Dr Jonathan D. Linton

Capitalism from Stalin's gulags

By Dr Jonathan D. Linton

No needn't look any further than Stalin's gulags to see that brilliant ideas can be stifled. But their impact - in this case on understanding the nature of science and technologies' interaction with the economy - cannot. Russian economist Nikolai Kondratieff's work on the long wave cycles caused by major technological discoveries offer valuable insights into developing more effective research portfolios and science policy.

The Theory

Kondratieff's theory suggested that, in addition to economic cycles that occurred over a few years, cycles based on major technological innovations occurred over a period of about 60 years. The discovery of major innovations resulted in the creation of tremendous economic value. The parties that captured the economic value became very wealthy and powerful, while other parties were dislocated by the new techno-economic regime.

Kondratieff went as far as suggesting that the timing of wars between countries is linked to these technological long waves. The basis of Kondratieff's theory was that a major innovation such as the steam engine or the railway resulted in tremendous economic growth - directly through the use of the invention and indirectly through the incremental improvements, new applications and derivative inventions. Once the untapped economic potential was used up, the opportunity for profit through innovation is eliminated and competition reduces prices — benefiting consumers while hurting suppliers. The lack of subsequent economic opportunity and the possibility for new technical discoveries relating to the major innovation causes entrepreneurs, investors, and technocrats to focus on the discovery and development of a new major innovation.

Attempts to replicate and extend the theory using modern data have been frustrated by the lack of continuous data streams (some metrics like lead consumption are no longer reliable, while others like gross national product have undergone numerous changes of definition).

An article in the The Economist (1999) suggests that there has been a compression in the timing of Kondrateiff waves due to the increase not only in number of technologists and entrepreneurs, but the acceleration in speed of communication and analytics. The primary difficulty in assessing this argument is that Kondratieff is unclear how to identify a major innovation. For example, some may suggest that transistors, computers, and information systems are all separate Kondratieff waves. Others believe that the transistor is a major innovation and that associated advances in electronics, comm- unications, computers, information systems and the internet are all derivative innovations — part of the long wave associated to the transistor.

Implications for S&T policy today

From a theoretical standpoint, such discussions might be important. However, from a practical standpoint the critical idea is that a single major innovation drives a huge number of minor innovations. Once the minor innovations have been mostly or completely exploited, the major innovation ceases to be a driver of economic growth and the products associated with the innovation become commodities.

Over the last three decades many products historically manufactured in Canada have matured to the point that they have now become commodities and their production has been or is being moved out of Canada to jurisdictions with lower and lower labour costs. The glut of capabilities, people, and products in traditionally high-tech areas as communication and information technology suggests that we are nearing the end of the long wave associated with these technologies. This suggests that we need to pursue the next wave. Areas such as biotech and nanotechnologies are trotted out by futurists as the next wave. Until a wave is well underway creating jobs and economic value, it is not clear whether one is truly dealing with a major innovation, minor innovation or derivative innovation. Consequently, picking which wave to ride is tricky.

The globalization of R&D coupled with the entry of emerging economies into many areas of R&D that traditionally were the domain of wealthy economies complicates the opportunities and treacheries associated with moving from one wave to another. This is bad news for Canada in many respects, but it's best to get the discussion going early on rather than after the fact.

The take-away for today's policy maker is that major innovations that lead to a stream of innovations over decades have traditionally created tremendous wealth and economic dislocation. While it is critical to focus on S&T that has clear short-to-medium term benefits, it is also advisable to build capabilities in other areas, just in case they lead to Kondrateiff waves that drive the economy for the next several decades.

If this is so great, why are so few familiar with it

Nicholai Kondratieff was a brilliant but unfortunate social science researcher. He was born in the wrong place at the wrong time. His demonstration and supporting theory of the critical impact that technology has on economic progress — as opposed to focussing on the political struggles between economic classes and the encouragement of developing heavy industry — was inadvisable in Stalinist Russia. Kondratieff's work was seen as heretical and eventually resulted in time in the gulags.

His work was translated into English in the 1980's and is only available in a small number of university libraries. The University of Ottawa has the English translation as well as the earlier French translation. Evidence of his thought can be found in both the work of Joseph Schumpeter (the father of entrepreneurship) and Simon Kuznets (the Nobel Laureate economist). One interesting contribution is Kuznet's estimate that 75% of US economic output is based on technological innovation. This figure is now considered an underestimation as the value of GDP has been increasing at a rate above factor inputs since this estimate was first offered in the 1970s.

Dr Jonathan D. Linton is the Power Corporation Professor for the Management of Technological Enterprises at the University of Ottawa's Telfer School of Management and Editor-in-Chief of Technovation. Linton@telfer.uottawa.ca