An economic policy for the fifth long wave*

Banca Nazionale del Lavoro Quarterly Review, Dec 2004 by Reati, Angelo, Toporowski, Jan

In the first part of this paper we recall the main features of the longwaves theory, a theory that, at the present stage of development of economic thought, is in our view the most valuable to understand the present situation and, consequently, offers the best guidance for economic policy. In the second part we shall outline some possible policy implications that can be derived from such an approach.

1. The long waves in economic development

1.1. The facts

A growing number of economic historians agree that long-term economic development of capitalist economies is an uneven phenomenon: periods of sustained growth of output and trade of about 25 to 30 years are followed by periods of slow or stagnating growth of analogous duration. Similar movements also appear in prices and other monetary variables. Up to now Western economies experienced four long waves and at present we entered into the fifth one. Table 1 summarises these movements.1

Long waves start in some 'core' countries, or technological leaders, and then spread to other economies, reaching the less developed regions only later on. As table 1 indicates, the first long wave originated from the early mechanisation (the industrial revolution); the technological leaders were Britain, France and Belgium, followed by the German states and the Netherlands. The second long wave was the era of steam power and railways, the technological leaders being the same as the first long wave plus Germany and the USA, and the followers were Italy, the Netherlands, Switzerland and Austria-Hungary. The third long wave was the era of electrical and heavy engineering. The earlier leaders succeeded in keeping their position, a position that they shared with Switzerland and the Netherlands that were thus 'upgraded' with respect to the previous wave. Italy and AustriaHungary continued to play the role of followers, joined by Canada, Japan, Russia and two European Nordic countries (Sweden and Denmark). It was during this wave that Taylorism appeared. The fourth long wave was the era of mass production (the Fordism)2 that spread all over Western Europe, the USA, USSR, Japan and Australia. The followers were located in Eastern Europe, Asia (Korea, China, India Taiwan), as well as in Central and South America (Mexico, Brazil, Argentina, Venezuela). The present fifth long wave is produced by the computerization of the entire economy and the information and communication technologies (ICT). The technological leaders are Japan, the USA, the European countries, Canada, Australia, Korea and Taiwan. The followers are numerous and include all those of the previous wave plus some other Asian countries (Indonesia, Pakistan) and very few African countries (Nigeria, Algeria, Tunisia).

Of course, each historical period is unique but, in spite of these peculiarities, "there is a certain sequence of events that recurs about every half century" (Ferez 2002, p. xvii) - i.e. technological revolutions, financial bubbles, collapses, golden ages, political unrests. This opens the possibility to construct a theory that explains the causes and mechanisms of the common characteristics of each long-term movement, and that also offers guidance for economic policy. We shall come back on this after discussing some theoretical and methodological aspects.

1.2. The Classical roots of the long-wave theory

Growth - and its uneven unfolding - was one of the main concerns of classical economists (Smith, Ricardo, Malthus, Marx), but the longterm oscillatory pattern of prices and output also attracted the attention of some of the founders of marginalism, such as Jevons (who in 1884 analysed the long-term fluctuations in prices) and Clark. They were joined by other exponents of the marginalist school (particularly, in 1913, Pareto, Bresciani Turroni, Aftalion) so that, at the beginning of the 20th century, there was a consensus among many economists on the reality of what was later called the long wave.

However, the gradual ascendancy of the neoclassical theory culminating with the model of general equilibrium - diverted attention from growth and its irregularities. When the theory of growth returned to the forefront of interest in the 1950s, the focus was on conditions for regular growth (the 'steady state'). The business cycle was not ignored, but it was treated within the conceptual framework of equilibrium, on the basis of the 'rocking horse' metaphor. According to this metaphor, the economic system tends spontaneously to equilibrium. Cycles are exogenous perturbations produced by random shocks (impulse generation), which trigger an endogenous propagation mechanism with stabilizing properties. This provides the rationale for separating growth and fluctuations, that is, for decomposing the movement of an economic system into trend and cycle. Trend is conceived as the loci of equilibria - a moving centre of gravitation while cycle is restricted to the analysis of the stochastic error term of series and to the properties of the equilibration mechanism.3