Figure 1
PART III: MANIC-DEPRESSIVE SOCIAL PSYCHOLOGY
Thus far, a substantial body of empirical evidence has been presented which strongly suggests the behavior of markets and society in general is literally insane. Specifically, man as a species currently appears to be suffering from collective emotional and mental instability that is manic-depressive in character. Wave patterns in stock prices, business cycles like Kondratieff's long-wave and contrarian phenomena exist because the collective mood of investors and social participants swings between irrational extremes of optimism and pessimism.
-The Initial Discovery-
In 1992, I proposed the idea of "manic-depressive man" in a letter
written to Elliott Wave theorist Robert Prechter:
I have just tapped upon a new theory which I'm sure will interest
you very much. I've discovered something which seems to tie together wave theory,
mood swings, and the dynamics of social change in an extraordinary way. As a
whole, man may very well be insane at present- grossly out of touch with reality.
specifically, the mass psychology of humanity (or at least Western Civilization)
may be at the end of an unprecedented episode of creative mania and is about
to sink into a severe depression which could ultimately lead to self- destruction.
As is readily reflected in the market, the mood of man naturally swings from
optimism to pessimism. What's important to note, however, is that in recent
centuries the mood swings have grown increasingly pronounced and regular. This
has coincided with a major upsurge in human creativity. The implication of this
pattern is that man may currently be suffering from a 'mad-genius' syndrome-
what psychologists refer to as 'manic-depressive illness'.
In order to properly diagnose man as manic-depressive, let's first examine exactly
what the disorder entails.
-Manic-Depressive Syndrome-
Manic-depressive syndrome involves distinct, periodic mood swings between
excessive optimism (mania) and excessive pessimism (depression).
According to the diagnostic criteria of DSM-III-R (the manual used by clinicians
to make psychiatric diagnoses), episodes of mania typically involve the following
symptoms (1):
1. A distinct period of elevated feelings and over-optimism.
2. Inflated self-esteem.
3. Increased activity and a decreased need for sleep.
4. Racing thoughts, flight of ideas, and an overactive imagination.
5. Increased goal-oriented activity, esp. work.
6. Buying sprees and reckless over-consumption.
7. Risky speculation and investment activity.
In general, mania entails a sharp, positive upsurge in thoughts, feelings, and
physiological activity. If this energy is properly focused, then heightened
productivity and creativity results. The energetic feelings and active imagination
of a manic makes supernormal accomplishments possible, although this may coincide
with potentially harmful over-indulgence and speculation as well as grandiose
delusions.
According to the diagnostic criteria of DSM-III-R, depression involve the opposite
features of mania: depressed mood, low self-esteem, fatigue and listlessness,
slowed thought and poverty of ideas, apathy, and sharply reduced consumption
and investment activity. During depression, a person may experience panics-
boughts of overwhelming irrational fear and guilt. In general, they become morbid
and destructive in both thought and behavior (2).
-Seasonality-
One of the distinctive features of manic-depression is the
periodicity of mood swings. The recurrent cycles between positive and negative
affect in a typical manic-depressive follows a circannu_al rhythm. In other
words, there is a dominant annual seasonal pattern to manic-depressive mood
swings. This seasonality is depicted in the following diagram:
Figure 1
As can be seen, mania tends to hit during the summer months; swings into major depression occur during the fall and spring- particularly September/October and April/May; winter seems to be characterized by an extended mild depression (3).
The actual seasonal variation in the mood swings of manic-depressive patients is shown in the histogram below:
Figure 2
There are distinct spikes at the 6 and 12 month intervals and any interval that
is a multiple of 12 months thus showing the dominant circannual pattern to manic-depressive
cycles (4). Further evidence of the seasonality of manic-depression comes from
historical suicide rates. The potential for major depression in the April/May
and September/October periods is reflected by seasonal peaks in suicide occurrences
in the months of May and October (5). with regard to circannual mood swings,
this means that during the peak seasonal transition periods there is the highest
emotional disturbance and greatest potential for major depression and suicide
attempts.
Notably, the seasonality of mood swings is not strictly a phenomenon among
manic-depressive personalities. A circannual oscillation in mood is evident
across the general population, just to a lesser degree:
Seasonal variations in mood and behavior appear to be common - in the general
population as well as in individuals with affective disorders. Eastwood and
colleagues (1985) compared the infradian rhythms of mood, sleep, anxiety, and
energy over a period of 14 months in 30 patients with affective illness and
34 healthy control subjects matched for age and sex. They found that the majority
of patients and many of the healthy subjects had infradian rhythms in mood,
energy, and sleep, and about half of these were seasonal (6).
-Manic-Depression & Creative Genius-
"I am come of a race noted for vigor of
fancy and ardor of passion. Men have called me mad; but the question is not
yet settled, whether madness is or is not the loftiest intelligence- whether
much that is glorious- whether all that is profound- does not spring from disease
of thought- from moods of mind exalted at the expense of the general intellect."
(Edgar Allan Poe)
Psychologists and psychiatrists have recognized that manic- depression often
is a "Key to Genius" (7). The mental and emotional instability of
manic-depressive personalities goes along with extraordinary imagination and
innovative thinking. Thus, as paradoxical as it may seem, something psychologists
have classified as a psychotic mental "disorder" is, in fact, qften
a part of supernormal mental capabilities.
The reality is that manic-depression has been a factor in the lives of many
of the creative personalities that have shaped human science, culture, and history.
Some of the more renown individuals to have shown classic manic-depressive traits
were: musical composers such as Mozart, Beethoven, Tchaikovsky, Handel, Schumann,
and Wagner; the majority of renown writers and poets- e.g., Yeats, Shelley,
Lord Byron, Emerson, Dostoyevski, Tolstoy, Goethe, Poe, Dickens, Melville, Hemingway,
J.S. Mill, F. Scott Fitzgerald, Virginia Woolf, etc.; great philosophical and
scientific minds like Plato, Aristotle, Socrates, Descarte, Rousseau, Nietzsche,
Bacon, and Newton; key political leaders like Napoleon, Lincoln, Lenin, Hitler,
Mussolini, and Churchill; and influential religious leaders such as Luther,
Calvin, and William James (8). Ironically, therefore, some of the greatest minds
in history were, in fact, severely unstable. This is most strongly reflected
by the fact that, at the same time such geniuses as Beethoven, Dickens, Rousseau,
and Newton were thinking up their creative masterpieces, they were concomitantly
suffering from irrational and typically grandiose hallucinations and/or delusions.
To get a sense of just how common manic-depression is among creative personalities,
consider the following chart and histogram which show the prevalance of severe
mood disorders among British writers and poets:
To give you an idea of how manic-depression typically influences the productivity of a creative genius, consider the chart below of Robert Schumann's life work:
Figure 5
As can be seen, episodic manias and depressions throughout Schumann's adult
life shaped the pattern of his work. When manic, he composed an enormous amount
of music, but when depressed Schumann achieved little or nothing. The tragedy
of his manic-depressive personality is demonstrated by how the life of this
musical genius was dotted with suicide attempts and by how, at the relatively
young age of 46, Schumann died of self-starvation in an insane asylum.
Summarily,
manic-depression often corresponds with creative genius. Some of the greatest
minds in history were what modern psychiatry refers to as "disordered".
Manic-depressive personalites pervade the creative arts and sciences and often
become important leaders because their mental and emotional instability goes
along with a supernormal flow of innovative thoughts and actions. More specifically,
periods of mania allow for extraordinary creativity and productivity after which
a period of reduced activity and depression occurs. Eventually the depression
lifts, however, opening the way for another creative upswing.
-The Diagnosis of Manic-Depressive Man-
In diagnosing society as manic-depressive, one needs to consider the combined
implications of Elliott Waves, business cycles, Kondratieff Waves, and contrarianism.
These empirical phenomenon are the evidence, the sociological symptoms, that
warrant a diagnosis of manic-depressive man.
-Elliott Waves and Contrarianism-
As Prechter has pointed out, Elliott Waves reflect that "mass investor
psychology swings from pessimism to optimism and back in a natural sequence".
In other words, Elliott Waves are, by definition, a phenomenon of bipolar swings
in popular mood- swings between the two poles of positive and negative affect.
That Elliott Waves in market prices are a symptom of popular manic- depressive
mood swings is corroborated by contrarianism. A contrarian investment strategy
works only because of the manic-depressive character of market psychology. The
underlying cause of cycles in market prices is swings in the aggregate mood
of investors. Because of radical subjectivity, greed and blind speculation,
the consensus beliefs and expectations of investors swings between irrational
extremes of optimism and pessimism. The prices of individual stocks or entire
markets are speculated to unrealistic heights by mass greed and then pushed
to unrealistic lows by mass fear. By paying attention to indicators of market
psychology and investor expectations such as opinion polls, cash levels, valuation
measures, and stock offerings, astute investors can determine when extremes
of optimism and pessimism are being reached and thereby successfully determine
in a contrarian fashion when to buy and sell as well as what to buy and sell.
Thus, by going against the irrationality of the crowd, a contrarian successfully
times the tops and bottoms of cycles in market prices caused by manic-depressive
crowd psychology. As is reflected by the varying scale Elliott Waves that can
occ~r- periodicities ranging from days to centuries- popular manic-depressive
mood swings come in many shapes and sizes. One way in which varying scale mood
swings manifest beyond market prices is business cycles. The 3- to 5-year Kitchin
cycle, the 7- to ii-year Juglar cycle, the 15- to 25-year Kuznets cycle, and
the 50- to 60-year Kondratieff long-wave, are the known business cycles (10).
Each of them represents a different scale bipolar swing in social mood.
-Psychological Theories of the Business Cycle-
The "psychological theories" of business cycles that have been developed
up until now by economists such as J.M. Keynes, A.C. Pigou, and F. Lavington,
are consistent with the theme of this paper. In his book Prosperity and Depression,
economist Gottfried Haberler points out that psychological theories emphasize
the impact of "optimism", "pessimism", and subjective "irrational
influences" (Keynesian "animal spirits") on market and economic
behavior (11):
The theorists of who stress the psychological factor, especially Professor
Pigou and Hr. Keynes, point out, furthermore, that the discovery of errors of
optimism aives birth to the opposite error of pessimism. Professor Piaou spea~sof
'the mutual aeneration of errors of optimism and pessimism'. The above passage
from Hr. Keynes continues: 'When disillusionment comes, this (optimistic) expectation
is replaced by a contrary error of pessimism, with the result that the investments
which would in fact yield 2% in conditions of full employment are expected to
yield less than nothing; and the resulting collapse of new investment then leads
to a state of unemployment in which the investment, which would have yielded
2% in conditions of full employment, in fact yields less than nothing. '
Professor Pigou points out that 'the extent of the revulsion towards pessimistic
error, which follows when optimistic error is disclosed, depends, in part, upon
the maanitude of the precedina optimistic error... .But it is also affected
by what one may call the detonation which accompanies the discovery of a given
amount of optimistic error. The detonation is greater or less according to the
number and scale of the legal bankruptcies into which the detected error explodes.'
If the enterprises which are making losses have been financed by the entrepreneurs
with their own money, the repercussions are less serious than in the case where
they have been financed by borrowing, especially borrowing from the banks. (12)
The symmetries between "psychological" theories of the business cycle
and contrarianism should be clear. The "contagion of confidence" emphasized
by Lavington is the groupthink of investor sentiment emphasized by David Dreman.
The way in which that confidence leads to "excessive valuation of capital
assets" is no different than how mass speculation leads to relatively overvaluated
financial assets like high PIE stocks. The "discovery of errors of optimism",
"dissillusionment", and "contrary error of pessimism", is
the turning point in popular sentiment, consensus opinion, and market prices
that contrarianism is used to determine. Thus, the behavior of markets as described
in
.
Prechter's Elliott Wave theory and Dreman's contrarianism parallels the behavior
of the economy as described by "psychological theorists" such as Lavington,
Pigou, and Keynes.
-Kondratieff's Long-Wave and Severe Social Mood Swings-
While Elliott Waves, business cycles, and contrarianism are strongly indicative of manic-depressive man, no where is the symptoms of an actual social disorder more evident than in the long-waves discovered by Nikolai Kondratieff. The Kondratieff wave clearly depicts recurrent, large-scale swings in society between creative prosperities and stagnant depressions. Furthermore, the different phases of the Kondratieff wave includes periodic episodes of dangerous, psychotic mania that are followed by panic and crashes into major social depressions. (13)
The general upswing of the Kondratieff wave is characterized by continuous
productivity gains, economic growth, expanding demand, and rising prices, mood,
and expectations. In American economic history, this occurred during the periods:
1789-1814, 1843-1864, 1896-1920, and
1937-1970's (see part I for graph). Each of these general upswings peaked with
a spike in general prices caused by excessive expectations with regard to future
demand and economic growth.
The spike in general prices is broken by a sharp, unexpected slump in the economy- the "primary recession". As general disinflation takes hold a distinct episode of "social mania" is set-off, i. e. , the so- called IIdisinflationary boom" or "speculative blow-off" stage of the Kondratieff wave. Transitions into full-blown manic-episodes struck the United States during the following periods: 1812-1814, 1863-1864', 1920- 1921, and 1979-1982.
The symptomology of a society caught up in a social mania is consistent with the DSM-III-R criteria used to diagnose individual manic-episodes (see above):
1. A distinct period of elevated feelings and over-optimism.
2. An inflated sense of group confidence.
3. A sharp increase in business and social activity.
4. A flurry of new ideas and innovations.
5. Increased goal-activity as reflected in higher productivity. -
6 Reckless over-consumption and heavy debt accumulation.
7. Rampant speculation and risky investment activity.
With regard to social manias, the final symptom listed above, speculation,
appears to be particularly relevant. Indeed, the term
"speculative mania" is often applied to Kondratieff disinflationary booms.
The nature of these manias is described in such classic texts as Charles Kindleberger's
Manias. Panics. and Crashes and Charles MacKay's Extraordinary Popular Delusions
and the Madness of Crowds (14). Kindleberger offers an intriguing list of the
words and phrases used in historical literature to describe speculative manias:
"manias, insane land speculation, blind passion, financial orgies, frenzies,
feverish speculation, epidemic desire to become rich quick, wishful thinking,
intoxicated investors, turning a blind eye, people without ears to hear or eyes
to see, investors living in a fool's paradise, easy credibility, overconfidence,
overspeculation, overtrading, a raging appetite, a craze, a mad rush to expand".
(15)
In association with Kondratieff disinflationary booms, America has suffered
four episodes of social mania each of which involved rampant speculation and
most of the other symptoms listed previously. Furthermore, they have become
increasingly pronounced and severe over history. The first two episodes, the
"Era of Good Feelings" that followed the War of 1812 and lasted until
1819 and the "Reconstruction" or "Industrial Overexpansion Prosperity"
between the end of the Civil War and 1873, were relatively mild compared to
the episodes of the twentieth century. The "Roaring Twenties" between
1921 and 1929 was a classic example of a social mania and involved all of the
symptoms listed above. Furthermore, the Roaring Twenties involved a speculative
mania the likes of which the world had not seen since the South Sea Bubble developed
in early eighteenth century England. Overshadowing the Roaring Twenties, however,
is the social mania that started in 1982 and is still underway to this day.
As described, for example, in Adam smith's book called "The Roaring Eighties",
America is experiencing one of the most severe Kondratieff wave manic episodes
in its history.
Following the Kondratieff wave outline, social manias are followed by a major
panic and collapse into a "secondary" social depression. The cross-population
symptomology of social depression is, again, consistent with the DSM-III-R criteria
for diagnosing major depression in individuals, i.e., depressed social mood,
low group confidence, general listlessness and apathy, sharply reduced business
and social activity, lack of new ideas and subdued innovation, and depressed
consumption and investment activity. As with individual manic-depressives, society
usually suffers panics during major depressions- i.e., boughts of overwhelming
irration,al fear that are associated with severe financial crises.
As with its episodes of social mania, America's panics and depressionary collapses
have become increasingly severe over history. The panic of 1818/1819 was relatively
mild compared to the stock market crash and financial panic in September of
1873. Likewise, the slump in socioeconomic activity, popular sentiment, and
prices between 1819 and 1843 did not earn the title of a "Great Depression"
as did the slump between late-1873 and 1896. The panic of 1873 and subsequent
depression were relegated to a footnote of history, however, by the "Great
Crash" in October of 1929 and the Great Depression of the 1930's. The Great
Depression involved all the symptoms of major depression listed above and involved
multiple panics, particularly between 1929 and 1933.
In summary, Kondratieff's long-wave is one of the most severe bipolar mood swings
suffered by society. The extended upswing and downswing of long-waves entail
large-scale swings between creative prosperity and optimism and general stagnation
and pessimism.
Furthermore, the speculative blow-off, panic, and secondary depression of the
Kondratieff wave is equivalent to a distinct episode of social mania followed
by a collapse into major depression. According to the manic-depressive interpretation
of the Kondratieff wave, there have been around three and a half bipolar long-cycles
in American history, each of increasing severity. In the context of the current
cycle, society is at the tail end of its worst manic-episode. ever and a crash
into an unprecedented depression is imminent.
-Seasonality-
Notably, the seasonality of manic-depressive mood swings in society is consistent
with the seasonality of mood swings in bipolar individuals. Seasonal patterns
in the mood of investors is reflected ~n stock price movements. Furthermore,
their is a distinct seasonality to severe social panics and breaks into major
depression.
MONTHLY SEASONAL TENDENCIES: S&P 500 INDEX 1926 to 1988
Direction of S&P 500 Index Average %
Advances Declines Change in S&P 500 Index
January 41 22 +1.34
February 34 29 + 0.05
March 35 28 + 0.09
April 35 28 + 1.11
May 32 31 -0.68
June 34 29 + 1.05
July 37 26 +1.55
August 40 23 + 1.58
September 24 39 - 1.39
October 33 30 -0.51
November 38 25 + 0.60
December 46 17 + 1.30
Total: 429 327 +0.51%
Figure 7
As can be seen in the table above, the stock market typically swings in line
with the circannual ryhthm of mood of manic-depressive individuals depicted
in figure 1 at the beginning of this chapter. During the summer there is typically
elevated sentiment and rising prices in what has come to be called the "summer
rally". The spring and fall are the worst period for stock prices; historically,
May, September, and October are the only months that stock prices are down on average. During the winter the market is generally up but not so much as during
the summer. The typical pattern is for a significant rally from late December
into January, i.e., the so-called "January effect" (16).
The seasonality of popular mood is best revealed by the timing _of major panics in American history. Consider, for instance, the following diagram from Eugene White's Crashes and Panics:
As can be seen, the worst social panics and stock crashes in American history typically occurred in the April/Mayor September/October periods- consistent with the pattern seen in individual manic- depressives. This seasonal tendency has been especially true during the twentieth century with crashes into October 1907, October 1929, OctoQer 1946, May 1962, October 1987, October 1989, and October 1990 (17). Notably, the severe panic and break into social depression every 50-60 years following a Kondratieff social mania has always struck around the September/October period: November 1818, September 1873, October 1929.
Interestingly, in America there is a unique cultural manifestation of October panic and depression. Given that the "Great" Crashes of 1929 and 1987 occurred on October 29th and October 19th, respectively, late- October appears to be the point of most acute seasonal transition and, in turn, mass fear. A cultural manifestation of this seasonal mood that is unique in America is "All Hallow's Eve" or, as it's more commonly referred to, Halloween. This dark holiday is about as explicit an expression as possible of a seasonal popular mood that is fearful, morbid, and depressed.
-The Creative Disorder of Man-
As was explained above, manic-depression often corresponds with creative genius in individuals. Many of the most creative personalities in history were manic-depressive. With regard to society, a s~me pattern appears to exist. The more pronounced the manic-depressive tendencies of popular mood, the greater the creativity.
The correlation between social manic-depression and creativity is most evident in America. The bipolar mood swings in American society are both distinct and, as reflected in recent Kondratieff long-waves, of increasingly severe magnitude. This pattern exists in what is probably the most creative society in the history of the world. What is more, the creativity of America has been particularly pronounced during the twentieth century- in conjunction with its most severe historical mood swings.
-Joseph Schumpeter, Business Cycles, & Innovation-
". ..the bulk of private fortunes is, in
capitalist society,
directly or indirectly the result of the process of which
innovation is the 'prime mover'"
(Joseph Schumpeter, Business Cycles)
That cross-population manic-depression is associated with man's creative potential appears to be revealed in "innovation theories" of business cycles and the Kondratieff wave in particular (18). While Schmookler and Hensch have offered evidence and theoretical support to the idea that innovation lies behind cycles, especially the long-cycle, no author has carried out a more comprehensive treatment of the subject
than Joseph Schumpeter. In a nutshell, Schumpeter attempted to construct a "disequilibrium" model of the Capitalist system that demonstrated the role of innovation and endogenous change (19).
In economic theory, the Capitalist system is depicted in stati.c, equilibrium models in which change is caused only by external forces. Schumpeter thought of this as follows:
I felt very strongly that this was wrong, and that there was a source of energy
within the economic system which could itself disrupt any equilibrium that might
be attained. If this is so, then there must be a purely economic theory of economic
change which does not merely rely on external forces propelling the economic
system from one equilibrium to another. It is such a theory that I have tried
to build and I believe now, as I believed then, that it contributes something
to the understanding of the struggles and vicissitudes of the Capitalist world
and explains a number of phenomenon, in particular the business cycle, more
satisfactorily than it is possible to explain them by means of either Walrasian
or the Marshallian apparatus. (20)
And what "source of energy within' the economic system" did Schumpeter
conclude was responsible for disequilibrium and change? That ultimate force
at the core of all historical development: creative thought.
In his Theory of Economic Development and again in his monumental work, Business Cycles: A Theoretical. Historical. and Statistical Analysis of the Capitalist Process, Schumpeter took multiple steps to build a realistic economic model of what is appropriately referred to as "general disequilibrium". After a first approximation in which only a two-phase business cycle is developed, Schumpeter models a second approximation that leads to a four-phase business cycle (21). This cycle consists of prosperity, recession, depression, and recovery and is graphically represented below:
To get the four-phase cycle above, Schumpeter begins with a "pure" model of the economy in which there is no change. Schumpeter's pure economy is characterized by a balanced circular flow of economic activity in which all knowhow and processes are routine. This system, which is effectively the neoclassical economic model, is characterized by general equilibrium and a lack of profits; all factor inputs receive payments equal to the value they add to output.
After building his pure, equilibrium model of the economy which, by definition, is a system in which there is no tendency for change, Schumpeter introduces entrepreneurship and innovation. In other words, he introduces change. Due to innovation, the balanced circular flow of the economy is disrupted and, consequently, profit opportunities emerge. In order to exploit these opportunities, financial investment, credit, and interest emerge. Productivity increases and there is economic growth. Financial boom, high expectations and prosperity are realized: a business cycle upswing has been triggered.
Eventually the impact of innovation runs its course and a growth recession occurs. What were once "new" ideas have become a routine part of the economy. As profits dwindle, investments fail to offer their expected return. The recession soon becomes a depression as bankruptcies occur, credit contracts, expectations turn negative, and investment activity drops-off.
Inevitably the downwave of "creative destruction" reaches a bottom
and a recovery ensues. The economy eventually returns to f~ll production and
equilibrium, but at a higher level of productivity than had been the case before
innovation was introduced.
After using two approximations to establish the simple four-phase business cycle
of prosperity, recession, depression, and recovery, Schumpeter develops a third
and final approximation which results in the simultaneous occurence of three
different four-phase business cycles in an economy. By introducing innovations
in periodic clusters and with varying scale impact, Schumpeter shows that the
capitalist system will be characterized by at least three business cycles of
different length (22). Specifically, his model demonstrates how the 40-month
Kitchin cycle, 9- to la-year Juglar cycle, and 50- to 60-year Kondratieff cycle
occur simultaneously.
Importantly, while Schumpeter found the above scheme to be "useful" in his work, he did not consider it a comprehensive model of the business cycles that occur in the capitalist system. He understood that the number of cycles could be indefinite- a point Robert Prechter would be quick to second. (20)
After completing his dynamic, disequilibrium model of the economy, Schumpeter takes but one more radical step beyond neoclassical economics and actually provides exhaustive empirical support for his theory. (Obviously orthodox economists fail to do so for the most part because examining economic reality would falsify their "equilibrium" models.) In Business Cycles, Schumpeter devotes the first five chapters and 220 pages to building his economic model of general disequilibrium and then spends ten chapters and 830 pages corroborating his model with a "histor.ical and statistical analysis of the capitalist process".
Specifically, Schumpeter reviews American, British, and German economic history from the late-eighteenth century through the Great Depression of the 1930's in the context of the varying scale business cycles depicted in his model. In other words, he overviews the historical pattern of disequilibrium and change that is involved in the "capitalist process".
While Schumpeter believes that entrepreneurial activity is responsible for
the smaller scale business cycles, what is most pertinent here is what role
he thought innovation played in large-scale business cycles in the American
economy, i.e., the Kondratieff wave. On this subject, Schumpeter wrote:
Historically, the first Kondratieff covered by our material means the industrial
revolution.. ..We date it from the eighties
of the eighteenth century to 1842. The second stretches over what has been called
the age of stearn and steel. It ran its course between 1842 and 1897. And the
third, the Kondratieff of electricity, chemistry, and motors, we date from 1898
on. (24)
Schumpeter's long-wave chronology is broken down in the table below:
Schumpeter's long-wave chronology
prosperity recession depression recovery
1. Industrial Revolution Kondratieff: cotton textile, iron, steam power - 1787-1800
| 1801-1813 |1814-1827 |1828-1842
2. Bourgeois Kondratieff: railroadization -
1843-1857 |1858-1869 | 1870-1884/5 | 1886-1897
3. Neo-Mercantllist Kondratieff:
electricity, automobile
1898-1911 | 1912-1924/5 | 1925/6-1939
Figure 11
All in all, Schumpeter recognized that cycles of prosperity and depression
are part of the process involving ongoing innovation and dynamic change called
"capi talism" . He ties the three completed Kondratieff waves in American
history to key innovations that changed the overall way of doing things within
the economy. These radical transformations corresponded with radically changing
knowhow and procedures throughout society which both required and fed into a
highly dynamic and unstable mass psychology.
.
In summary, Schumpeter's theory of economic development can be reduced to four
basic propositions (25):
1. Innovation is the fundamental impulse which sets and keeps the capitalist engine in motion.
2. Innovations are an essentially discontinuous phenomenon: they appear in swarms.
3. Therefore economic development is a cyclical process: 'cyclical "waves"
are essentially the form "progress" takes in competi ti ve capitalism'
.
4. Innovations have different impacts. That is why, simultaneously, cycles of
different length exist. The long wave is caused by such basic innovations as
railroadization, electrification and motorization.