A Simple Model of the Economic Long Wave

Sterman, J.D. (1985). A Simple Model of the Economic Long Wave. IIASA Collaborative Paper. IIASA, Laxenburg, Austria: CP-85-021

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Abstract

Recent economic events have revived interest in the economic long wave or Kondratiev cycle, a cycle of economic expansion and depression lasting about fifty years. Since 1975 the System Dynamics National Model has provided an increasingly rich theory of the long wave. The theory revolves around "self-ordering" of capital, the dependence of the capital-producing sectors of the economy, in the aggregate, on their own output. The long-wave theory growing out of the National Model relates capital investment, employment and workforce participation, monetary and fiscal policy, inflation, productivity and innovation, and even political values. The advantage of the National Model is the rich detail in which economic behavior is represented. However, the complexity of the model makes it difficult to explain the dynamic hypothesis underlying the long wave in a concise manner.

This paper presents a simple model of the economic long wave. The structure of the model is shown to be consistent with the principles of bounded rationality. The behavior of the model is analyzed, and the role of self-ordering in generating the long wave is determined. The model complements the National Model by providing a representation of the dynamic hypothesis that is amenable to formal analysis and is easily extended to include other important mechanisms that may influence the nature of the long wave.

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