What are the innovations that are predicted to unlock economic growth in the 6th wave?
I recently completed an MBA degree in service innovation and design, and ended up writing the thesis on a subject that I have been closely working with at Elisa — enabling and managing employee driven innovation. This was when I stumbled across a long-wave economic theory known as Kondratieff waves, which can help in understanding how economic cycles come about and how to identify them.
This economic wave lasts for approximately 40-60 years, and is named after Nikolai Kondratieff who was a prominent long-wave scholar. Kondrateiff used several indicators of economic activity such as commodity prices, wages, foreign trade turnovers, raw material production and consumption rates, and private banks savings in his analysis. He suggested that fluctuations occur around a long-term cycle that involves shifts over time between periods of relatively rapid economic growth and periods of relative stagnation or decline. Economists have mixed opinions over the theory because they cannot ascertain the causaily of the waves. But the wave-like behavior of the economy exists, making this an intersting study nonetheless.
There are five criteria to identify and predict a new Kondratieff wave–
- The basic innovation: this shapes the innovation process for several decades, creates a large new market, extensively alters society and has a life cycle of 40– 60 years. This also means that for a new wave to appear, the previous basic inovation should have exhausted economically. For e.g., information technology was the basic innovation of the fifth Kondratieff (Fig. 1). Over five decades, it shaped technological, economic and social changes in the developed countries and turned the world into a global village in terms of information.
- The leading industry: The industry that develops and benefits most because of the basic innovation. This industry acts as the growth engine for the economy, and the greatest benefits accrue to industries that are in the value chain of the leading industry. For e.g., during the first Kondratieff, this was the textile industry, during the fifth Kondratieff it was the information technology industry.
- Reorganisation of society: the basic innovation leads to reorganisation of society, so that new occupations, new work practices and forms of management, new forms of entertainment and leisure, newer legal controls, capital investments taking place in companies socialised in production and application of the basic innovation. For e.g., data protection acts during the fifth Kondratieff wave.
- Lifecycle of the basic innovation: During the life cycle, the basic innovations and leading industries display an above average growth. Remember the S-curve representing lifecycle of a basic innovation? Tying to the first point, the previous basic innovation has exhausted its capacity for future growth, leading to a recession.
- Barriers to the new wave: This criteria is especially important to understand the primary economic growth barriers that prevent the onset of the next Kondratieff wave. Previous waves leave challenges that the next wave should solve through a basic innovation. Only those innovations that reduce the barriers the most can be classified as basic innovations. Those barriers can for e.g. be adherence to outworn concepts, a lack of willingness to innovate, fear of the future, etc.
According to several long-form economics researchers like Leo Nefiodow and Markku Wilenius, the greatest barriers we face today are — social entropy, traditional healthcare systems, depleting natural resources, ageing population and climate change. The biggest challenge we face today is an ethical one. If you could add up the damages just caused by social entropy, it would amount to at least US $14,000 billion for the year 2006, with an increase of 25% by 2013! Moreover, resource scarcity is pushing companies to adopt more sustainable means of extracting and consuming resources. Simultaneously, the previous wave already established the use and exploitation of ICT.
By combining the barriers and existing resources and infrastructure, could it be that the next wave of economic growth comes from biotechnology and ICT and their application in resource conservation and healthcare sector? What will be the new services and businesses that migth be unlocked by the companies that come in the value chain of these industries? The future is always clearer when one looks back, so perhaps I will revisit this in a couple of years to see how things fared after all.