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The Long Wave

Dozens of people are eager to explain the collapse of the Asian Tiger economies. Few of them predicted it. Other economic implosions, from the 1995 failure of Britain's venerable Barings Bank to the 1987 dive in the US stock market, have been explained primarily after the fact.

Similarly, the 1994 rise to Congressional power of the US right was not predicted, nor convincingly accounted for afterward as a rebellion of white male voters. The conservative shift is not a male, American, or sudden phenomenon. For almost two decades there has been an unrelenting worldwide pressure pushing right.

Unpredicted. Poorly explained even afterward. In the 1980s in addition to Ronald Reagan and Margaret Thatcher there were conservative swings throughout Europe. Even Canada, the Netherlands, and Denmark questioned their long-entrenched welfare states. At the fascist edge arose anti-government militias in the United States, neo-Nazis in Germany, and anti-Semitic Jean Marie Le Pen in France. Vladimir Zhirinovsky preached genocide in Russia. Serbian soldiers practiced it in Bosnia. Why? Why now?

"Unpredicted and poorly explained" holds for financial volatility too, which also is not a recent matter and not confined to one part of the world. Barings Bank was one of many casualties of the razor-edge sensitivity of the global capital market. Other examples were the demise of US savings and loan banks in the 1980s, the collapse of the junk bond empire, the burst of real estate bubbles in Japan, the bankruptcy of Orange County, California from overzealous investment in derivatives, and the New Era Fund Ponzi scheme that took in some of the most level-headed portfolio managers in the nonprofit world.

The political economy seems to have wandered into strange territory. All the business indicators were up on the day when the Dow crashed 508 points. The US GNP is rising, but not the income of the average worker. Companies make record profits by firing people. Tax breaks for the rich produce not investment in productive capacity, but speculation in financial instruments untied to real assets. And policies that were considered mainstream twenty-five years ago (invest in roads and schools and research, shore up the poor, be generous with foreign aid, preserve endangered species, strengthen environmental regulations, forbid racial discrimination, tax the rich more heavily than anyone else) are now under attack or simply undiscussable. Why? Why now?

Few if any explanations for these phenomena postulate any connection between the rightward political slide and the edgy financial markets. I know of only one group that has not only connected them and explained them, but predicted them.

Kondratieff, Schumpeter, and Speeches from the Throne

Twenty years ago, a scattered, committed, largely ridiculed group of "long wave" scholars told us to start watching for:

·  Stagnation in the real economy and volatility in the money economy

·  Social distrust, selfishness, isolationism, scapegoating

·  Deflation of real asset values

·  Retreat to "basic values" and yearning for the strict imposition of law and order

·  Cutthroat economic competition globally, erosion of social compassion locally.

This social and economic pattern has occurred before, they said. It happens every fifty to sixty years. The last time was in the 1920s and 1930s, before that in the 1880s and 1890s, before that in the 1830s. Financial crashes and political conservatism are characteristic of the long wave downturn.

The long wave is also called the Kondratieff wave, after Nicolai Kondratieff, a Russian economist who spent the 1920s studying long-term patterns of industrial output in the United States, France, Germany, and England. What he saw at first glance was the century-and-a-half-long expansion of the industrial revolution. Then he removed the underlying growth trend from the data and discovered—cycling above and below the central upward tendency—a wobbly cycle, decades long, especially in the production of basic industrial commodities such as iron and coal.

The cycle Kondratieff saw was not absolutely regular, like the swinging of a pendulum, but its peaks and troughs repeated roughly every fifty to sixty years. When he wrote, the last trough had been in the 1880s and 1890s. It was accompanied by financial panics and failed banks, including Baring Brothers, which expired in 1890 and was reconstituted by the British government. The next downturn was due in the 1930s, he said. He said that in 1926.

No one took him seriously. Most Western economists still don't take him seriously.

Kondratieff lived through only part of the depression he had foreseen. In 1930, he was jailed by Stalin for protesting the collectivization of Soviet agriculture. He died in prison in 1938. It took the advent of glasnost in the 1980s for the Soviet Supreme Court, at the request of Kondratieff's descendants, to declare that he had been not a criminal against the Soviet state, but a notable and prescient economist.

Kondratieff was not the only person of his era who saw cycles. In 1939, the great economist Joseph Schumpeter hypothesized that technology runs in fifty-year waves. Not waves of invention—human creativity seems to perk along at a fairly constant pace—but waves of adoption, building innovation into the operating hardware of an economy. There seem to be distinct periods when industrial transformations completely change economic production—mechanized textile-making in the 1780s, railroads and steel in the 1840s, electricity in the 1890s, electronics and computers in the 1950s. Between these periods, technologies in practice are elaborated and perfected, but not displaced.

Schumpeter noticed that bursts of technical transformation coincide with upturns in economic activity. He assumed that they were the cause of that activity—that new technology spurred economic growth. Present-day long-wave theory sees the connection as two-way. Innovation causes growth, but growth opens the opportunity for innovation to penetrate the economy.

Kondratieff found cycles in industrial production, Schumpeter found them in technical application, and, quite independently, social scientists discovered them in politics. Over the past half-century political scientists have developed "content analysis," a method of classifying political tracts according to the key words they embody. Applying content analysis to documents such as Republican and Democratic party platforms, or the British monarch's annual "Speech from the Throne" (much like the US president's State of the Union address), several studies in the 1970s and 80s revealed fifty-year political cycles.

Periods of retrenchment, militarism, obsession with the accumulation of wealth, the enforcement of order, and the undoing of social reforms occurred in the 1920s, 1880s, 1830s, 1790s. For example, a Speech from the Throne in 1830 sounds strangely familiar today: "It will be satisfactory to you to learn that His Majesty will be enabled to propose a considerable reduction in the amount of the public expenditure, without impairing the efficiency of our naval or military establishments."

Liberal swings are obvious around 1800, 1850, 1900, 1960. Here is part of a Speech from the Throne in 1907, busy with do-good ideas: "You will also be invited to consider proposals for the establishment of a Court of Criminal Appeal, for regulating the hours of labour in mines, for the amendment to the patent laws, for improving the law related to the valuation of property in England and Wales, for enabling women to serve on local bodies, and for the better housing of the people."

Modeling the Economy

So economic upswings, political liberalism, and technical change tend to occur together. Economic downswings correlate with political conservatism and technical burrowing-in. For decades, those observations were just statistical curiosities, with no theory behind them. Why cycles? Why should politics, technology, and the economy oscillate together? Without a theory, long-wave believers could be dismissed as a bunch of sun spot watchers.

Then in the 1970s Jay Forrester and his team of computer modelers at the Sloan School of Management at MIT came up with a persuasive long wave theory—all the more persuasive because they weren't looking for one.

Forrester was trying to understand how the economy works. He was especially interested in the short-term (four-to-seven-year) business cycle, the most obvious dynamic characteristic of market economies. Forrester is an engineer, not an economist or historian. At the time he began his economic modeling, he had never heard of Kondratieff or Schumpeter's technical waves or Speeches from the Throne.

He and his team put together a model that was divided into two sectors. The first sector makes Consumer Goods and Services , such as refrigerators, shoes, cars, health insurance. The second makes Capital Goods —the metals, machines, chemicals, concrete, motors, computers, buildings that industry needs in order to turn out refrigerators, shoes, cars, and insurance.

To a dynamic modeler, the distinction between consumer and capital sectors is necessary not only because of their supply hierarchy, but also because of the different time scales on which they operate. The output of the consumer goods sector lasts from days or weeks (food, paper, haircuts) to years or decades (clothing, refrigerators, cars). The output of the capital goods sector lasts from decades (machines, boilers, trucks, power plants) to centuries (buildings, roads, ports). The two sectors face different inventory costs, market fluctuations, technical change rates, decision rules, and response times. They have to be modeled separately. So that's how the MIT team modeled them.

When they did, a short-term business cycle appeared. That cycle came out of the model; it wasn't put in. In Forrester's type of modeling, one doesn't throw in a driving cyclic function to make a cycle come out. Rather, one keeps track of the stocks and flows of the system (factories, inventories, cash flow, orders, sales, etc.), puts in their multiple interactions, and sets them loose to behave in the computer the way they behave in the world—or so the modeler hopes.

Ask a system dynamics modeler why the Forrester model produces a business cycle, and the shortest answer you are likely to get is: delays in the consumer goods sector. Press for a longer answer and you will be told: 1) the consumer goods sector is sufficient in itself to generate the cycle, without help from the capital sector, 2) the four-to-seven-year cycle is an intrinsic harmonic of that sector—like a spring, if you nudge it with almost any input, it responds with its own built-in oscillation—and 3) the reason the oscillation is four to seven years is because of the length of response delays in that sector, especially in building up and selling off inventories of consumer goods.

Hang a Slinky—one of those long plastic springs kids play with—uncoiled from your hand, move your hand up and down, and the Slinky will bounce up and down. No surprise: you're driving its cycle with your hand. Let the Slinky come to a stop and give your hand just one jerk. The Slinky will bounce with its own frequency, in a damped oscillation that eventually stops. Give the Slinky occasional random jerks and it will bounce in messy, imperfect cycles, always tending toward its own periodicity.

According to Forrester, random jerks come constantly from the events of the world—storms, strikes, elections, holidays, accidents, rumors—and the economy responds like a Slinky. It does so because it can't respond instantly. In the real economy of physical stuff, things take time. If you've overproduced you can't sell your stacked-up inventory overnight. If you're underproducing, you can't hire workers, order materials, and gear up a factory overnight. These delays compound one another in causal circles called feedback loops. As business tries to adapt to changing sales, it hires or unhires people, and that, after a while, affects consumer income, and that, after some more time, affects the very sales to which business is trying to adapt. Trying to catch up, always having to make decisions that can't come to fruition for months or maybe years, managers overshoot and undershoot and overshoot and undershoot.

Much as we like to blame economic downs and ups on presidents or heads of the Federal Reserve System, normal recessions and recoveries are created by business chasing its own tail. The tail is never caught, the market never equilibrates, because in the physical world (as opposed to the world of economic theory) materials, products, people, prices, credit, perceptions, and policies can't change quickly. The four-to-seven-year periodicity of the business cycle comes from the consumer goods sector's one-to-three-year delays in perceiving and believing economic news, in gearing up or down, in dispersing or rebuilding inventories, and in consequent changes in employment and consumer disposable income.

That's why Forrester's model produced business cycles. To his surprise, however, when he ran his simulation out over decades, a longer cycle also appeared; a fifty-sixty-year fluctuation.

He thought it was a mistake. He tried to make the long cycle go away.

It wouldn't.

So he looked more closely to figure out why the model was doing that long oscillation. He discovered that it came from a complex of interconnected feedbacks, the most important of which ran between the consumer goods sector and the capital sector. Meanwhile, his students were searching in the literature for evidence of a long cycle. They came up with Kondratieff and Schumpeter and, in 1981, Robert Philip Weber's newly published content analysis of Speeches from the Throne.

Why There is a Long Wave

To explain how the long wave works, let's start at the bottom, in the mid-1940s, for instance. Because of the depression and the war, consumers' stocks of refrigerators, houses, cars, and just about everything else are low and old. Families have deferred purchases, nursed along old clunkers, gone without. Finally, the time of troubles is over. Jobs, cash, credit, and confidence are coming back. People flock to showrooms, place orders, deplete inventories. Makers of consumer goods gear up, hire workers, and those additional jobs create even more demand. Car makers and house builders order tools, trucks, lumber, concrete, steel, oil, electricity.

So far, that's just a set-up for a normal business cycle upturn. But this is a long-depressed economy, which has shut down or written off much of its productive capacity. It doesn't take long for the makers of refrigerators and shoes and cars to start running their factories full out. What they need is more factories. That creates a flurry of orders to the capital sector.

Before long the capital sector is also running at full capacity. Steel mills and machine tool shops are working overtime, but unfilled orders from the consumer goods makers are still piling up. Before it can fill them, the capital sector has to make steel and machines and tools to expand itself . That necessity is the central cause of the long wave. Forrester calls it Capital Self-Ordering . While the capital sector is rebuilding itself, unfilled orders from consumer goods makers pile up still further. There seems to be no end to the economy's need for productive capacity. The capital sector raises its expansion plans even higher. The result is a long, long boom, the most recent of which took place in the 1950s and 1960s.

The problem for the capital sector, and to a lesser extent for the consumer goods sector, is that it can't distinguish between orders that signify a permanent rise in the scale of the economy and orders that come from a temporary need to fill deficiencies in inventory or infrastructure. Most business planners, faced with month after month of inability to meet rising orders, will expand with increasing urgency. Furthermore, each firm hopes to increase its market share, so it expands a bit beyond what it actually expects to need.

Unemployment is falling and wages are rising, so labor is being replaced by capital, which further increases capital-sector orders. Because orders for goods are straining the capacity to make them, prices rise. The resulting inflation makes real interest rates low or even negative—so it's easy to borrow for expansion. There is a general mood of optimism. Risk is minimal, success is occurring all around, everyone scrambles for a piece of the action.

The result, inevitably, is overbuilding. The inevitability is important to understand. If you're trying to fill a half-empty bathtub with an open drain (an economy with its consumer goods stock regularly wearing out), you have to turn the input faucet higher than the rate of outflow until the tub is filled. Then, to keep it just full, you have to turn the inflow back down to equal the long-term outflow. When an economy is making up a capital shortage, it must place orders for steel and machine-tools at a higher rate than it will need in the long term. Then, when it catches up, its orders must decrease. There's no way around that, and it's just about impossible for investors to take it into account. They see the orders and sales in their particular businesses. They sense the prevailing mood and make the best decisions they can. Toward the end of the rising phase of the long wave, those decisions are systematically too optimistic.

As the wave approaches its crest, unemployment is as low as it can get, incomes are high, consumers have finally acquired most of the refrigerators and cars they want. Inventories begin piling up. Factories under construction keep coming into production, though now they are no longer needed. (In 1993, as six General Motors plants and two Volvo plants closed and more shutdowns were being planned, enough new plants were still coming on line to build 1.7 million more cars per year. Said the president of Volvo, "The significant overcapacity in the industry in the United States, Europe, and Japan will continue for a very long time.")

At this point competition gets fierce. Cost-cutting becomes mandatory. Manufacturers "downsize" their labor force and pay less to the workers they keep, thereby decreasing consumer demand and making the problem worse. With way more capacity than they need to supply domestic markets, firms cast desperate eyes on foreign markets. Governments, sensing the economic stress, kick in with tax cuts, lower interest rates, deregulation, more social or defense spending, export subsidies, anything that might encourage investment and economic growth. But investment is precisely what is not needed. Capacity is already too high. Government incentives just permit the overbuilding to get worse.

Finally the weakest competitors falter and with them their employees, suppliers, and lenders. The capital sector gets hit first and hardest. Steel mills and machine shops shut down, people lose their jobs. They stop buying cars, houses, and refrigerators. Those inventories pile up, more factories shut down, more unemployed folks reduce their spending. The virtuous cycles that sustained the boom become vicious cycles feeding the downward slide. The slide will go on until enough capital plant is abandoned to bring productive capacity in balance with demand . Then it will go on still longer.

Just as the economy inevitably overshoots in the upturn, it undershoots in the downturn, for the same reasons. Managers still don't know where equilibrium demand will be, and this time they guess too low. Confidence is shaken. The mood turns sour. Both lenders and borrowers get conservative, credit dries up, "downsizing" makes even those who are still employed nervous about big purchases. Times get hard and can stay that way for years, until it finally becomes clear that there are too few operating plants to satisfy even the remaining minimal demand. That shortage sets up the conditions for the next upturn.

How can investors so badly over- and then under-estimate the needs of the economy? Conventional economics, which has a religious belief in the acumen of investors, says they can't. That's one reason why few conventional economists believe in the long wave. (There's a joke in which economists explain why there are cycles, if the economy is supposed to be always in equilibrium. "Workers have cyclical preferences for leisure.") But real players in the market have no way of measuring equilibrium demand, knowing what other investors are doing, guessing correctly their own future market share, or, as a system dynamicist would put it, managing a complex system with nonlinear feedback loops and tricky delays. They are very attentive, however, to each others' moods and expectations and very impressed by their own recent experience. So, taking their cues from each other, they overdo it, both on the upturn and the downturn.

In Forrester's model the long wave period is fifty to sixty years because of the combined delays of capital build-up and depreciation in both the consumer-goods and capital sectors, with the added delay of capital self-ordering. The linked economy is a complex, ponderous Slinky.

Technology Waves, Financial Panics, Political Upheavals

Forrester's is not the only long wave theory in circulation. Many of the others suppose, as Schumpeter's technology theory does, that the long wave is driven by some other cycle, which itself then has to be explained. What is most interesting about Forrester's theory is that it doesn't require another cycle to drive it. In fact, it explains those other cycles.

Technology gets implemented in cycles, says Forrester, because there is a window of opportunity at the beginning of each upturn. You don't build new car factories that use lightweight, crash-resistant, unrustable plastics when you're struggling to keep your existing metal-stamping plants running. You don't build combined-cycle gas power plants if you have coal-burners standing idle. You wait until the upswing demands a burst of new capital. Then you can build in new technologies. If they are cheaper and more effective than the old ones, they will enhance the upswing.

As the economy gets built back up, the window for major retooling closes. In a nation with a functioning, efficient rail network, entrepreneurs won't find it easy to start up an incompatible mode of transport. Thus, the Wright Brothers flew in 1903, but significant commercial air transport started with the DC-3 in 1935, after the depression had wiped out many railroads. The airline industry was only fully capitalized in the 1950s and 1960s (then overcapitalized in the 1970s and 1980s). During the long upswing, economic growth builds upon established technologies. New ideas get tested in small companies, many of which go broke, until the next upwave, when the best of those ideas can be literally cast into concrete or plastic or

silicon chips.

The seeds of technical revolution are planted during long wave troughs and bloom during upturns. Super-volatility in investment and banking is characteristic of peaks and downturns. The economy must shed excess capacity. It needs little new investment, compared to its voracious appetite during the upturn. But there is an enormous pool of pension funds, endowments, private savings, and financial game-players eager to multiply money. With few real investment opportunities, the financial markets, with stunning creativity, think up unreal ones. They have to be newly invented at each long wave downturn, because most of the inventions of fifty years before have been outlawed.

In the 1920s, there were leveraged brokerage accounts, fictitious gold and oil stocks, Florida land booms, and trusts whose only assets were stock in other trusts. In the 1980s, there were junk bonds, derivatives, and leveraged buyouts. (If you can't expand in real terms, you can pretend to expand by buying other companies.) Both downturns saw speculative excess in real estate, art, and other assets. The more these bubbles were allowed to blow themselves up, the bigger the pop when it became obvious that money value far exceeded real value. Many pops have occurred in the past twenty years. There are probably more ahead.

In the long wave trough, asset values finally depreciate to their real worth. Then they depreciate even more. After a time for everyone to sober up, it becomes clear that some assets are undervalued. The economy turns slowly into the next upturn, with so many sound investments to make that few in-vestors will be attracted to unsound ones.

So much for technical cycles and financial cycles. Now why political cycles? During the long wave expansion, wages are rising, investments are paying off, material expectations are being met faster than people expect. There's enough satisfaction to be generous and enough optimism to consider all problems solvable, whether it's putting a man on the moon or extending civil rights to long-oppressed minorities or rebuilding war-torn Europe. The up-turn is a time for progressive politics.

As the wave continues upward, and domestic production begins to catch up with domestic demand, businesses, followed closely by politicians, begin to look beyond national borders. Trade expands, as companies scramble to find new markets. Competition gets cutthroat, because capacity is beginning to outstrip demand worldwide. Content analyst Robert Weber calls this the "cosmopolitan" phase. It can be characterized not only by great interest in trade and foreign policy, but also by adventurism, imperialism, and conflict. In the early part of this century nations trying to make the world "safe" for their dominance set up the pressures that exploded in World War I. Fifty years later Cold War tensions drove dozens of smaller conflicts in Korea, Vietnam, Afghanistan, and elsewhere.

During the downturn, the most outmoded plants begin to shut down. People lose jobs or worry about losing jobs. Real wages fall, banks wobble, tax revenues drop, generosity dries up. The political agenda has less space for foreign adventure or domestic idealism. Faltering businesses and banks plead for deregulation. Struggling families want to hear about tax cuts. The underclass, hit hardest, may explode—leading to calls for law and order. It's a time when conservative thinking begins to make sense.

Robert Weber calls the bottom of the trough "parochial." That's a polite label. A more honest one might be "chaotic," or "panicked" or even "fascist." After fifteen to twenty years of downsliding, conservative policies lose their appeal. Tax breaks for the rich lead not to investment, but to resentment. Less public support throws even middle class folks onto their own diminished resources. The headlines are full of bank failures and foreclosures. Rough business competition can degenerate into rough personal competition; people begin to be out for themselves, uninterested in the public good. It's easy to lose faith in government, corporations, the rule of law, the whole society, the future. It's tempting to find someone to blame.

At this point, any assured voice is attractive, whatever that voice says. That makes the political situation unpredictable—it depends on what voice is loudest. In the 1930s, the loudest voice in the US happened to be that of Franklin Roosevelt, who preached optimism, compassion, mutual belt-tightening, and government activism in creating jobs and providing basic needs. In Europe, the loudest voices belonged to Hitler and Mussolini, who offered rigid control, trains that ran on time, national pride, militarism, and in the case of Hitler, industrial-scale genocide.

In the 1990s in America, with Democratic agendas looking like Republican agendas of the 1950s and Republican agendas edging toward repression, Rush Limbaugh and Newt Gingrich were the most certain-sounding voices for awhile. They had—and have—many adherents. But they came a bit too late in the cycle; facts are debunking their policies. Bill Clinton is unsatisfying, not because his ideas are wrong for the time (some are appropriate) but because he sounds so wavery. He's in power mainly because he has been blessed with even less substantial opponents.

At this point, in the late '90s, at the trough of the cycle, opportunities for leadership—even for humane, whole-system, forward-looking leadership—are wide open.

Why Liberal Policies Sometimes Work, Conservative Policies Sometimes Work , and Politicians Never Learn

The long wave has been operating since the industrial revolution began, but it hasn't penetrated our understanding. One reason for that is that technical and social changes over the course of a single cycle ensure that no upturn, downturn, peak, or trough is exactly like the one before. The downturn of the 1930s was sudden, steep, and imprinted indelibly in memory and history. The depression of the 1880s and 1890s was undramatic, more like the slow, discouraging slide we are experiencing a century later. There are too many sources of variation, there is too much complexity, learning, institutional change, and social evolution for cycles to repeat themselves exactly.

The long wave is also hard to perceive because it isn't the only thing that's going on. Several different dynamics are working simultaneously. There is short-term noise, caused by the normal socioeconomic hiccups. There are four-to-seven-year business cycles, eighteen-to-twenty-five-year construction cycles (called Kuznets cycles), and the fifty-to-sixty-year long wave. Finally there is the 200-year upthrust of the industrial revolution, propelled by population growth, capital investment, and technical advance, which will continue to raise all boats until it runs into social or environmental limits.

Consider for a moment just two of these dynamics, the business cycle superimposed upon the long wave. During the long wave upturn, recessions tend to be gentle. They make short interruptions in long, satisfying booms. These are the times when economists start talking about having recession under control and politicians begin to think they have mastered economics.

During downturns, however, the picture reverses. Long, deep recessions alternate with "weak recoveries," "structural adjustments," "recovering profits without job growth." Since we traditionally blame economic events on politicians, during downturns we begin to think of our leaders as bozos. This can be a period of rapid shifts in power, as voters discover that no party knows what to do about the worsening economy.

To see how hard it is to untangle the signals from the noise, consider the last fifty years of US unemployment rates.

You can see the blips of noise in this graph, and the four-to-seven-year business cycle troughs (unemployment peaks). You might also make out two twenty-five-year Kuznets cycles (driven mostly by delays in the construction industry). The long-wave downturn is visible in the three increasingly worse recessions of the 1970s and 1980s, each one ending in a "recovery" with a higher unemployment rate than the one before. The way we keep unemployment statistics (defining the hopeless out of the labor pool, not distinguishing permanent from temporary jobs or high-paying ones from low-paying ones) hides much of the evidence for the long wave, however. It becomes more apparent when you look not at unemployment but at real wages.

A final reason for non-understanding of the long wave is that a fifty-sixty-year cycle is incompatible with human learning. Those who might have absorbed the lessons of one downturn (or upturn) are just about off the scene when the next one shows up. Those in power at any time formed their professional experience during the phase of the long wave that least resembles the phase they are negotiating. So we have people whose learning is out of phase with present events, trying to cope with a complex system that is undergoing many kinds of ups and down, some of which offset each other, some of which reinforce each other.

Let us pause for a moment of commiseration for the politicians who have to pretend to control this system, and for the rest of us who have to make a living within it.

The complexities of economic dynamics can be eased by pretending that they are simpler than they are—by cleaving to a liberal or conservative ideology. Both these ideologies persist because they contain important truths. Each is particularly applicable to one phase of the long wave. Unfortunately, because of the bad match between human generations and the timing of the wave, they tend to get applied with astonishing perversity at exactly the wrong times.

Consider the upturn. Production capacity can't keep up with rising demand. Stunning new technologies are coming on line. Capital is urgently needed. This is a time to damp down consumption and encourage savings and investment. High consumption taxes and low investment taxes make sense. So does fiscal conservatism—government shouldn't be running deficits, competing with the private sector for scarce savings. Jobs are plentiful; anyone who can't find one probably needs to be given a kick. If there was ever a time to shift the tax burden away from the rich and onto the consuming masses, a time when the idea of trickle-down has validity, this is it.

During the downturn, however, promoting investment is about as effective as pushing on a wet noodle. There is too much capacity, there can be no recovery until the economy discards the excess. What needs to be pushed is consumption, to keep up faltering demand. The long wave trough is the time to ease the lot of the poor, tax away the uninvestable excess of the rich, and run deficits. It is also the time to impose strong regulations on businesses, which are sorely tempted under duress to abuse resources, scrap environmental precautions, beggar their workers, and engage in risky financial maneuvers.

Especially during the downturn people instinctively do the opposite of what is called for. Times are scary, businesses are failing, debts are mounting. It seems logical to reduce deficits, cut government spending, and try to keep shaky firms afloat by deregulating. Conditioned by decades of fighting the inflation inherent in the upturn, we keep money tight, though in the downturn the problem is


None of these policies produce the desired results, but ideologists are self-absorbed, self-righteous, and self-reinforcing. Faced with failure, they just add another layer of denial and turn up the volume of rhetoric.

What to Do About the Long Wave?

Forrester's model is just a theory. Economics is nothing but a bunch of theories. This particular one—that a long wave exists and that it is caused by systematic, self-induced, economy-wide over- and under-investment-is never going to be popular. If there ís anything people don't want to hear, it's that they are causing their own pain-or, worse, that they are being tossed around by the internal dynamics of an amorphous system that is not only impervious to human will, but that subtly conditions human will.

But this theory is as deserving of consideration as any other. Its hypothesized causal links are based on measurable elements of the physical economy. It has successfully predicted phenomena that have taken other theorists by surprise. Those of us who have watched its predictions play out for two decades now have no choice but to take the long wave model seriously, whether we like it or not. And its implications are not, in fact, so bad. If the long wave really does manifest from the linkages of a large-scale, complex, and deeply entrenched system, that does not mean that nothing can be done about it. The MIT analysis suggests ways to reduce the amplitude of its cycles and to mitigate the danger of the downturns.

Better information about the whole economy, collected by government and made available to all players, would help. Knowing, for example, how much electrical or steel or car-building capacity was on order economy-wide (which means, for steel and cars, world-wide) could sober the tendency to over-order as the long wave swings up, and ease the panic that causes too much downsizing as the wave swings down. Tracking, insofar as possible, the central long-term tendency of the economy, and the degree to which productive capacity has deviated from that tendency, could keep builders, lenders, and speculators from exacerbating the deviations.

The government could practice counter-cyclic policy. At the beginning of the upswing it could damp consumption and encourage investment; as the upswing threatens to go too far, it could do the opposite. Government could move against inflation on the rising wave and deflation on the falling wave. It could stand firm on regulations, especially on the downswing, when companies are tempted to cut corners and financial markets are tempted to lose prudence. It could strengthen the social safety net when it is most needed, even if that means deficit spending. It could repay debt and run insulating surpluses during upturns.

No government will have the discipline to do any of those things unless it deeply understands the economic structures that cause both the business cycle and the long wave. No democratic government will be allowed to do them unless the people understand as well. That means a massive job of public education, especially during the scary time of the downturn.

What is needed in the downturn, above all, is reassurance. The downward slide does not signal a disintegration of the social order. It is simply a correction for excess capital, first in the capital-producing heavy industries, later in the consumer-goods industries. The real wealth of the nation-land, resources, people, machines, know-howó-is still there. It needs to be reorganized and restructured. Some businesses and workers can be hurt in the shift, if there is no social commitment to help them. If there is that commitment-if solidarity and generosity can be summoned-then not only will the political rhetoric be uplifting rather than nasty, but the trough will be less deep.

The good news about a long wave is that what goes down must come back up, at least as long as there's room on the planet for the exponential growth of the industrial revolution. (Some of us believe there's little or no room left, but that's another computer model.) In the coming upturn technical opportunities will blossom. The IBMs and Xeroxes of the future are forming now around, I hope, solar energy, nanotechnology, digital information transfer, radical energy efficiency, fuel cells, hydrogen fuel, zero-emission manufacturing and total materials recycling all of which would help the limits problem too.

The most important thing to understand is that downturns are no one's fault. The hard times are not caused by Republicans, Democrats, Indonesians, South Koreans, Japanese, immigrants, unwed mothers, overpaid CEOs, environmentalists, gays, feminists, Russians, Mexicans, investment bankers, Hillary Clinton, Rush Limbaugh, the Bureau of Alcohol, Tobacco, and Firearms, the National Rifle Association, NAFTA, GATT, the United Nations, El Niño, Comet Hale-Bopp or any other handy scapegoat. Most of us enjoyed the ride up. We can minimize the slide down by being compassionate with one another and by stepping back far enough to understand, accept, and counterbalance intelligently the ups and downs of the market system.

So Where Are We Now?

I started by saying these long-wave folks could predict, but they don't do it with precise numbers by the week so you can use them to make a killing on the stock market. They predict important things, but they do it in broad sweeps, over decades.

Most of them would say now that we're right at the bottom of the trough, though perhaps riding high on a short-term business cycle. The US, having shed much of its capital-producing capital over the past twenty years (one-third of its steel production, huge chunks of its machine-tool industry), may be about to turn upward. But we may be delayed by the linked world economy, which still has significant retracting to do.

According to William Greider's new book, One World, Ready or Not , worldwide car-building capacity was twenty-five percent over demand in 1985, thirty percent over demand in 1995, and is projected to be thirty-six percent over demand in 2000. The global tire industry in 1994 was operating at seventy percent of capacity. World steel production exceeds demand by twenty percent. Commercial aircraft-building capacity is twice market demand. Greider quotes an economist at the Chemical Manufacturers Association: "It seems safe to predict that generally the world supply of many basic industrial chemicals will trend toward an over-supply situation during much of the rest of the decade and perhaps beyond." A research head at Roche pharmaceuticals: "Global prescription sales would need to reach about $280 billion a year within ten years [more than twice the current sales] to justify the present levels of investment. The chances of reaching that figure are more than lowóthey are non-existent." A Sony executive: "Consumer electronics suffers from overcapacity, but thatís why we are living in an interesting world." A former IBM strategic planner: "I've been worried for a long time that there's too much capacity, and as a result, there are very few people in the computer industry making much money. It's true in other industries too."

Asia was probably the main reason why this particular long wave downturn was more gradual than the last one. Asia provided a great sponge to soak up investment that had few other places to go. But now significant parts of Asia are themselves overbuilt. Card-houses are tumbling down. There could yet be a spectacular implosion, if overvalued financial assets come back down to earth quickly.

If no implosion, if we've managed by now to let off most of the steam of the overpressured economy, relatively unscathed by panic and totalitarianism (compared to last time, anyway), there ought to be an upturn sometime within the next ten years. It's an important one. It's the one we get to use to build the technologies and institutions and attitudes and understandings that will let us live sustainably within the limits of the planet.