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Unformatted text preview: Lecture 8 Kondratiev waves. I was going to skip over this, but someone asked me about it, and it actually raises an important methodological point. According to the Kondratiev wave concept, theres a cyclical pattern to world economic development, from depression to recovery to prosperity to recession to depression, with a wave- length (e.g., from depression to depression) of 50 or 55 years. I have two problems with this concept, one theoretical and the other, much more serious, with its empirical application. My theoretical objection is that there's a fundamental contradiction in the concept. It claims at the the same time that (1) there's a 50-year wave length and (2) that the engine driving the cycle is fundamental innovation (like the steam engine or electricity). To believe both at the same time means you believe that fundamental innovations must occur with wave-like regularity. What possible mechanism could produce this? What demigod could cause Jobs and Wozniak to invent the Apple in 1978? Invention is inherently unpatterned. The other problem is that when you map the wave onto actual history you get nonsense. One example: the K-wave was supposed to have bottomed in 1890 and 1940. This means (a) 1915, the middle of WW I in other words, was the peak of the intervening wave, while World war II was in the next succeeding trough; (b) what everybody else thinks of as the trough of the depression, 1931-32, was actually halfway up one leg; (c) the supposed 1890 trough has no historical correlate--what the hell was so special about 1890? In fact, when you graph actual economic depressions on the 50-year sine wave, you get no correlation at all. Try it: 1837 (before a trough); 1857 (just short of a peak); 1873 (halfway down); 1893 (just past a trough); 1907 (approaching a peak); 1929 (halfway down). The main point is not the K-wave concept itself, which is transparently nonsensical, but the basic methodological point: facts first, and theory a long way second. Its just not possible to continue to maintain a theory so blatantly contradicted by fact. Engels Law. I was also asked why the prices for commodity prices, and particularly food prices, tend to fall relative to the prices of manufactured goods. It's because demand for manufactured goods expands faster than for food, once basic food needs are met, as food takes up a smaller and smaller part of the average budget. This is known as Engel's Law, and will continue to hold true as long as food production outpaces population growth, which has been...
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- Spring '08