The worst thing for policy makers is to think they are right

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The worst thing for policy makers is to think they are right

A good lesson...

Economic lessons from Lenin's seer

Published: February 15, 2009 by Kyle Crichton

Nikolai Kondratieff was not exactly a faceless bureaucrat in
post-revolutionary Russia. He had held an important economic post in the last,
short-lived government of Alexander Kerensky before the Bolsheviks took charge;
then he founded an influential research organization, the Institute of
Conjecture, and became an important theorist of the New Economic Policy
under Lenin.

But he would long ago have been consigned to the dustbin of history had it
not been for his quirky academic passion, which he pursued in a series of books
and papers through the 1920s. Reviewing economic history since the late 18th
century, Kondratieff came to a startling, doomsday conclusion: that capitalist
economies were fated to go through regular and predictable cycles of around 50
years, inevitably culminating in a depression.

Despite having become a committed Communist and the author of a theory of
inevitable if periodic capitalist collapses, Kondratieff was executed in 1938, a
victim of the Stalinist purges. Apparently, he had raised too-trenchant
questions about the government's newfound enthusiasm for heavy industry and
agricultural collectives. After spending eight years in the gulag, he left
behind a final letter to his daughter, poignantly urging her to be "a clever and
good girl" and "not to forget about me."

It was a fitting epitaph, for whenever it seems Kondratieff is about to be
forgotten, the economy nosedives. And once again, perhaps the most dismal of the
dismal science's practitioners is back in the news, which his disciples try to
fit into the cycles, or "Kondratieff waves," that he described.

Kondratieff and his disciples — among whom was Joseph Schumpeter, who wrote
about capitalism's "creative destruction" — identified four stages in each
cycle, corresponding to the seasons. After spurting ahead in the spring phase,
they said, the economy cruises through the summer, experiences a scary drop as
autumn sets in, and then — despite the TARPs, TALFs and whatever else
governments do — descends into a winter phase that can last up to 20 years.

In case you hadn't noticed, it has been getting quite chilly lately.

Over the years, Kondratieff's appeal has waxed and waned in counterpoint to
the economy, falling out of favor in good times but charging back when things
look bleak. But his theory has never been accepted by mainstream economists, who
consider it an occult hall of mirrors in which any sort of pattern can be
discerned by shifting starting dates and definitions.

Kondratieff's adepts have cried depression before, for example in 1982.
Reporting on the buzz his theory was getting during that downturn, a New York
Times correspondent, Paul Lewis, wrote: "According to Kondratieffian analysis,
the world is caught in the fourth great economic downswing since the 1790's, a
period of global recession that will probably last until near the end of the
century when a new age of prosperity will begin — and there is little anyone can
do about it."

Today, Kondratieff's disciples (a dwindling band, by the way) are just as
certain that the bad times began in 2000, with that year's stock market crash.
That was followed by the autumn phase of the Bush years, characterized by an
enormous (Kondratieff would say desperate) expansion of debt and leverage in an
attempt to maintain the prosperity of the spring and summer years.

Evidently, Kondratieff waves tend to be in the eye of the beholder, and
whatever value they have is descriptive, rather than predictive. After all, the
American economy ultimately shrugged off several market drops like that of 2000,
allowing the 25 years that followed 1982 to be a period of largely uninterrupted
growth. But in the last decade of that period, the United States's growth was
driven by debt in a desperate attempt to maintain an unsustainable level of
consumption, a stage that Kondratieff's theory quite accurately describes.

"The people who do the predicting are usually not central within the
discussion of economics," said David Colander, an economic historian at
Middlebury College, and an expert in the discipline's crank theorists. But
economies do "have this tendency to exceed" that Kondratieff and others have
grasped, he added, and that is largely lost in modern economic theory.

He offers the Austrian School as a possible rival to Kondratieff's line of
thought. Austrian economists tend to emphasize a laissez-faire approach and
entrepreneurship (not the most popular policies at this moment) and strict
limits on money supply growth, usually by hitching the currency to the
gold standard.

While considered outside the mainstream, the Austrian School is far more
respectable, counting in its ranks two Nobel Prize winners, Friedrich Hayek and
James Buchanan. Peter Schiff of Euro Pacific Capital — an adviser to the
libertarian presidential candidate Ron Paul and one of the most prominent
doomsayers in the current collapse — also subscribes to its theories.

Hayek is said to have successfully predicted the Great Depression and some
Austrian School devotees are taking credit for calling this one. "The financial
meltdown the economists of the Austrian School predicted has arrived," Paul
wrote in September, 11 days after Lehman Brothers filed for bankruptcy.

In the 1930s, John Maynard Keynes displaced Hayek and the Austrian School in
intellectual popularity, establishing his "general theory" as the economic bible
of the postwar decades. The Austrian line of thought made something of a
comeback in the Reagan years, but never quite gained acceptance in the economic
fraternity, Colander says.

"It probably should," he says.

"A good profession should take its outsiders more seriously," Colander says.
"They make you look at things in different ways. The worst thing for policy
makers is to think they are right."


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