In a market economy there is no signal to tell the steel industry, for instance, how much steel the world really demands on a long-term basis. There is only one way to find out -- produce more steel and see if it sells. But that takes a long time. Each company has to make a decision to expand, get financing, build a plant, start producing, implement a marketing strategy, and sort out the confusing short-term signals from strikes, trade breakdowns, business cycles, and all the other noise of the economy.
All companies are expanding together, and they are fighting for market share, so each has an incentive to out-expand the others. The result is significant overbuilding, industry-wide, economy-wide, world-wide. It takes decades for the economy to overbuild itself, then to get the message that it has done so, then to believe that message. It takes another decade or two to cut back factories and workforces to the level of production the economy really needs. And since no one knows what that level is, the cutback, like the building phase, goes too far. When that finally becomes obvious, the next upturn of the cycle begins.
The Kondratief cycle is caused by a great lumbering economy, which takes decades to change course, seeking by trial and error for an ever-changing equilibrium point. The government doesn't cause the cycle's downturn, though it usually gets the blame; it also doesn't create the upturn for which it likes to take credit. Even if the economy consisted of nothing but well-run companies making impeccably rational decisions, the cycle would exist. The presence of greedy companies making foolish decisions makes it worse, as does a government trying to spur investment at a time when investment has already gone too far.
Speculative booms at the beginning of the downturn seem to be inherent. There is no real expansion to put money into -- no need for more oil wells or electric plants or steel mills when existing ones are standing idle. So excess money stops going into building the economy and starts going into conspicuous consumption and wild speculation. The stock market loosens its tethers to the real economy and starts soaring, blown up by money with nowhere else to go.
Monday, January 4, 2010
The Kondratieff Cycle
article from the Donella Meadows archive has a more comprehensive explanation of the causes of the Kondratieff Cycle. According this this account, there is a cause, although it's systemic, and thus there should still be ways to avoid it. There just might not be much the government itself can do in terms of monetary policy.