Are we heading towards an economic downturn? … Wave theory, tech revolutions, and reasons to be optimistic

August 15, 2019

We’re all familiar with the economic cycles that thrill us in the upturns, and then just when we realise that times are good, we’re on that rollercoaster to tough times again.

Business progress, is marked by a cycle of boom times and struggles. And whilst the external world may be largely responsible for the disruption in growth, the result is often a time of frantic innovation as businesses use a downturn to reset, and reinvent themselves and their industries. As we enter the so-called fourth industrial revolution maybe it is not so surprising that the world’s economies are looking more turbulent again.

Therefore talk of a downturn might ring alarm bells on the trading floors of Wall Street, but it should also galvanise the strategic innovator into action.

Wave theory

Russian economist Nikolai Kondratiev was shot by firing squad on the orders of Stalin in 1938. He died for what he believed was the truth. His execution was ordered because his academic work propounded that the capitalist system would not collapse as a result of the great depression of 1929. This truth Stalin did not want to hear, and his work suppressed for over two decades.

Kondratiev’s analysis described how international capitalism had gone through many such “great depressions” and as such were a normal part of the international mercantile credit system. The long term business cycles that he identified through meticulous research are now called “Kondratieff” cycles or “K” waves.

The K wave is a 60 year cycle (+/- a year or so) with internal phases that are sometimes characterized as seasons: spring, summer, autumn and winter:

  • Spring phase: a new factor of production, good economic times, rising inflation
  • Summer: hubristic ‘peak’ war followed by societal doubts and double digit inflation
  • Autumn: the financial fix of inflation leads to a credit boom which creates a false plateau of prosperity that ends in a speculative bubble
  • Winter: excess capacity worked off by massive debt repudiation, commodity deflation & economic depression. A ‘trough’ war breaks psychology of doom.

Increasingly economic academia has come to realize the brilliant insight of Nikolai Kondratiev and accordingly there have been many reports, articles, theses and books written on the subject of this “cyclical” phenomenon. An influential essay, written by Professor W. Thompson of Indiana University, has indicated that K waves have influenced world technological development since the 900’s. His thesis states that “modern” economic development commenced in 930AD in the Sung province of China and he propounds that since this date there have been 18 K waves lasting on average 60 years.

Today’s economy

Stephane Garelli, one of today’s leading economists, recently said “Whatever the situation, some economists always predict the worst: the stock market is on the eve of a resounding crash, and the economy will plunge into an unprecedented recession. Disaster is their business. If the economy is cyclical, and it probably is, they should sooner or later be right: but when? Today, as usual, they announce that the worst is yet to come.”

The synchronized economic recovery is bad news. Some candid economists, such as I, might have thought that this is a positive sign long awaited. On the contrary, they believe that when all nations are growing at the same time, the economy has reached the top of the cycle. It can then be a victim of a combination of tensions: pressure on wages as in the United States, Germany or France, raises in interest rates, volatility of currencies or increase in the price of raw materials. In the end, growth succumbs to all these strains, and a recession occurs.

Inflation is in the pipeline. Theoretically, the primary consequence of a robust economic recovery is to create a risk of inflation. However, if everyone talks about it, very few countries have experienced it, so far. Most countries remain below the fateful 2% mark. Europe at 1.1%, or Japan at 1.5%. It is true that there is a slight inflationary surge in the United States with 2.4% and in Great Britain with 2.5%. But for the moment the predicted catastrophe has not occurred.

Productivity stagnates. Indeed, the extraordinary technological innovation that we are observing – social networks, automation, artificial intelligence, etc. – should increase productivity. However, it is not the case for most industrialized countries. Productivity changes oscillate between -1% to plus 1%. Many economists, such as Paul Krugman the Nobel laureate or Christine Lagarde the director of the IMF, regularly raise the issue. Doom and gloom economists think it’s a forerunner of a deteriorating economy.

In fact, it is quite possible that our gauge of productivity does not correctly reflect the true state of the economy. On the one hand, the vitality of the immaterial economy, that of data and intangible assets, is visible everywhere but measured with difficulty. On the other, some of the weaknesses of the conventional, the more material economy may be overemphasized. We need to reconcile both, as in daily life. It is the fridge syndrome.

The young and dynamic executive who spent his day in the office managing blockchains, exchanging bitcoins and developing artificial intelligence algorithms operates in a highly productive environment. But when he comes home at night and opens his fridge, he finds it… empty. He then confronts a harsh reality: we cannot eat friends on Facebook, or drink bitcoins. Sooner or later, the economy becomes material, conventional and sometimes quite slow moving.

Karl Popper, the science philosopher, became famous for his theory establishing the principle of falsification. In short, a theory is plausible only if it can regularly cope with all the attacks that attempt to falsify it. Maybe this is where disaster economists have added value. Their criticism, and doom and gloom approach to the economy force everyone to rethink the validity of current assumptions, to test the strengths and the limits of the system and to reform it, if possible, before a crisis.

However, one major drawback is that they propagate perpetual skepticism and shake the overall level of confidence. It may not always be what we need.

Constant fear of disaster is a bad counselor. As Mark Twain pointed out, “I have spent my life worrying about things that have never happened …”. Better stay optimistic!

Surviving and thriving

So here are some of the best articles I’ve come across for preparing, surviving – but also thriving – in times of downturn:

Companies Need to Prepare for the Next Economic Downturn by Martin Reeves, Kevin Whitaker, Christian Ketels … Whenever it happens, it won’t look like 2008.
What Companies Should Do to Prepare for a Recession by Kevin Laczkowski and Mihir Mysore … Here’s what successful companies did last time around.
How to Survive a Recession and Thrive Afterward by Walter Frick … A research roundup.
Seize Advantage in a Downturn by David Rhodes and Daniel Stelter …  A downturn opens up rare opportunities to outmaneuver rivals. But first you need to put your own house in order.
Save or Invest? How Companies Should Navigate Recessions by Ioannis Ioannou and Caroline Flammer … You need to do both; one or the other isn’t enough.
How to Be a Good Boss in a Bad Economy … by Robert I. Sutton … Finds ways to provide more predictability, understanding, control, and compassion.
Layoffs that Don’t Break Your Company by Sandra J. Sucher and Shalene Gupta … Research shows that job cuts rarely help senior leaders achieve their goals.
Roaring Out of Recession by Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen … Master the delicate balance between cutting costs to survive today and investing to grow tomorrow.