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Waves of Innovation

“Konratiev Waves” Help Explain What Carries Our Economy Forward over Generations

Kondratiev Waves, as Postulated by Joseph Schumpeter. SOURCE: The Economist, 20 Feb 1999. Kondratiev Waves, as Postulated by Joseph Schumpeter.

Innovation is a serious matter. It is the key to American prosperity, security, better jobs, and better health, as well as responses to coming challenges like energy security and global warming. But it’s not as simple as the president’s State of the Union address, or his Strategy for American Innovation would suggest, according to a recent study of economic history. The authors argue there are historic patterns in innovation and industry that can inform science policy in the 21st century.

In As Time Goes By: From the Industrial Revolutions to the Information Revolution, a seminal work in cliometrics—the study of economic history—Chris Freeman and Francisco Louçã use historical data on technological advances, economic structure, salaries, and political unrest to derive a clear pattern linking innovation to the performance of the economy. These generational cycles of invention, expansion, and depression are called “Kondratiev waves” in honor of Nikolai Kondratiev, the Russian economist who first postulated their existence.

Cliometrics was founded in 1960 as a response to the simplistic models of neoclassical economics. By combining historical facts and economic theories, cliometrics seeks to create a fuller picture of economic growth than either discipline alone can provide. Combining the quantitative field of economics with the qualitative study of history leads to conclusions that may not always fit squarely under the methods of either discipline, but nonetheless the exercise tosses up some intriguing conclusions. Here are several of them.

Kondratiev waves carry transformational technologies into the market and create new industries

When we think of the industrial revolution, we think of steam engines and factories, but in fact, this was only one of many industrial revolutions. Freemand and Louçã show the correlation between repeated technological revolutions and the waves of economic growth that carry them. Each of these Kondratiev waves is driven by a “carrier-branch technology,” defined as a new way of doing things so much more efficiently than the old ways that it reshapes every aspect of the economy. The five carrier-branch technologies that Freeman and Louçã identify are:

  • Water-powered machinery
  • Steam power
  • Electrification
  • The internal combustion engine
  • Computerization

Carrier-branch technologies have a core input, for example coal, or iron, or oil, or computer chips, and give rise to a whole secondary economy of supporting industries and social institutions. And each Kondratiev wave follows a similar economic pattern—the initial invention creates a period of boom, with rising material wealth, but as the technology reaches a point of saturation, the economy enters a downswing or “crisis of structural readjustment.” These upswings and downswings in the past lasted from 20 years to 30 years each, leading to a total cycle time of around 50 years.

Let’s use the familiar example of steam power. Practical steam engines were invented in 1712 by the English engineer Thomas Newcomen, but it took nearly a century for this invention to find widespread adoption. Invention is just the first step in technology lifecycle that drives a Kondratiev wave. Newcomen’s early engine was heavy and inefficient, and was used only for pumping water out of mines.

By the early 1800s, advances in metallurgy and cylinder boring allowed the creation of efficient, high-pressure steam engines. In 1829, George Stephenson demonstrated the first practical steam locomotive, kicking off a two-decade long railroad-building boom. Better mining techniques lowered the cost of iron and coal, while railroad barons made immense fortunes and businessmen everywhere benefited from the lowered cost of transport. Tourism, hotels, restaurants, and national markets all owe their origins to the low cost and high speed of rail travel. The demands of financing and administering the new railroads led to new forms of social organization such as the joint stock corporation, dedicated administrators, and new educational institutions such as the Harvard Business School.

But nothing lasts forever, and by the 1870s, all the profitable rail lines had already been created. Competitive pressures and price wars between railroad companies, along with wartime inflation from the American Civil War and Franco-Prussian War, initiated a worldwide long depression. In the United States, prices of basic commodities like grain, cotton, and iron fell by over 50 percent, devastating the earnings of farmers and industrial laborers. Unemployment reached 25 percent in some states, while businesses defaulted on over a billion dollars of loans and multiple banks collapsed. Social unrest exploded with a wave of strikes, including the Great Railroad Strike of 1877. The corrupt machine politics of the time lead to a popular disenchantment with both major parties, laying the foundation for the first progressive movement. The world economy did not recover until well into the 1890s, buoyed by new industries based around electrical power.

Similar patterns can be seen with the other Kondratiev waves, but I would like to focus on the one that we are most familiar with, having lived through it. Computing and information technology have driven unprecedented productivity gains in the U.S. economy and underpinned much of recent growth. The dawn of the computer era can’t be precisely pinned down; good arguments can be made for the creation of ENIAC in 1946 or the integrated circuit in 1959.

But I prefer the mid-1960s, with the first standardized commercial computers, such as the IBM S/360 and DEC PDP-8. Like the steam engine it took a little while for society to recognize the value of a new transformational technology. The astounding growth in Silicon Valley since then has driven innovation around these machines, making them cheaper, more reliable, and more user friendly. The presence of computers, and especially networked computers, changed every aspect of business over the past 45 years, leading to whole new markets and products that could scarcely be dreamed of before, as well as socially transformative access to information and knowledge through computer networks.

The next Kondratiev wave?

Computers are rapidly approaching the point of saturation in many markets. Microprocessors are in every imaginable device, and there are over 4.6 billion cell phone users on the planet. Computer processor and memory manufacturing is a cut-throat business conducted on the slimmest of margins, and while technology keeps improving, at this point, much so-called “innovation” has become about advertising and sales, not fundamental technological breakthroughs. The dot-com bubble and recent financial crisis, which was made possible by complex computerized financial instruments, are two signs that the Kondratiev wave based off of computers may be reaching its peak, and we are now in a period of structural adjustment.

Kondratiev wave theory would posit that the Great Recession cannot be blamed only on complex derivatives, bad mortgages, or greedy bankers, or government deficits, although these are all contributing factors. Rather these are signs that we have reached the limits of our present technology. Escaping it will require a new carrier-branch technology, with all that that entails. I can’t tell you what that technology will be renewable energy, an industrial revolution founded on nanotechnology and synthetic biology, completely recyclable zero-waste products that turn trash into gold, or advances in robotics and artificial intelligence. What is certain, however, is that it will be based on a fundamental breakthrough in science and technology.

The federal government must play a crucial role in that breakthrough. Look to the historical record: The steam power revolution did not begin in England by accident; rather England held an advantage in the core inputs: iron and coal, stemming from the Crown’s casting of thousands of cannons for the Napoleonic Wars. With peace and the loss of their primary market, English ironmongers turned their ingenuity to new products and techniques. Early railroads required an Act of Parliament before they could be built, demanding the active involvement of government, and eventually changes in law that made it easy to incorporate.

In America, the Federal government played a central role in the computer revolution. The SAGE air defense network consumed approximately half of the nation’s programmers and computers in the 1950s, creating an immense base of institutional knowledge that kickstarted the computer revolution. The Internet began as a military project in the Defense Advanced Research Projects Agency, and only later found civilian applications. The Federal government has played a valuable role as the first customer for technologies too risky for industry to invest in.

Beyond the role of a customer, the Federal government can also build the foundations for the sixth Kondratiev wave, by supporting science and engineering and encouraging investment in new technologies. At the heart of America’s lead in science and technology is the human capital of its scientists and engineers. This human capital must be maintained and reinforced, through science, technology, engineering, and math, or STEM, education at the primary and secondary level, visas for skilled workers and innovators, and a world-class system of universities and research centers which can train the next generation of scientists, and attract them to interesting and useful projects. Because the next carrier branch technology is still unknown, and cannot be foreseen, all areas of science and technology should be supported robustly. Program like the Marine’s “Green Company” are a good start, but the government has to be both more creative and aggressive in finding ways to harness the power of the market.

The Federal government represents the interests of all Americans, not just for the next quarter or the next election cycle, but for the next century. Real job creation and prosperity depend on finding new carrier branch technologies to start the next Kondratiev wave sooner rather than later, and finding them in America, not overseas. But it won’t happen if we don’t invest in the building blocks of innovation here at home. With the active participation of the government in crafting forward-looking regulation and laws, funding fundamental research in our universities and national labs, helping innovative technologies navigate the commercialization “valley of death”, and supporting human capital through public science and technology education, the grand project of forging the next carrier branch technology for the 21st century is within our reach.

Michael Burnam-Fink is a PhD student with the Consortium for Science, Policy and Outcomes at Arizona State University.

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