Canada and the world ride the long wave to GDP gloom: Don Pittis

Murdered by Stalin as an enemy of communism, Nikolai Kondratieff was never really a hero to capitalism, either.

The Russian economist's idea, widely challenged by many conventional Western economists, is that capitalist economies, as well as passing through periodic recessions and booms, face worse declines every half-century or so, caused by general industrial overcapacity.

• Canada's GDP grew 0.8% in last 3 months of 2015
• China set to lay off millions in coal, steel, other industries

As Canada contends with a worldwide glut of oil, commodities and industrial products, it is reasonable to re-examine Kondratieff's theory and ask whether it can tell us anything about what the global economy is experiencing now.

Creative destruction

Kondratieff's core idea, formulated by studying historical data, was the "long wave," which he determined to be between 50 to 60 years. The idea was championed by the Austrian-American economist Joseph Schumpeter, who also argued that creative destruction was the force that renewed capitalism and kept it fresh.

That's the idea that in an entrepreneurial economy, businesses with old management methods and old technology must collapse to make way for vigorous competitors.

Long-wave theory, as it sometimes called, is used to support many competing economic arguments. But perhaps the one most disliked by market economists who believe in the self-correcting nature of capitalism is the concept of a general economic overcapacity and glut.

For reasons that are disputed, the world's productive capacity begins to grow to a point where it produces more than people want to or can afford to consume.

Saudi Arabia and OPEC are taking the blame for producing too much oil. For the production of industrial goods from solar panels to steel, many critics see China as the villain of the story.

Zombie march

In an article this week titled The march of the zombies, The Economist directs a pointy finger at China, whose "huge exports of industrial goods are flooding markets everywhere, contributing to deflationary pressures and threatening producers worldwide."

Of course it is easier to blame others. The global oil market was relatively stable until U.S. domestic shale production kicked in. In China, U.S. companies from Apple to Walmart are part of the problem.

"It's classic long wave; it's overproduction," said David Knox Barker back in 2010.

"Washington is complaining about Chinese production and the goods they're dumping on our market but 60 percent of those exports out of China are owned by U.S. Fortune 500 companies, by our manufacturing facilities in China."

The fact is much of the world was thrilled when China followed the U.S. lead and began dumping money into its economy following the 2008 economic meltdown. It drove demand for iron and copper, potash and pork.

The stupendousness of China's industrial growth remains hard to comprehend. By 2014 it was producing as much coal as the rest of the world combined. By 2013 it was producing 90 per cent of the world's computers and 80 per cent of the world's air conditioners.

Yesterday an indicator of China's industrial production fell to its lowest level since 2011, just as the government was announcing it was shrinking coal and steel production, eliminating six million jobs. That is about a third of Canada's entire labour force.

At the same time, China is trying to boost growth by allowing its banks to lend more freely. Of course the danger is that with world interest rates near zero, zombie companies — those that Schumpeter says should have died in the destruction phase — continue to survive inside and outside China, contributing further to overproduction and making deflation worse. 

Feedback loop

Expanding overcapacity becomes like a giant feedback loop. Countries and companies produce more to counteract falling prices, pushing prices even lower. If breaking the cycle were easy or painless, it would already have been done. As many have said, it may be that the only way out is a crisis.

The long-wave idea has many doubters. Theories based on history are easily discredited by saying things are different now. Some say Kondratieff's analysis read the historical data wrong. Like scientists predicting earthquakes, no one really knows whether the next one will be the big one or just another tremor.

Some experts say faster technological change means the cycles will come more quickly. Paul Mason, author of Postcapitalism: A Guide to Our Future, says Schumpeter's idea of creative rebirth has been wiped out by technology that allows our best entrepreneurial ideas to be shared and reproduced in the form of bits and bytes at almost no cost.

In fact, this may be part of a Canadian economic rebirth. It is certain that when recovery comes, it will come to some places before others.

With so much of our manufacturing industry exported to places like China, we have already passed through the destruction phase.

A retreat from mass production might suit us well. Perhaps the next economic wave will be specialized and individual, local and fresh, based on quality and service. Drugs will be tailored just for you. Energy will be created on your roof. 

Micro-manufacturing and 3D printing will make exactly what you want.

And then maybe we can give foreign mass production the long wave goodbye.

Follow Don on Twitter @don_pittis

​More analysis by Don Pittis