Learn about long waves to better ride the next one - Part 1
Learn about long waves to better ride the next one - Part 1
May 22, 2023
Currently, most business leaders, policy-makers, and investors focus mainly on how to best deal with the COVID-19 crisis and its economic repercussions. Perhaps these current problems are your main concerns these days, too. Such a narrow focus on short-term crisis management is understandable and, in some cases, even life-saving for humans and companies alike. Yet, it might also prevent business leaders, politicians, investors, and you from noticing and paying attention to some crucial mega-trends with significant long-term implications that have already started to play out in parallel.
A major crisis is a turning point. It often accelerates developments that have already been on the horizon, waiting for their time to come. The coming unfolding of the Sixth Wave is such a fundamental change. It will disrupt business as we know it, lead to the rise of new cutting-edge technologies and related industries, and radically transform our economies. In a recent study, the World Economic Forum predicted an innovation tsunami to wash over established industries (such as the energy sector that was the specific focal point of the said report). Similarly, in their book The Innovator’s Secret Formula, Sorensen, Brocchini, and Kane noted, “We are living in the Age of Hyper-Innovation, in which more world-changing innovations will be developed in the next 10 years than were produced in the previous 100 years.”
In a three-article episode, let’s jointly explore these long economic cycles, given that the first currents of a giant new innovation wave have already begun unfolding. Today, I will first explain how long cycles work in general and what waves we have already had. In part 2, published in two weeks, I will give you an outlook on the Sixth Wave and its likely leading-edge technologies. In the final part 3 of the article, I will offer you some suggestions on how you can best innovate in tune with the motion of the next wave.
What are long waves?
Long waves describe major technological revolutions that unfold in long cycles of initially four to six decades and trigger the creation of new leading-edge industries or economic sectors. The Russian economist Nikolai Kondratiev discovered and introduced these technology-driven long economic cycles in the 1920s. In the 1930s, the influential Austrian economist Joseph Schumpeter popularized Kontratiev’s discovery and integrated it into his macroeconomic theories of evolutionary economics, centering around the concept of creative destruction. To honor the person who discovered the phenomenon, Schumpeter named these long waves Kondratiev waves (or short K-waves).
How do long waves unfold?
Nowadays, most scholars agree that a long cycle unfolds in four distinct phases (different authors label with various terms). Because I most like the concept and terminology of Carlota Perez, I use her model in the following to introduce the four phases of a long cycle to you:
In the first phase that Perez calls irruption, innovators create a disruptive innovation or new technology that subsequently gestates and slowly gains traction among early adopters and influential proponents.
Frenzy is the second phase of Perez’s long cycle model. Here, the disruptive technology (and the emerging related industry that drives it) takes off. The excitement about the new technology and related investment opportunities promising generous returns leads to a decoupling between the real and financial value of assets. This phase ends at the turning point when the technology bubble bursts.
In the third phase, called synergy that follows the collapse, the real and paper value of assets recouple. At this point, the market separates the wheat from the chaff. The future leaders of each industry niche (devolved from the leading-edge technology) emerge and drive a new phase of plausible, healthy growth.
In the fourth phase that Perez calls maturity, profits and growth from the innovation or industry gradually converge to the levels of the more established industries. Hence, investors with financial capital and ‘Idle money’ begin looking for fresh investment opportunities in new areas and industries, thus supporting the emergence of new disruptive technologies and the start of the next wave.
Perez maps out the four phases on an S-curve and breaks them into two periods of an equal length separated by the turning point. The first two phases form the installation period of the disruptive innovation (driven by financial capital), while the last two phases constitute its deployment period (governed by productive capital).
How many waves did we have so far?
The First Wave (ca. 1785-1845) triggered the industrial revolution and was based on a series of disruptive innovations in the water power, textile, and iron industries. As a result of these innovations, small manual workshops transformed into large, efficient mechanized textile and iron factories powered by James Watt’s steam engine with rotary motion.
The Second Wave (ca. 1845-1900) was fueled by steel and the steam-powered railway.
In the Third Wave (1900-1950), the disruptive innovations driving growth were electricity, the chemical industry, and combustion-engine powered vehicles. It was succeeded by …
… the Fourth Wave (ca. 1950-1990) powered by oil and petrochemicals, electronics, and aviation.
Finally, the disruptive innovations of the Fifth Wave were information and communication technology (ICT), software, digital networks, and social media. Some experts see this latest long cycle to have already started in the 1970s-1980s, while others date the Fifth Wave from 1990-2020.
Scholars studying long waves tend to vary in their views on the timing of when exactly a particular cycle started and ended. While some experts continue to support Kontratiev’s initial view of long waves unfolding in long economic cycles lasting 40-60 years, others such as Daniel Šmihula see the long waves accelerating with each new cycle being shorter than the previous one.
How does each long cycle impact the economy?
Interestingly, as a new Kontratiev-wave unfolds over a few decades, it drives economic growth not only directly (through new ventures that introduce a new lead technology and then promote, grow and establish it in the market). It also indirectly supports economic growth through related private and public investments to build the necessary infrastructure to give disruptive innovation traction during the installation period. (On the other hand, national and international governing bodies that define common standards and norms tend only to get established much later during the deployment period when a long-wave industry realizes synergies and matures.
What critical infrastructure investments supported each of the five long waves?
The construction of a nationwide canal system (in England and other countries) indirectly supported the first wave by expediting the transport of goods coming out of the textile mills and iron factories.
Similarly, in the Second Wave, the infrastructure build-up of a wide-ranging railway system was at the same time made possible and accelerated by the primary industries powering the Second Wave (steel and steam engine-powered locomotives and trains).
In the Third Wave, the set-up of a network of power grids and stations was pivotal to lighten up homes and electrify machines and factories. At the same time, the construction of a new road system allowed combustion-engine powered cars and trucks to demonstrate their superiority over horsepower.
Public investments in a vast network of airports helped boost modern-day aviation as one of the drivers of the Fourth Wave.
Finally, in the Fifth Wave, the deployment of ever-more-powerful and faster ICT networks was necessary for the most recent computer revolution and the rise of the Internet.
Interim conclusion and outlook: Sometimes, you just have to go with the waves
Many experts believe that we’ve already moved into the irruption phase of the Sixth Wave. This new long cycle will stimulate economic growth and prosperity for at least the coming 2.5 to 3 decades (and perhaps even longer). What are the leading-edge technologies that will likely drive the Sixth Wave? Come back to this blog in two weeks, when we will discuss the technology drivers of the Sixth Wave in part 2 of the article.