin developments of ‘regulato-
ry relaxation' and 'increased risk taking'. These developments increase both the supply of and demand for risk.

The process of regulatory relaxation has three dimensions. One dimension is regulatory capture whereby the institutions intended to regulate and reduce excessive risk-taking are captured and weakened. Over the past twenty-five years, this process has been evident in Wall Street's stepped up lobbying efforts and the establishment of a revolving door between Wall Street and regulatory agencies such as the Securities and Exchange Commission, the Federal Reserve, and the Treasury Department. A second dimension is regulatory relapse. Regulators are members of and participants in society, and like investors they are also subject to memory loss and reinterpretation of history. Consequently, they too forget the lessons of the past and buy into rhetoric regarding the death of the business cycle. The result is willingness to weaken regulation on grounds that things are changed and regulation is no longer needed. These actions are supported by ideological developments that justify such actions. That is where economists have been influential through their theories about the 'Great Moderation' and the viability of self-regulation. A third dimension is regulatory escape whereby the supply of risk is increased through financial innovation. Thus, innovation generates new financial products and practices that escape the regulatory net because they did not exist when current regulations were written and are therefore not covered.

The processes of regulatory capture, regulatory relaxation, and regulatory escape are accompanied by increased risk taken by borrowers. First, financial innovation provides new products that allow investors to take more risky financial positions and borrowers to borrow more. Recent examples of this include home equity loans and mortgages that are structured with initial low 'teaser' interest rates that later jump to a higher rate. Second, market participants are also subject to gradual memory loss that increases their willingness to take on risk. Thus, the passage of time contributes to forgetting of earlier financial crisis, which fosters new willingness to take on risk. The 1930s generation was cautious about buying stock in light of the experiences of the financial crash of 1929 and the Great Depression, but baby boomers became keen stock investors. The Depression generation's reluctance to buy stock explains the emergence of the equity premium, while the baby boomer's love affair with stocks explains its gradual disappearance.

Changing taste for risk is also evident in cultural developments. One example of this is the development of the 'greed is good' culture epitomized by the fictional character Gordon Gecko in the movie *Wall Street*. Other examples are the emergence of investing as a form of entertainment and changed attitudes toward home ownership. Thus, home ownership became seen as an investment opportunity as much as providing a place to live.
Importantly, these developments concerning attitudes to risk and memory loss also affect all sides of the market so that market discipline becomes an ineffective protection against excessive risk-taking. Borrowers, lenders, and regulators go into the crisis arm-in-arm. Lastly, there can also be an international dimension to the Minsky long cycle. That is because ideas and attitudes easily travel across borders. For instance, the period 1980–2008 was a period that was dominated intellectually by market fundamentalism, which promoted deregulation on a global basis. University economics departments and business schools pedaled a common economic philosophy that was adopted by business participants and regulators worldwide. Organizations like the International Monetary Fund and World Bank also pushed these ideas. As a result, developments associated with the Minsky long cycle operated on a global basis giving rise to common financial trends across countries that multiplied the overall effect.

The twin cycle explanation of Minsky's financial instability hypothesis incorporates institutional change, evolutionary dynamics, and the forces of human self-interest and fallibility. Empirically, it appears to comport well with developments between 1981 and 2008. During this period there were three basic cycles (1981–1990, 1991–2001, and 2002–2008). Each of those cycles was marked by developments that had borrowers and lenders taking on increasingly more financial risk in a manner consistent with Minsky's 'hedge to speculative to Ponzi' finance dynamic. The period as a whole was marked by erosion of thwarting institutions via continuous financial innovation, financial deregulation, regulatory capture, and changed investor attitudes to risk, all of which is consistent with the idea of the Minsky long cycle.

The Minsky long cycle enriches long wave theory. In addition to adding financial factors, the Minsky cycle has different implications for the pattern of long waves compared to conventional long wave theory. Conventional theories see a separate long wave on top of which are imposed shorter waves. In contrast, the Minsky long cycle operates over a long time scale to gradually and persistently change the character of the short cycle (i.e. the Minsky basic cycle) until a crisis is generated.

This pattern of evolution is illustrated in Fig. 6, which shows a series of basic cycles characterized by evolving greater amplitude. This evolution is driven by symmetric weakening of the thwarting institutions, represented by the widening and thinning of the bands that determine the system's floors and ceilings. Eventually the thwarting institutions become sufficiently weakened and financial excess becomes sufficiently deep that the economy experiences a cyclical downturn that is uncontrollable and becomes a crisis.
<figure><img src="image_23.png" /><figcaption>**Fig. 6.** De-trended GDP – symmetric fluctuations</figcaption></figure>

Fig. 6 shows the case where economy undergoes basic cycles of symmetrically widening amplitude prior to the crisis. However, there is no requirement for this. Another possibility is that cycles have asymmetrically changing amplitude. This alternative case is shown in Fig. 7 which represents Minsky's endogenous financial instability hypothesis as having an upward bias. In this case thwarting institution ceilings are less durable than the floors, giving rise to stronger and longer booms before crisis eventually hits. A third possibility is a long-cycle of constant amplitude and symmetric gradual weakening of thwarting institutions that eventually ends with a financial crisis. This richness of dynamic possibilities speaks to both the theoretical generality and historical specificity of Minsky's analytical perspective. The dynamics of the process are general but how the process actually plays out is historically and institutionally specific.

<figure><img src="image_24.png" /><figcaption>**Fig. 7.** De-trended GDP – asymmetric fluctuations</figcaption></figure>
Analytically, the full Minsky system can be thought of as a combination of three different approaches to the business cycle. The dynamic behind the Minsky basic cycle is a finance-driven version of Samuelson's (1939) multiplier-accelerator formulation of the business cycle (see Section 3.4). This dynamic is essentially the same as that contained in new Keynesian financial accelerator business cycle models (Bernanke et al. 1996, 1999; Kiyotaki and Moore 1997). Thwarting institution floors and ceilings link Minsky's thinking to Hicks' (1950) construction of the trade cycle. The thwarting institutions are explicitly present in the floors and ceilings, but they can also be present in the coefficients of the multiplier-accelerator model, which determine the responsiveness of economic activity to changes in such variables as expectations and asset prices. Shifting and weakening of floors and ceilings and changing of the behavioral coefficients then capture the long-cycle aspect. This connects Minsky to long wave theory, with the role of financial innovation linking to Schumpeter's (1939) construction of an innovation cycle.

Despite these commonalities with the existing cycle theory, formally modeling Minsky's financial instability hypothesis is difficult and can be potentially misleading. Though models can add to understanding, they can also mislead and subtract.

One problem is that formal modeling imposes too deterministic phase length on what is in reality a historically idiosyncratic process. Adding stochastic disturbances jostles the process but does not adequately capture its idiosyncratic character, which Heraclitus described as 'No man ever steps in the same river twice'. A second modeling problem is that the timing of real world financial disruptions can appear almost accidental. This makes it seem as if the crisis is accidental when it is, in fact, rooted systematically in prior structural developments, which had generated vulnerabilities.

A third problem is the financial instability hypothesis is a quintessentially non-equilibrium phenomenon in which the economic process is characterized by the gradual inevitable evolution of instability that agents are blind too, even though it is inherent in the structure and patterns of behavior – and agents may even know this intellectually.

This problematic of non-equilibrium is explicitly raised by Minsky (1992b: 104) in his 'Schumpeter and Finance' essay, 'No doctrine, no vision that reduces economics to the study of equilibrium seeking and sustaining systems can have long-lasting relevance. The message of Schumpeter is that history does not lead to an end of history'.
# 5. Empirical Evaluation of the Cycle Theories of Different Time Scales

Next we discuss some methodology used in the extraction of cycles from data. In the literature there are three typical methods to empirically study cycles. These are, first, spectral analysis (Fourier's theorem), second, filtering methods (HP - filter, BP - filter and penalized splines), and, third, wavelet theory.<fnref n="10" /> Since the advantages and disadvantages of the second one have been discussed widely, we will here more extensively focus on the first and the third methods.

## 5.1. A general approach of extracting cycles from data: Fourier's theorem

Generally speaking, a function is termed periodic if it exhibits the following properties:

$$f(x) = f(x + T).$$

In this case, T is known as the 'period' and, if x is time, then is the frequency. In the physical world there are many phenomena that exhibit periodic behavior, for example, pendulums, springs, and waves, to name just a few. Mathematical examples also abound.

It is interesting to consider what happens when periodic functions are added together. When several periodic functions are added together, some parts reinforce each other (when both are positive) and other parts cancel each other (when the functions are of opposite sign). But the interactions may be more or less complex and form surprising shapes, for example, a square wave.

From the physical world, we can readily observe certain properties of periodic phenomenon, for example, cancellation, reinforcement, damping, etc. When one moves away from two sound sources emitting tones of different frequencies, one hears, alternately, louder and softer tones.

It was observations of this kind that motivated Joseph Fourier, in the early 1800s to speculate that virtually any function could be formed by adding together the correct combination of periodic functions. In his famous analysis, Fourier defined a sequence of trigonometric values as follows: for any function, f, which is integrable from -π to π

$$a_n = \frac{1}{\pi} \int_{-\pi}^{\pi} f(x) \cos(nx) dx$$

$$b_n = \frac{1}{\pi} \int_{-\pi}^{\pi} f(x) \sin(nx) dx.$$

<footnote n="10">¹⁰ On the usefulness of wavelets to study cycles at different time scales see Gallegati, Ramsey and Semmler (2011).</footnote>