Future Global Economic Trends
We all worry about what economic conditions hold in store for us. The answers to our present-day concerns lies in figuring out where we stand in much longer business cycles lasting from five to seven years, fifteen to twenty-five, and forty-five to sixty years. The behavior of each of these cycles is influenced by underlying economic processes. Globalization, sustainable manufacturing, renewable energy, and the knowledge economy are all important trends. To truly appreciate their likely impact, though, we must also know something about Juglar, Kuznets and especially, Kondratieff Cycles.
Keywords Creative Destruction; Enabling-Technology; Globalization; Juglar Cycle; Kitchin Cycle; Kuznets Cycle; Kondratieff Cycle; Socio-Institutional Framework; Sustainable Development; Techno-Economic Subsystem
Global Stratification: Future Global Economic Trends
Vilfredo Pareto, one of sociology's theorists of note, started out as an economist; his work on economic efficiency and income distribution are prized to this day. Yet, ironically, he felt he could not explain economic matters in purely economic terms and so moved farther afield into sociology. Certainly Karl Marx and Max Weber agreed: both pioneers in the field were well versed in economics too. A society without a functioning economy would soon descend into chaos; an economy without a social infrastructure or legal system would be at best primitive and static.
So when one asks where the global economy is heading, one is also asking what lies in store for the world social order, and by implication, what the qualities of our lives and those of our children and grandchildren will be like. Alas, for all its rarefied equations, modern econoimcs has yet to overcome its age-old nemesis: uncertainty. Reams of raw data and robust econometric analysis yield at best probabilities of X or Y happening in six months to a year. Beyond this point, even the most sophisticated numerically-based computer-forecasting models simply run up against far too many variables and must make far too many assumptions to produce very accurate projections. As huge, complex, and prone to randomness as a global economy is, to expect more is perhaps unrealistic.
Yet, it is in everyone's interest to have a clear sense of what lies ahead economically and socially, farther and farther out along the time-horizon: five, twenty, even fifty years in the future. Fortunately in this respect, economists have identified certain patterns in the mass of historical data available that have some predictive value. The first economist to do this was Joseph Schumpeter, who characterized capitalism as a continual process of creative-destruction. By this, he meant that the sheer dynamism of the marketplace ensured that a steady stream of new technologies would dislodge existing ones. With these innovations come new products, organizational structures, and markets that push existing ones aside.
Schumpeter's work also led him to believe that that there was such a thing as business cycles that progressed through four distinct phases: recovery, prosperity, recession, and depression. Some are fairly short; others longer and a few are very long indeed. The short ones last three to five years, were keyed to the rise and fall in the inventory-levels of consumer-goods manufacturers, and are called Kitchin Cycles (Fels, 1952).
A Juglar Cycle takes seven to eleven years to run its course. The cycle begins with an economic boom, which causes companies to commit capital resources and hire additional workers to meet higher demand. When the boom subsequently goes bust, companies wring this excess capacity out of their operations, postponing planned investments in new equipment and laying off workers (Evans, 2001). National accounts data shows that most industrialized countries periodically go through the highs and lows described in the Kitchin model. As to the Juglar Cycle, there have also been major recessions 1974-75, 1982-83, 1990-92, 2000-01 and one looming in 2008 (O'Hara, 2003).
Every fifteen to twenty-five years, there is a cyclical peak output in the capital equipment sector of the economy that makes the heavy machinery used in the manufacture industrial and durable goods. This depreciates with wear and, because of the high price-tag involved, is one of the first thing firms postpone reordering when the economy turns down. Eventually, however, this pent up demand has to be met; back-orders are fulfilled as new orders are placed when the economy improves, and so the cycle peaks. Economists call this a Kuznets Cycle (Forrester, 1977).
The Long-Wave Cycle
A Kondratieff Cycle or Long-Wave Cycle lasts forty-five to sixty years. That's about how long it takes, proponents say, for the impact of a ground-breaking new technology to work its way fully through an economy. The steam engine, for example, made industrial manufacturing cost effective: the weaving machine it powered jump-started mass automation. Likewise, the blast furnace produced the steel rails that trains loaded with passengers and cargo traveled on, and the dynamo-generator that produced the electricity that lit cities they traveled through and pushed sound through telephone lines over equally long distances. The train was later overtaken by the combustion-engine car whose manufacture brought about assembly-line production (Patomäki, 2005).
A Kondratieff Cycle (K-cycle) begins its ascent when the following conditions arise: creativity, technical ingenuity, entrepreneurship, the necessary capital to finance the required plant and equipment, skilled workers, a sufficient supply of energy and raw materials, and up-to-date information on scientific, industrial and market developments (De Greene, 1988). What's most important about the resulting innovation is the drastically lower cost structure it introduces that the entire techno-economic subsystem eventually shares. Virtually everything is affected one way or another: what raw materials are used, how manufacturing processes worked, and the scale and pace of mechanization and automation in general. These developments, in turn, alter the division of labor and force a redesign of the corporate organizational structure to capitalize on new ways of creating and delivering value. All of these changes will be dedicated to stimulating demand for new types of goods being produced, occasioning changes in patterns of consumption (Rennstich, 2002).
Forrester believed a Kondratieff Cycle's uniqueness lay in the fact that a series of technologies came along in quick succession that enervate a given industry. In the transportation industry for example, railroads replaced canal-barges, trucks replaced railroads. Energy was produced first by burning wood, then coal, then oil (Baqir, 1981). A Long-Wave Cycle starts at an economic low-point, usually a depression or major recession during which time capital plant continues obsolescing and new plant construction remains close to non-extent.
However, a deteriorating industrial infrastructure must be replaced at some point. When that finally happens, there are at least two decades of new inventions entrepreneurs can turn to. As the new technologies become known and investors come to believe in their potential, employment rises and consumer consumption with it, encouraging even greater investment.
At this point, the "lock-in" effect is already beginning to take hold; tinkering with the dominant technologies continues, but the goal is now incremental — not radical improvement. Too much is riding, essentially, on the existing techno-infrastructure at this point. Any advance that does not "fit" the existing techno-economic regime is effectively side-tracked. The cresting wave of change carries banks, corporations, labor unions, and others with it. At a certain point, though, its momentum falters: overcapacity and declining marginal productivity begin to take their toll. Investment plateaus and the long slide towards recession and depression begin all over again (Forrester, 1977).
All this does not, however, occur in a vacuum. The techno-economic subsystem functions within a broader socio-political system. Markets value and spontaneously reward efficiency and innovation; politico-cultural institutions by contrast value and steadfastly preserve the status quo. The innate conservatism of the latter favors incremental change at best, the natural brashness of the former favors the opposite. In normal times, a tense but workable process of give and take exists between the two (Oözçelik & Özveren, 2006).
But times are far from normal at the beginning or end of a Kondratieff Cycle. Prolonged economic downturns aggravate existing social inequalities and political grievances. A long-wave depression signals "a breakdown in the complementarity between the dynamics of the economic subsystem and the related dynamics of the socio- institutional framework. It is, in the same movement, the painful and conflict-ridden process through which a dynamic harmony is reestablished among the different spheres of the total system" (Perez, 1983, p. 1). The crisis will persist until the social-political structure realigns itself to better accommodate the new techno-economic forces at work and recovery can commence.
So where does the modern global economy sit on the Kondratieff Cycle? Are we in the ascendant, peaking, headed downwards, close to hitting bottom? To answer this important question, we must first establish the untapped potential of the two great enabling technologies of our day: micro-electronics and bio-technology. Both in a sense are the fundamental building-blocks for the current techno-economic regime in the sense that both can vastly improve the productivity of a host of related and unrelated technologies (Tylecote, 1992). The...
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