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statistical methods were wrong; that he’d misunderstood the causes of the waves; and that the political conclusions were unacceptable.

First, Kondratieff’s main opponent, economist Dmitry Oparin, argued that the method he had used to smooth out shorter cycles was false, and had distorted the results. In addition, long-term data on the rise and fall of savings did not support Kondratieff’s theory.

Then the seminar turned to the issue of cause-and-effect. The economist V. E. Bogdanov argued that, instead of the rhythm of the long cycles being dictated by capital investment, it must be dictated by innovation. (This makes him the first person to reduce the long-cycle theory to a history of technological innovation, but not the last.) Bogdanov, however, raised a valid point. It was not logical, he argued, that the cost of building big things such as canals, railways or steel mills should dictate the rhythm of the world economy over fifty years. The objection to a capital-driven cycle led him to propose a tech-driven one, and on this basis he then advanced a more rigorous version of Trotsky’s ‘external shock’ argument.

If long waves did exist, they must, according to Bogdanov, be caused by the ‘random intersection of two essentially causal series’: the internal dynamics of capitalism and those of the external, non-capitalist environment.¹³ For example, the crisis of non-capitalist societies such as China and the Ottoman Empire in the late nineteenth century created new openings for Western capital; the agrarian backwardness of a country like Russia shaped the growth of its capitalist sector, forcing it to seek funds from France and Britain.

Bogdanov had a point. Kondratieff’s theory assumed that the rhythms of capitalism exert a one-way gravitational pull on the non-capitalist world. In fact, the two constantly interact, and any synthetic version of Kondratieff’s theory would have to take account of that.

Towards the end of the seminar, a long-time Communist Party hack, the agrarian economist Miron Nachimson, weighed in on the political implications of long-wave theory. The obsession with long waves, he said, was ideological. Its purpose was to justify crisis as a normal state of affairs; to say that ‘we are dealing with an essentially perpetual movement of

capitalism, first upwards and then downwards, and that it is not appropriate to dream of social revolution yet’. Long cycles, Nachimson realized, would pose a big theoretical challenge to Bolshevism, whose premise was capitalism’s imminent doom.¹⁴

The debate gets close to the heart of the problem with Kondratieff’s work:

1. He saw the dynamics of capital investment as the primary cause of fifty-year crises. Yet his account of these dynamics was not sophisticated.

1. He assumed the non-capitalist world was the passive bystander to capitalist wave patterns when it was not.

1. At this point, though he saw each wave as a more complicated version of the next, he failed to situate the role of long waves within the ultimate destiny of capitalism.

And there was another, related, problem with Kondratieff’s work: the data problem. It has pursued long-cycle theory all the way through from the era of the slide rule to that of the Linux box. We must consider it here because the data problem has acted like a ‘no entry’ sign to Kondratieff’s work for a generation.

THE CHALLENGE OF RANDOM NUMBERS

It’s a mark of Kondratieff’s ambition that the research group he ran employed one of the great mathematicians of the twentieth century, Eugen Slutsky. And while Kondratieff wrestled with real data, Slutsky was engaged in a project of his own, using random numbers.

Slutsky showed that, by applying a moving average to random data, you can easily generate wave-patterns that look like real economic facts. To prove the point, he produced a wave-pattern from random lottery numbers and superimposed it on to a chart of British growth statistics: when the one was squashed down on to the other, the shapes looked remarkably similar. In statistics, this is known as the ‘Yule-Slutsky Effect’, and is now understood to mean that the very act of smoothing out data generates spurious results. However, Slutsky believed the opposite. He believed that the emergence of regular wave-patterns from random events was real¹⁵ – not just in economics but in nature:

It seems probable, that an especially prominent role is played in nature by the process of moving summation with weights of one kind or another, where the magnitude of each consequence is determined by the influence, not of one, but of a number of the preceding causes, as for instance, the size of a crop is determined, not by one day’s rainfall, but by many .¹⁶

In other words, raindrops fall randomly into a square kilometre, but at the end of the season you have a crop yield that you can measure against last year’s. The cumulative impact of random events can produce regular, cyclical patterns.

By the time Slutsky wrote this, Kondratieff was becoming dangerous to know. In 1927 conflicts within the Soviet bureaucracy erupted into expulsions and street fighting. Historian Judy Klein points out that it would have been easy for Slutsky to disown Kondratieff, who was under suspicion as an avowed market socialist. Instead, he supported Kondratieff’s basic theory.¹⁷

In fact, Slutsky’s experiment added a crucial insight to long-wave theory. He noted that waves generated by filtering random data do not repeat for ever. As he computed them over time, the patterns would suddenly break down, an event he dubbed ‘regime change’: ‘After a more or less considerable number of periods every regime becomes disarranged, the transition to another regime occurring sometimes rather gradually, sometimes more or less abruptly, around certain critical points.’¹⁸

To anybody interested in the long-range patterns in economics, the challenge posed by Slutsky’s observation is clear. First, long waves may not be traceable to a tangible cause – whether it be innovation, external shocks or the rhythms of capital investment. They may just be a regular feature of any complex economic system over time. Secondly, whatever the cause, we should expect regular wave patterns to break down and reset themselves.

Slutsky himself believed this pattern of sudden breakdown could operate at two levels: inside the ten-year business cycle and across the fifty-year long cycles. But his work raises a third possibility. If industrial capitalism has produced a sequence of fifty-year waves over a period of more than 200 years, then maybe at some point this too breaks down, inaugurating a regime change that leads to a whole different pattern.

In the past twenty years there has been a stats-driven backlash against Kondratieff. Various modern studies claim to show that, if better smoothing-out techniques are used, Kondratieff’s waves simply disappear, or become patchy. Others correctly point out that the long-term price fluctuations observed within the first three waves disappear once a sophisticated global marketplace emerges after 1945.¹⁹

However, given the massive amount of extra data and better methods that we possess, it should be possible to detect Kondratieff waves in the global growth statistics.

In 2010, the Russian researchers Korotayev and Tsirel did just that.²⁰ They used a technique called ‘frequency-analysis’ to show convincingly that there are powerful fifty-year pulses in the GDP data. For the post-1945 period, they show that even the raw data contains clear evidence of an up phase after 1945 and a prolonged down phase beginning in 1973.

In fact, using the IMF’s definition of recession (six months during which global growth dips below 3 per cent), they calculate that, while there were no recessions for the period 1945–73, there have been six recessions since 1973. They are confident that the Kondratieff wave is present in world GDP figures after 1870, and observable in Western economies before that.

There is more evidence for the existence of long cycles in the work of Cesare Marchetti, an Italian physicist who analysed historical data on energy consumption and infrastructure projects. The result, he concluded in 1986, ‘very clearly reveals cyclic or pulsed behaviour’ in many areas of economic life, with cycles lasting roughly fifty-five years.²¹

Marchetti rejects the idea that these are waves, or primarily economic – preferring to call them long-term ‘pulses’ in social behaviour. But, he says, signals that are unclear in economics ‘become crystal clear when the “physicals” are analysed’.

Marchetti says that the clearest evidence for long cycles lies in the pattern of investment in physical communication ‘grids’. Taking canals, rail, paved roads and airline networks as his examples, he showed how the build-out of each peaked roughly fifty years after the previous technology had done so. On this basis, he predicted that a new type of grid should

appear around the year 2000. Though writing a mere fourteen years before the millennium he could not guess what it would be. Today we have the answer: the information network.

There is, then, physical and economic evidence that a fifty-year pattern exists. The wave shapes generated by such a pattern, or pulse, are of secondary importance to the fact of the pattern’s existence. To an economist they indicate deeper processes at work – just as for the astrophysicist a black hole can be detected only by the movement of matter around it.

And here’s why it’s important. Kondratieff gave us a way of understanding mutations within capitalism. Left-wing economics had been looking for a process that led only to breakdown. Kondratieff showed how the threat of breakdown usually leads to adaptation and survival.

The problem with Kondratieff remains his account of the economic force that drives the cycle; and how this relates to the ultimate destiny and longevity of the system. It is this we have to fix.

SAVING KONDRATIEFF

I once gave a lecture on Kondratieff to 200 economics students at a British university. They had not a clue who, or what, I was talking about. ‘Your mistake,’ said an academic to me after the talk, ‘was to mix micro- and macro-economics. They are just not used to that.’ Another lecturer, whose job it was to teach economic history, had never heard of Kondratieff.

But they’d heard of Josef Schumpeter. In Business Cycles (1939), Schumpeter argued that capitalism is shaped by interlocking wave-cycles, ranging from a short-wave three- to five-year cycle produced by the buildup of stocks inside businesses, through to the fifty-year waves Kondratieff had observed.

In a tortuous logical exercise, Schumpeter ruled out the credit cycle, external shocks, changes in taste and what he termed ‘growth’ as causes of the fifty-year cycle. Instead he argued: ‘Innovation is the outstanding fact in the economic history of capitalist society and … is largely responsible for most of what we would at first sight attribute to other factors.’²² He then supplied a detailed history of each of Kondratieff’s waves as an innovation cycle: the first is triggered by the invention of the factory system in the 1780s, the second driven by railways from 1842, the third by a cluster of innovations we now call the Second Industrial Revolution, in the 1880s and 90s.²³

Schumpeter took Kondratieff’s wave-theory and made it highly attractive to capitalists: in his version the entrepreneur and the innovator drive each new cycle. Conversely, periods of breakdown are the result of innovation becoming exhausted, and capital being hoarded in the finance system. For Schumpeter, crisis is a necessary feature of the capitalist system, in that it promotes the ‘creative destruction’ of old and inefficient models.

And though Kondratieff was largely forgotten, Schumpeter’s work has lived on as a kind of religious insight: a techno-determinist account of boom and bust that mainstream economists can turn to at times of crisis, when their normative beliefs fail.

The most prominent modern follower of Schumpeter, Carlota Perez, has used the tech-driven theory to urge policymakers to give state support to info-tech, biotech and green energy – with the promise of a new ‘golden age’ to follow sometime in the 2020s, once the next wave takes off.

Perez added some refinements to wave-theory that are useful for understanding the present phase. The most important is her idea of the ‘techno-economic paradigm’. It is, she argues, not enough for there to be a cluster of innovations at the start of each wave-cycle, nor for these innovations merely to interact with each other. A ‘new common sense, guiding the diffusion of each revolution’ has to emerge, a recognizable ‘logic of the new’ that enables the replacement of one set of technologies and business practices with another.

But by dating the waves from the invention of key technologies, not their rollout, Perez departs both from Kondratieff and Schumpeter. And she proposes a different causal sequence: innovators invent, financiers get excited and speculate, it all ends in tears and the state moves in, regularizing the situation so that a golden age of high growth and productivity can occur.

Perez’s supporters say this date sequence is just a repackaging of Schumpeter, with the start-point of each wave dragged twenty-five years earlier. But it is more than that. For her, the primary focus of long-wave theory is ‘the irruption and gradual assimilation of each technological revolution’, not the upswings and downswings in GDP that were the focus for Kondratieff.²⁴

As a result, she is left with all kinds of consistency problems. Why is the fourth wave (1909–71) nearly seventy years long? Because the policy response to the 1930s Depression did not bear fruit until 1945, she answers. Why does the clear sequence ‘innovation, bubble, bust’ happen twice between 1990 and 2008? Again, she answers, because of policy mistakes.

Perez’s version of wave-theory stresses the response of governments at crisis points, but puts very little emphasis on the struggles between classes or the distribution of wealth. In an almost pure inversion of Kondratieff, the economics are driven by technology, and technology is driven by governments.

The attraction of the tech-driven wave-theory is that the evidence for it is tangible: clusters of innovation do take place before the start of long waves, and their synergies can be documented. It is materialist, in that it sees revolutions and changes in social attitudes as the product of something deeper. New technologies bring to power what Schumpeter called ‘new men’ – who in turn bring with them their own tastes and norms of consumption.

But Kondratieff was right to reject technology as the driver of big change. It is adequate for describing the start of fifty-year cycles but does not fully explain why the clustering of inventions takes place, nor why a new social paradigm emerges – nor indeed why the wave ends.

If we stick with Kondratieff, and extend his sequence of long cycles to the present, drawing on Marchetti’s ‘physicals’, and much better data than that which was available in the 1920s, we can draw the following outline.

Industrial capitalism has gone through four long cycles, leading to a fifth whose takeoff has stalled:

1. 1790–1848: The first long cycle is discernible in the English, French and US data. The factory system, steam-powered machinery and canals are the basis of the new paradigm. The turning point is the depression of the late 1820s. The 1848–51 revolutionary crisis in Europe, mirrored by the Mexican War and Missouri compromise in the USA, forms a clear punctuation point.

1. 1848–mid-1890s: The second long cycle is tangible across the developed world and, by the end of it, the global economy. Railways, the telegraph, ocean-going steamers, stable currencies and machine-produced machinery set the paradigm. The wave peaks in the mid-1870s, with financial crisis in the USA and Europe leading to the Long Depression (1873–96). During the 1880s and 90s, new technologies are developed in response to economic and social crises, coming together at the start of the third cycle.

1. 1890s–1945: In the third cycle heavy industry, electrical engineering, the telephone, scientific management and mass production are the key technologies. The break occurs at the end of the First World War; the 1930s Depression, followed by the destruction of capital during the Second World War terminate the downswing.

1. Late-1940s–2008: In the fourth long cycle transistors, synthetic materials, mass consumer goods, factory automation, nuclear power and automatic calculation create the paradigm – producing the longest economic boom in history. The peak could not be clearer: the oil shock of October 1973, after which a long period of instability takes place, but no major depression.

1. In the late–1990s, overlapping with the end of the previous wave, the basic elements of the fifth long cycle appear. It is driven by network technology, mobile communications, a truly global marketplace and information goods. But it has stalled. And the reason it has stalled has something to do with neoliberalism and something to do with the technology itself.

This is just an outline: a list of start- and end-points, technology clusters and significant crises. To go any further, we need to understand the dynamics of capital accumulation better than Kondratieff did, and in ways the techno-theorists barely touch. We need not only to understand that capitalism mutates but also to understand what within the economy drives the mutations, and what might limit them.

Kondratieff gave us a way to understand what systems theorists call the ‘meso’ level in economics: something between an abstract model of the system and its concrete history. He left us a better way to understand its mutations than the theories advanced by twentieth century followers of Marx, who focused on external factors and doom scenarios.

We are not done with Kondratieff yet. But to complete what he tried to do we have to dive into a problem that has obsessed economics for more than a century: what causes crisis.

Was Marx Right?

In 2008 something bizarre happened to Karl Marx: ‘He’s Back!’ shouted a headline in the London Times. The German publishers of Marx’s Capital reported a 300 per cent increase in sales after a government minister declared his ideas ‘not so bad’. Meanwhile in Japan, a manga version of Capital went viral. In France Nicolas Sarkozy was photographed leafing through the French edition of Marx’s masterpiece.

The catalyst for Marx-mania was, of course, the financial crisis. Capitalism was collapsing. Marx had predicted it so he should be deemed right, or reappraised, or at least allowed some posthumous schadenfreude.

But there’s a problem. Marxism is both a theory of history and a theory of crisis. As a theory of history it is superb: armed with an understanding of class, power and technology, we can predict the actions of powerful men before they know what they’re going to do themselves. But as a theory of crisis, Marxism is flawed. If we are going to utilize Marx in the present situation, we need to understand his limitations – and the theoretical mess his followers got into as they tried to overcome those limitations.

These are not dead questions. The more Marx’s bearded face pops up in the panicked pages of mainstream newspapers, and the deeper the social catastrophe inflicted on the youth of tomorrow, the greater the chance becomes that they will try to repeat the failed experiments of Marx’s followers: Bolshevism and the forced-march abolition of the market. The premise of this book – that there is a different route beyond capitalism, and different means to achieve it – demands we deal with the Marxist theory of crisis here.

3

So what’s the problem?

Marx understood that capitalism is an unstable, fragile and complex system. He recognized that class gives different agents in the market unequal power. But Marxism underestimated capitalism’s capacity to adapt.

The man himself had witnessed only one global adaptation: the upswing of the second long wave in the two decades following the 1848 revolution. Tragically, by the time his followers were in the middle of the third long wave, Marxist economics had stopped evolving as an effective theory of systems.

In the end, three general features of complex adaptive systems were to challenge Marxism. First, such systems tend to be ‘open’ – that is, they thrive on contact with the world outside. Second, they respond to challenges by innovating and transforming in unpredictable ways, with each innovation producing an intricate new set of opportunities for growth and expansion within the system. Third, they generate ‘emergent’ phenomena, which can only be studied at a higher level than the workings of the system itself. For example, the behaviour of an ant colony might be a product of the ant’s genetic code, but it has to be studied as behaviour, not genetics.

Marxism was, in a way, the most systematic study ever attempted of emergent phenomena, but was constantly confused as to their nature. Only in the 1970s, when the idea of ‘relative autonomy’ arrived in Marxist economics, did the discipline begin to understand that not all layers of reality are a simple expression of the layers beneath them.

In this chapter, I will show how for the past 100 years capitalism’s adaptive nature has confused not only Marxism but the wider left. Yet the original insight of Marx’s Capital, which describes how market mechanisms lead to breakdown, remains not only valid but essential for understanding the big adaptations.

Marx’s theory of crisis, when properly understood, provides a better explanation than Kondratieff for what drives the major mutations – and why they might stop occurring. But the Marx we are concerned with here is a twenty-first-century imagination trapped in a nineteenth-century brain.