Farrar, Straus and Giroux

Once the new technologies, business models and market structures begin to work in synergy – and the new ‘technological paradigm’ is obvious – capital rushes into the productive sector, fuelling a golden age of above-average growth with few recessions. Since profit is everywhere, the concept of allocating it rationally between players becomes popular, as does the possibility of redistributing wealth downwards. The era feels like one of ‘collaborative competition’ and social peace.
Throughout the whole cycle, the tendency to replace labour with machines operates. But in the upswing, any fall in the profit rate is counterbalanced by the expanded scale of production, so overall profits rise. In each of the up cycles, the economy has no trouble absorbing new workers into the workforce even as productivity increases. By the 1910s, for example, the glass-blower displaced by machinery becomes the projectionist in a cinema, or the worker on a car production line.
When the golden age stalls, it is often because euphoria has produced sectoral over-investment, or inflation, or a hubristic war led by the dominant powers. There is usually a traumatic ‘break point’ – where uncertainty over the future of business models, currency arrangements and global stability becomes general.
Now the first adaptation begins: there is an attack on wages and an attempt to de-skill the workforce. Redistribution projects, such as the welfare state or the public provision of urban infrastructure, come under pressure. Business models evolve rapidly in order to grab what profit there is; the state is urged to organize more rapid change. Recessions become more frequent.
If the initial attempt to adapt fails (as it did in the 1830s, 1870s and 1920s), capital retreats from the productive sector and into the finance system, so that crises assume a more overtly financial form. Prices fall. Panic is followed by depression. A search begins for more radical new technologies, business models and new supplies of money. Global power structures become unstable.

During the first long wave, roughly between 1790 and 1848 in Britain, you have an industrial economy trapped within an aristocratic state. A prolonged crisis begins in the late 1820s, characterized by the factory owners’ determination to survive by de-skilling the workforce and cutting wages, and also by chaos in the banking system. Working-class resistance – the Chartist movement culminating in the General Strike of 1842 – forces the state to stabilize the economy.
But in the 1840s a successful adaptation takes place: the Bank of England gains a monopoly over the issue of banknotes; factory legislation ends the dream of replacing the skilled male workers with women and children. The Corn Laws – a protective tariff favouring the aristocracy – are abolished. Income tax is levied and the British state finally begins to function as a machine for the ruling industrial capitalists, not as a battleground between them and the old aristocracy.
In the second wave – which starts with Britain, Western Europe and North America but pulls in Russia and Japan – the downswing begins in 1873. The system tries to adapt through the creation of monopolies, with agrarian reform, an attack on skilled wages and by pulling in new migrant workers where possible as cheap labour. Countries move on to the Gold Standard, form currency blocs and impose trade tariff measures. But sporadic instability still plagues growth. The 1880s see the first mass workers’ movements. Though the movements themselves are often defeated, skilled workers succeed spectacularly in resisting automation, while unskilled workers benefit from the beginnings of a social welfare system. Only in the 1890s, as monopolies become fused with banks or backed by a liquid financial market, does a strategic change take place. A cluster of radically new technologies is deployed and – as in the 1840s – there is a step change in the economic role of the state. The state – whether in Berlin, Tokyo or Washington – becomes indispensable to maintaining optimum conditions for big monopoly companies through tariffs, empire expansion and infrastructure building.
Once more, it is working-class resistance that prevents the system adapting on the cheap, without technological innovation.
For the third wave, if we take 1917–21 as the start of the downswing, the system adapts by tightening state control of industry, and by trying to revive the Gold Standard. In most countries there is an attack on wages during the 1920s but they do not fall fast enough to solve the crisis. Then, once the Depression begins, fear of social unrest pushes each major country to pursue a competitive exit route: destroying the Gold Standard, creating closed trading blocs, using state spending to boost growth and reduce unemployment.

In emphasizing this, I am making what I consider a crucial addition to wave-theory: in each long cycle, the attack on wages and working conditions at the start of the downswing is one of the clearest features of the pattern. It sparks the class warfare of the 1830s, the unionization drives of the 1880s and 90s, the social strife of the 1920s. The outcome is critical: if the working class resists the attack, the system is forced into a more fundamental mutation, allowing a new paradigm to emerge.

If the working class is able to resist wage cuts and attacks on the welfare system, the innovators are forced to search for new technologies and business models that can restore dynamism on the basis of higher wages – through innovation and higher productivity, not exploitation.

The tendency of the rate of profit to fall, interacting constantly with the counter-tendencies, is a much better explanation of what drives the fifty-year cycle than the one Kondratieff gave.

In 1948 the Marshall Plan kicked in, the Cold War began and Bell Laboratories invented the transistor. Each of these events would shape the fourth long cycle that was about to unfold.

Here’s how financial repression works: you hold interest rates below inflation, so savers are effectively paying for the privilege of having money; you prevent them moving money out of the country in search of a better deal, and force them to buy the debts of their own country at a premium.

The role of the state in creating the new paradigm is equally clear. The 1840s see the triumph of the Currency School economists, who impose sound money on British capitalism by insisting the Bank of England has a monopoly on issuing notes. In the 1880s and 90s, there is the rise of state intervention. In the 1930s, it is outright state capitalism and fascism.
The history of long cycles shows that only when capital fails to drive down wages and when new business models are swamped by poor conditions is the state forced to act: to formalize new systems, reward new technologies, provide capital and protection for innovators.

These were remarkable things to achieve within capitalism: to treat research as public property, to suppress competition and to plan not just production but the direction of research. And though the USA perfected it, all major combatant states attempted it. The result was to stimulate an unprecedented culture of cross-fertilization in strategic disciplines. The new approach inserted maths and science into the heart of the industrial process; economics and data management into political decision-making.

Nixon’s reasons for doing so are well documented.27 As America’s competitors caught up in productivity terms, capital flowed out of the US into Europe, while its trade balance declined. By the late 1960s, with every country engaged in expansionary policies – with high state spending and low interest rates – America had become the big loser from Bretton Woods. It needed to pay for the Vietnam War and the welfare reforms of the late 1960s, but could not. It needed to devalue but could not, because to make that happen, other countries had to raise their own currencies against the dollar, and they refused. So Nixon acted.
The world moved from exchange rates fixed against the dollar and gold to totally free-floating currencies. From then on, the global banking system was effectively creating money out of nothing.