Wednesday, July 09, 2008

Kondratiev cycles, innovation and over-regulation - a challenge from Bob Q

In a comment, Bob Quiggin challenged the arguments I put forward in Kondratiev cycles, innovation and over-regulation . I do like challenges because they force me to check and refine.

Bob began his comment:

Dear Jim,

Rubbish. :)

The reason you haven't heard of Kondratiev cycles since uni is because they lacked both provability, predictive force and explicative force (i.e. they stand as an article of faith).

Why? because the period of the cycle is defined post-hoc, which is why long term can mean anything from 30 years to 70 years or in some writers' belief 150 years. So much happens in such a cycle that to ascribe it to a single factor beggars belief.

Secondly, because the timing is post hoc, so is the explanation, which means that thirdly there is no predictive force.

Now here I think Bob is both right and wrong.

When I first came across Kondratiev cycles in economics, I was also studying history. Historiography is littered with examples of people attempting to define patterns that can then be used for explanatory or predictive purposes. The great British historian Arnold J. Toynbee is an example with his focus on comparative history.

As an aside, I did not know that Toybee was first married to Gilbert Murray's daughter. I wrote about the Murray family in Patrick Desmond Fitzgerald Murray 1900-1967. I am constantly struck with just how small a world the old British Empire and Commonwealth was, at least among the educated elites.

The problem with all these attempts at pattern definition is the risk of the post hoc ergo propter hoc fallacy, literally after this, therefore because (on account) of this. Just because a follows b does not, of itself, imply anything about causation.

Kondratiev cycles certainly suffers from this problem.

If I remember my history, Kondratiev himself was a marxist. Marxist theory suggested that capitalism must collapse under its own weight, yet this appeared to Kondratiev to be at odds with the historical evidence. He developed his cycle or wave concept to explain this, a theological sin for which he was to perish in Stalin's gulags. Kondratiev's work was then taken up and popularised by the great American economist Joseph Schumpeter in his explanations of economic development.

Yet while Kondratiev cycles do suffer from the problems as specified by Bob, I still find them useful because they challenge some of the implicit assumptions and world views embedded in modern economics.

Bob went on:

You blithely talk about the exhaustion of the ICT wave - I see terabyte desktop machines for less than $A1500, when Paxus (now extinct) had a 20 terabyte facility in Canberra that was the largest or second largest in the southern hemisphere less than 20 years ago.

IMHO Moore's law continues to operate but it allows rigidities like onerous record keeping and all the other up-the-down-escalator brakes on progress, some of which are justified and some of which are not.

Over-regulation is indeed a key problem, but its relationship to ICT of Kondratiev is about the same as mine to the consumption of Resch's Pilsener (a near zero correlation, which if anything is negative).

How is your silver bullet campaign going, BTW.

Bob, I fear that my silver bullet campaign is making slow progress, although I do now have a regular supply of Resch's Pilsener. As a consequence, my overall shopping at the nearby Woolies is down about sixty per cent because I tend to buy things at the IGA next door to the bottleshop!

My response to Bob's core comment is a simple one.

Concepts such as Kondratiev cycles force us to ask new questions of the evidence. Take the ICT revolution as an example. Yes, it is true that technological advance continues. But does that mean that the new developments will have the same impact? I think not.

The impact of the motor car in Australia is instructive in this context.

The really big impact came in the first twenty years when cars and lorries replaced horse drawn transport. In the ten years between 1919 and 1929 the new form of transport wiped out not just horses, but all the activities and industries linked to horse drawn transport. In doing so, it totally altered the structure of life, especially in regional Australia.

The next big impact came in the 1950s when growing wealth allowed mass ownership of cars. While this had a major impact on city structures, the trigger was wealth, not technology. The same thing holds today in India and China.

My point here is that the greatest impact of ICT lies, I think, in the past. Developments will continue, but now we are dealing with change at the margin. Greater processing power, greater storage capacity, greater bandwith will allow new things, but these are changes at the margin.

To my mind, the next big effect from the ICT revolution will, like the car before it, come not from technological development, but from diffusion associated in developing countries with growing wealth.

7 comments:

marcellous said...

The Murray family are definitely intriguing. Gilbert Murray married particularly well (into the family which owned the stately home used in the TV version of Brideshead Revisited and Polly Toynbee is just the latest prominent member of that line.

Earlier this year in Canberra I picked up a fascinating if flawed book, by one Mary Anne Bunn: The Lonely Pioneer, William Bunn, Diarist, 1830-1901 (Braidwood: St Omer Pastoral Co, 2002). This is the edited diaries of the son of Anna Maria, T A Murray's sister (the one who recruited the governess to look after the then widowed T A Murray's children whom Murray then married and with whom he then had his more famous children). It is just a little ironic that Bunn should be called lonely, as although he is always whingeing in the diaries, including about loneliness, he was in fact a de facto bigamist or possibly even trigamist, only marrying the mother of some of his children after his mother's death (she was of an social class unacceptable to his mother and also, at least at first, already married to some fellow who had shot through). Most of JWB's economic strains related to the large number of women and children he had to support. Amazingly, despite this, the family (or one limb of it) still own the property, St Omer, where he lived. Anna Maria Bunn (nee Murray) is credited with being Australia's first lady novelist.

Jim Belshaw said...

That you for this fascinating material, Marcellous. Another thing to follow up.

Bob Quiggin said...

Jim,

I'll still challenge you on the impact of ICT now. It, by virtue of hardware capability, software inventiveness and business innovation, has given rise to a whole new model - the Google model wherein you give away virtually the entire value of your product and rely on advertising revenues only. That's pretty revolutionary in itself.

But also, I still think (assuming for the barest picosecond that a Kondratiev cycle IS coming to an end) that for you to define it as an ICT period is to ignore other possible explanations. How about the end of the supremacy of military forces in the face of suicide bombers and other 'asymmetric warfare' options, with all of the social and therefore economic disruption that implies, as well as huge shifts in military investment, aid programs and other quite world shaking changes?

I think your familiarity with ICT predisposes you to think in these terms, despite the fact that with almost zero time you actually follow the Google business model yourself in these blogs.

And the major, major weakness of the theory - why should there be a Kondratiev winter? Why shouldn't the next great thing have started long before the end of the first cycle?

I'm now heading into the second half of the first century of my life. If there is one thing I believe it is that one-factor explanations of something as complex as economics or history says more about the theorist than reality.

Cheers!

Jim Belshaw said...

Hi Bob. Great to have sparked another comment from you. I may not respond tonight. I have to go to Orange tomorrow early am for a workshop, and have some things to write first. Still, I will respond!

Bob Quiggin said...

Dear Jim,

I thought I'd refine or expand my thoughts a little, in advance of your reply.

You have argued in favour of Kondratiev cycles (KCs from this point on) as a review tool, for casting new light/new perspectives on current historical developments.

My core point, as you put it, extends beyond the initial characterisation of KCs, since if they are garbage, then an analysis using them must have a garbage quotient - a partial GIGO rule, if you like.

KCs view history as a single continuous thread, built of marxist/historical determinist inevitability but with room to wriggle. Extending the broadloom analogy, Quiggin matrices (of which the economics courses in our land are abysmally ignorant :) ) view history as an n-dimensional tapestry in which the play of a single thread can warp the fabric in several directions but is unlikely to determine the whole and entire shape of the piece.

Why this analogy? Because if you need a simplistic tool, matrix analysis would be a far better tool/explanator/viewpoint than KC analysis. For a start, it could even have predictive power, hence testability.

I'm not suggesting for a moment that this is the best or even an adequate tool, but it at least recognises the complexity of history, especially while it isn't only the victors who are writing it.

KCs, on the other hand, are so flawed as to not be a useful tool at all.

Finally, I agree that ITC diffusion will have a massive economic impact. That in itself would be sufficient from my point of view to argue that any KC based on ITC is far from over.

Jim Belshaw said...

Mmm, Bob. I think that KV are a useful device for looking at turn points. More later.

Bob said...

:)

"I'll come come to that later"

If I could count the times you've said that to me, whether or not you did, and had a dollar for each one, I'd own a property on Darling Harbour.

Not that I'd remind you that your first promise of a response is close to a month ago :).