(Guest article by Edward Lewis of sciencejunk.org) The world economy is in the middle of a depression period that will last the rest of this decade and perhaps well into the 2020s. This depression period and the others that the world has experienced since the late 1700s were due to an 80 year cycle of change in physics and technology development. Twenty-five years ago, this author developed an economic model concerning this relationship between physics paradigm changes and depressions and described the model and the evidence for it in a book titled: The Periodic Production of Rationalized Phenomena and the Past Periodic Depressions. I then predicted, based on the model, that there would be an economic boom in the countries that led in the development of Quantum Mechanics-based technology in the first decade of this century followed by a financial crisis around 2009 and a long depression period perhaps lasting 12 years. The prediction proved correct. Unprecedented peacetime lending and currency creation has kept the usual depression symptoms at bay, but conditions will get worse during this decade. Here’s the model, some information about the current economic situation, and predictions.
Economic Depression Model
In the early and middle 20th century, economists such as Kondratiev and Schumpeter identified a cycle in advanced economies that was known as the “long wave” or Kondratiev wave. They thought that the cycle lasted about half a century. This assumption was mainly based on the depressions of the 1800s that happened about 50 years apart. But actually, these major depressionary eras tend to happen 40 years apart as I discovered in the late 1980s. The economic long wave in advanced societies is due to the technological change that is due to paradigm changes in physics that happened about every 80 years.
Thomas Kuhn wrote about how these instances of physics paradigm change happened, but he never described that they happen 80 years apart or that they had any regular timing to them. But the regular timing is clear: historically they have happened from 73 to 87 years apart. What does it mean that a physics paradigm change happens? It means that large groups of people think about the world differently than earlier generations, and they development new kinds of technology and products. These products, new technologies, and new industries start to appear about 20 years after the theory of the paradigm is well developed around the time of the “crisis period” at the end of each physics paradigm.
I wrote a whole book and many papers about this in the 1990s, and some of these can be found on my site, sciencejunk.org, or published in various places. The economics model is simple and based on the work of Kondratiev, Kuznets, and J. Waters mainly. So if this model interests you, you can read about it online. The book goes into a lot of detail explaining the history of science.
Industrial Revolution Depressions
Franklin’s Fluid paradigm was developed by Aepinus, Lavoisier, Coulomb and many others in the period from about 1750 to 1785, and it led to the development of industries relatively quickly because his paradigm was accepted and adopted in advanced countries quite rapidly. Young people such as Watt started to make devices based on the conception of fluids of heat, electricity, and magnetism that each had their own unique properties. Watt developed a good steam engine design that was adopted to power many industries during the First Industrial Revolution of the 1790s and early 1800s. So labor productivity in Britain started to rise out of the depression era of the 1780s and 1790s.
Likewise, Faraday’s conception of point atoms and lines of force that extended from them was developed by Maxwell around 1865. Twenty years later, researchers such as Hertz, Tesla and Edison started to make the technology of the 20th century. There was an industrial revolution in the 1890s and early 20th century. Due to the depletion of the technology potential of the Fluid paradigm and the small size of the nascent Field theory based industries, as well as other factors all stemming from this change of technology, there was a depression period in the US and Great Britain in the 1890s. As the new industries of the Field paradigm grew, productivity growth started to increase in the first decade of the 20th century from its low during that depression period.
Similarly, Einstein’s model of quanta of energy and space-time change to describe gravity was well developed as two different theories called Quantum Mechanics and General Relativity. These two theories make up the Einstein paradigm, and they were both well developed by about 40 years after 1905 that was when he formulated this paradigm. Again, 20 years after the theory was well developed around 1965, young inventors started to innovate the main products of this technology paradigm such as lasers, computer chips, and PCs. Due to the depletion of the technological potential of the field theory paradigm and the development of the new technologies, there was a depressionary era in the 1970s and 1980s coinciding with the third industrial revolution of those decades.
The above is a short outline for why the industrial revolution depressions were timed as they were in the 1780s-1790s, 1880s-1890s, and 1970s-the early 1980s. For more information, read my articles on sciencejunk.org. In my book that was written mostly in the early 1990s, I explain this model in greater detail.
Technological Acceleration Depressions
For the last two centuries, after about 20 years after the end of an industrial revolution depression, there has been a sudden doubling of labor productivity growth. Joseph Waters pointed out this acceleration of productivity growth rates in his book Technological Acceleration and the Great Depression. When I found this book in 1989, it helped me understand how productivity growth acceleration in the US caused the Great Depression. There was a similar doubling in the 1820s in Great Britain when it was the technology leader of the Fluid paradigm industries.
The doubling of growth happens because people in the industries of a paradigm switch their product innovation from product introduction to process innovation. During an industrial revolution, the generation of young inventors such as Edison focus on designing and introducing new kinds of products. These products are revolutionary, and spur great demand. But 20 years later, the industries standardize so that the people focus on producing the standardized products cheaply and are in competition for market share in markets that become oligopoly markets. The same features can be seen in the economies of Great Britain in the 1820s, the US in the 1920s, and the US in the decade of the 2000s.
Automation, economies of scale, and capturing the market for a standardized product became the emphasis, and the competition between the many companies in each industry was price competition and merger and acquisition activity. Through heavy borrowing and offering consumers credit, some companies expanded, automated production to reduce prices, and survived in oligopoly or monopolistic markets while the other companies were absorbed or went bankrupt. We saw this happen during the last decade when oligopolies emerged in the US. The remaining companies unemployed of a large part of the workforce through their acquisition and streamlining of production processes.
The switch from product to process innovation is what caused the technological acceleration depressionary periods of the 1830s-1840s, 1930s-early 1940s, and now. So there was a standarization of available products, a lack of new product innovation for revolutionary new products that would allow for new markets, and a great increase in unemployment or disemployment. Since the US was the technological follower of Great Britain, the country entered its depression era about 8 years after Britain did starting from 1837 with a large number of bank closures.
In 1989, I realized that by the regular timing of depressions of the past of the 80-year physics paradigm change process causing depressions about every 40 years, there was going to be a depressionary period of the technological acceleration type that would commence about the year 2009 although I wasn’t sure my model was accurate enough to pinpoint 2009 as the exact year. But the model did prove very accurate, and the depression era commenced in 2008.
Past Predictions as Evidence for the Model’s Accuracy
I’ve been writing about this depressionary period of the 2010s for 25 years after I developed this model in 1989. The model explains why the long wave happens as a result of paradigm changes in physics. The predictions matched what has happened for the last 25 years is evidence that this model is accurate.
In the early 1990s, I wrote:
“Scientific revolutions have happened at about 80 year intervals, and these have caused “technological revolutions” at about 80 year intervals and economic depressionary
periods about every 40 years. The periodic depressions have been called Kondratiev depressions.” Introduction to The Periodic Production of Rationalized Phenomena and the Past Periodic Depressions, 1996.
In the middle of the 1990s, I wrote:
“If the trend of economic development continues as it has for the past 200 years, the peoples who lead in the production of Q.M.-type phenomena will undergo the first kind of depressionary period about the year 2010 or 2020 unless there will be some type of financial collapse. It is interesting to me that economists such as Dent are also predicting a depressionary period about the years 2010 or 2020 based on generational life-cycle theory.” Introduction to The Periodic Production of Rationalized Phenomena and the Past Periodic Depressions, 1996.
So 20 years ago, I tried to bracket out in my online introduction to my book the time when the technological revolution depression would happen based on my model. I wasn’t totally sure about the 2010 date although I thought this depression would follow along on the 40 year timing, so I included 2020 as a possible late date just in case the 2010 date was too early. As you can see, I was basically predicting that the decade of the 2010s would be the depression period. What I meant about including the phrase “unless there will be some type of financial collapse” is that I was thinking the financial markets could collapse before 2009 since it seemed that a disaster or some other trigger might cause a financial crisis given the record high government debts. Though there were financial crises between 1996 and 2008, none was severe enough to start a depression. By this time, in 1996, I had read Dent’s book and his economic predictions based on demographics, and I was surprised that such a different model predicted the same time for this depression period.
I tried to publish the book and my articles during the 1990s. But almost no one believed me. People who believed in economic long waves then mostly predicted that a depression would occur in the 1990s based on their assumption that these depressions happen every 50 or 60 years and that the last such depression was the 1930s Great Depression. They didn’t believe that the 1970s great recession was actually a Kondratiev long wave dip, and they didn’t believe that there are two alternating types of depressions.
In 1998, I was blogging on early long-wave discussion forums and telling people that an economic boom was about to start that would be similar to the 1920s boom period with its doubling of productivity growth rates. Though few people believed or agreed with what I was saying since most of the long wave bloggers were thinking that the US was in a long wave depression era then, I was predicting an 10 year economic boom was starting. In a note attached in May 28, 1998 to the the 1996 article cited above, I wrote:
“According to the theory, barring unforeseen disasters, even more rapid industrial development and higher growth rates are predicted for the future. Specifically, during the next 10 years the most advanced economies will experience economic development in many ways similar to the period from 1917-1929 in the U.S., a time when the U.S. economy boomed and entire industries were developed. That was a time of great social change.” Note on the Introduction to The Periodic Production of Rationalized Phenomena and the Past Periodic Depressions, put online in 1998. www.padrak.com/ine/ELEWIS6.html
It is clear that this prediction about the period 1999-2008 proved accurate though almost no one I knew
about but Harry Dent was writing the same thing.
By 2003, it was clear to me that the technological acceleration had started just as I predicted it would about the year 2000, and it was clear that the US was in a boom period with high borrowing just as I predicted. It was also clear to me that this science-economic model proved accurate enough that a new major depression period was about to start about 2009. I calculated the date 2009 from the pattern of the 1920s. The productivity growth doubling happened in 1919, and the depression started with a financial crash 10 years later in 1929. So I thought that a financial crash and a depression would start about 2009 or 10 years after the productivity growth doubling of 1999. So I tried to warn people about this imminent depression and financial crash, and after several attempts of sending to journals and magazines, I eventually published a letter in a small science magazine.
In that letter, in late 2007, I wrote:
“If any of these predictions hadn’t turned out to be so accurate, it would have disproved this theory. But since these predictions from 1990 have proved so accurate, it seemed proper to warn people of a possible depression or deep recession in the near future. Even if the idea of an 80 year periodicity of revolutions seems untrue to you, if these trends continue of rising productivity due to the displacement of labor by automation, oligopoly and efficiencies of scale, increasing business and consumer debt, and the satiation of consumer demand of the available types of products within the constraints of their budgets, what will the outcome be but a general decrease of consumption demand?” “Economic Depression or Deep Recession Coming Soon, ” May, 2008. tc38.metawerx.com.au/oldsite/LewisLetter79.pdf
In the middle of the last decade, merger and acquisition activity had reached a new high in the US, and I saw other data that reminded me of the 1920s such as the high consumer and corporate debt. It was clear that products were standardizing and that the major quantum mechanics based industries were becoming oligopoly markets and were rapidly automating. In late 2007, I thought that unemployment would soon quickly spike due to the merger and acquisitions and the automation of production similar to what happened in 1929. So I titled this letter: “Economic Depression or Deep Recession Coming Soon.”
In the late 2007 letter to the editor, I also wrote:
“In 2007, the stock market reached record highs. Americans are also working record hours per week and the unemployment rate this decade has been lower than any decade since the 1960s. Many American states have record low unemployment. Since August 1982, when it bottomed at 776, the Dow has risen almost 1,700%. That ascent reflects an economy that has nearly tripled from $5.2 trillion in 1982, adjusted for inflation, to $13.9 trillion today. Extremely high debt levels were predicted for the lead economy. This is evident. As happened in the late 1920s, the U.S. has record business and private debt as businesses struggle to survive as oligopolies formed in each industry and the survivors tried to gain market share. In 2005 and 2006 a record was set for mergers and acquisitions in the U.S. economy. Mergers and acquisitions are at the highest level since the Great Depression.”
“Total corporate debt that has financed the corporate drive for market share and for corporate survival is the highest since the Great Depression. Total American consumer debt
reached $2.2 trillion in 2005, up from $1 trillion in 1994. And, 2005 was a record year for personal bankruptcies.” “Economic Depression or Deep Recession Coming Soon, ” May, 2008. tc38.metawerx.com.au/oldsite/LewisLetter79.pdf
This letter was sent to a little magazine called Infinite Energy in December of 2007, and it was eventually published in May of 2008. It is a good record that I was warning people about the imminent K-wave depression period and that this depression would be like the 1920s depression. I explained the causes of the imminent depression and what the depression would be like. It explained that it was all due to the transitioning of the QM based industries from product innovation to emphasizing process innovation. However, I couldn’t get published in other journals or magazines though I tried to submit my articles and letters to a handful of publications during several months.
At the time I wrote this letter in late 2007, I looked online for people who were predicting that a financial crisis and depression era would soon occur, and other than Dent who I already knew about, I only found about two or three other writers saying the same thing. However, in the last few years, I’ve learned of several more people who were publishing the same prediction back in 2007, so it brings the total of accurate predictors to about 8 individuals out of the thousands of economists and business writers.
From what I can tell, the difference of my predictions from the others, other than Dent, is that I was making my predictions based on a very fundamental economic model. Others were simply predicting based on their assessment of the statistics around 2007. By my predictions dated from 1990. In my papers, I explained the 80-year paradigm change model and other details of this model that most people still don’t believe. I described in more detail about what characterizes both types of depressions, and in my longer articles, I try to include more historical data concerning each of the 6 major Kondratiev wave dips since the late 1700s. To understand more about this model, you can read my papers online.
The Current Economic Situation
Since 2008, the Central Bank has been doing some amazing monetary actions and the government has kept expanding and providing jobs, food, and money to people. The Central Bank, the big banks, and the government has been following a money production and spending program that is different than the behavior of the US government and the banks in the first half of the Great Depression. So most Americans have not suffered as much as the people did in the 1930s so far. However, it is clear that this is really a depressionary decade.
Though official numbers have declined, the unemployment and disemployment are still at record levels as of 2014. People are working less hours, and their income and quality of work has decreased since 2007.
So far, the unemployment during this depression is similar or a little worse than the 1970s-1982 deep recession and about a half of that of the Great Depression. In 1994, the government started to quote the U3 rate as the labor unemployment rate in 1994. It replaced a statistical number that is more similar to the current U6. It undercounts because it doesn’t count people who haven’t interviewed for a job in four weeks, and a part-time job is counted as a full time job. When a person with a full time job gets another part-time job, this side job is counted as job in the statistics of new jobs added to the economy.
Four out of five of the new jobs are considered low or minimum wage jobs. Most of these jobs fall into categories such as retail, hospitality, health, and temporary employment. I think that these new service jobs are a result of the booming stock market and cash creation. This gives the wealthy and some other people extra money for luxuries such as restaurant meals, vacations, vacation houses and other luxuries. So there is an increase in the number of service workers and laborers such as waiters, resort staff, hotel staff, people building vacation houses, and medical and health service workers. Much of this low paying work is done for the wealthy and elderly.
This stock bubble and the new low paying service jobs are similar to what happened at the end of the 1920s economic boom when there was a surging stock market. But these things are happening during a long wave depression era. It is said that the derivatives and stock speculation has reached record levels by the fall of 2014 even exceeding the time just before 2008.
92 million people are officially counted as not in the labor force in the US. This is the lowest labor force participation rate in 36 years. The largest part of the jobs added in the early fall of this year were given to people in the 55-69 age bracket. As in Europe, there is very high unemployment and low labor participation for people in their 20s and younger.
Government Deficits and Official Money Expansion
The official Central Bank money creation program is unprecedented for peace time. The big banks’ derivatives program is also unprecedented. There have also been unprecedented federal deficits, and there is a correlation between deficits each year and the officially recognized money expansion each year.
So deficit spending is now about twice the level in terms of GDP as during the Great Depression. What would have happened if it had been less and more similar to the 1930s’ level? Probably, this depression decade would have been much worse in terms of what the average person felt about it.
There is a rough equivalence between Central Bank QE and the deficit in this depression era.
Up until October 2014, these are the official statistics. Shadowstats and others say the deficit spending is actually much higher. The deficits seem to stay in line with the QE numbers.
The unprecedented central bank spending and derivatives keep many banks operating. There are also unprecedented federal deficits. So thus far, the economic crisis doesn’t seem as severe to most people as did the middle of the Great Depression seem to the average person then. Thus far, though unemployment is at record highs matching or surpassing that of the 1970s long wave dip, it hasn’t reached the levels of the Great Depression. It is clear that the number of unemployed and bankrupt consumers is lessened by money creation by both governments and banks.
Predictions According to this Model
This model that was developed 25 years ago predicted a depression period for the 2010s lasting perhaps into the 2020s that would be due to the availability of important new kinds of products, the standardization of products, and the cessation of the introduction of important new categories of products as has been usual for the period about 30 years after an industrial revolution. This model predicts that this depression era will be prolonged until at least about 2020, the merger and acquisitions and associated unemployment will continue, there probably will be more personal and corporate bankruptcies, and productivity growth will continue to rise to a peak around 2032 and then decrease as the QM industries mature.
This model predicted that this depression era would be due to the unusually heavy consumer and corporate debt loads that would accrue by the end of the decade of the 2000s and the economic consequences of the switch from product innovation to process innovation that would enable a productivity growth spurt starting about the year 2000. These economic consequences of the standardization of products and the cessation of new product innovation included the rise of oligopolies and monopolies, oligopoly price competition for standardized products through their usual labor layoffs, mergers and acquisitions, the automation of production, and a great rise in personal and corporate bankruptcies associated with a financial crisis similar to that of the late 1820s in Britain and the 1920s in the US.
The period of the 1930s had three depression dips that seem to have been associated with the regular business cycle of recessions every 4 to 7 years. This depression era will also have at least one more dip that people call “the double dip,” and there will probably be even more. It is during these times that disemployment and corporate and consumer bankruptcies will occur most heavily during this decade and the next matching what happened in the US in the 1930s and early 1940s.
This model doesn’t take into account exogenous factors such as major natural disasters, wars, or government or bank policies. These things can’t be foreseen, but since the economic development of Britain during and after the First Industrial Revolution and the economic development of the US during and after the Second Industrial Revolution were so similar, in the late 1980s that was just after the Third Industrial Revolution, I thought I could identify the main economic factors arising from science and technology paradigm change and so described this model.
The governments of the US and the other most advanced industrialized countries and the central banks and the big banks of these countries have followed a monetary and spending course that is unprecedented by Britain and America during the two scientific-industrial paradigms from 1800 to 1980. I believe that these are policies are factors endogenous to this model. This depression period would have happened even with better government and banking policies, and perhaps the unprecedented government spending and currency and derivatives spending has so far kept the people from experiencing the bankruptcies of banks and the more severe visible poverty of the early to middle 1930s.
I think the great increase of government debt, derivatives creation, and bank currency making is ominous and can’t really produce any good result for most Americans. But I can’t predict what will happen because of this by only basing my predictions on what is in this model since this model doesn’t consider this exogenous factor. This model is about the characteristic economic effects of periodic scientific and technological change.
In general, I think that this depression will grow worse for the average American, with rising rates of unemployment and an increase of poverty during the next seven years. But as happened in the 1930s, I think a small segment of the population, the ones who control the oligopolies, banks and the government, might grow wealthier in terms of ownership and control of the land, the resources, and the productive power.
Since the government and banking policies are so different than those of the technological acceleration depression eras of the 1830s, 1840s, and 1930s, I can’t suppose what the next 15 years will hold. In the last two technological acceleration eras, the economies emerged from their depression eras within 15 years or so. But other than what I’ve predicted here, I don’t know what else to predict based on this model since I don’t know what will happen about war, natural disasters, and government and bank policies. At best, these actions have only delayed the worse features of this depression for some years. At worst, the economic catastrophe will be extremely severe and more severe than the 1930s depression.
I tried to give an overview of this economic model and quoted some predictions that were written in the past 22 years before this current depression period started in 2008. Then in the third part, I wrote some more predictions about what will happen in the next twenty or thirty years describing how this depression might play out according to this model and how productivity growth will continue to increase until a peak about 2030 and then go to the characteristic low marking the end of the quantum mechanics based industries. By including quotes from old articles, I showed that the model predicted that the industrial revolution underway in QM based industries would bring about a doubling of productivity growth by about 2000, an economic boom like the 1920s boom in that decade of the 2000s, and a long wave technological acceleration depression like the Great Depression starting with a financial crash about 2010 and extending for at least 10 years.
Because government and central bank policies are so different than in the prior two technological depression eras of the 1830s and 1840s and 1930s and 1940s, the outcome might prove to be very different than in the past. In the past, the leading economies of Great Britain and the US weathered their depressions and reemerged in a period of prosperity. Great Britain did so without any major wars in the 1840s, and the US also emerged from its depression era in the 1840s without major wars. The main part of America’s 1830s-1840s depression was over by 1843. Funding the Mexican American War may have contributed some production stimulus in the middle of the 1840s, but it was a relatively minor war compared to the size of the country’s economy then.
The US emerged from WWII with clear economic dominance, and the high level of federal deficit
spending of about 19% of GDP during the war years seemed to contribute to ending the depression era. But based on the record of both Great Britain and the US in the similar depression era of the 1830s, I think the US economy might have recovered in the 1940s even if there was no war.
In both the US by the 1940s and Great Britain by the 1840s, every industry was clearly monopolized or oligopolized by the end of their depressions. Productivity growth was very high during those decades which helped spur a second boom in the economies of both countries in their respective season of world dominance. During this decade, even tighter oligopolies will form in each industry, but it seems to me that the result of the current policies will be to deindustrialize the US and straddle the country with such huge debts that it could grow weaker, so economic leadership may pass to other countries. On the other hand, other major technologically advanced competitors such as Japan or Germany also have record high levels of bank money creation and government debt, so maybe the US will continue as a technology leader.
Because there is much potential for process innovation in terms of achieving automation of production and economies of scale, whichever country or regional economy that has the technological leadership will enjoy booming labor productivity growth rates probably reaching a peak of at least 4 percent per year growth by 2025. I get this number by extrapolating on the productivity growth behavior in this quantum mechanics paradigm compared to the prior two paradigms. Actually, the productivity growth rates may be 4.5 percent or more by 2025 judging from the doubling jump from the 1970s trough to 2000. Computerization and robotic technology clearly has the potential for great labor saving gains in both the service and manufacturing industries. How such an economy may have full employment after this depression era isn’t clear to me since most of the usual production can be handled by robots and computers. This depression era may last longer than those of the 1830s and 1930s because of the government and bank actions of the last 15 years.
It still remains to be seen whether another physics paradigm will replace quantum mechanics. I write about this much in other articles. If another paradigm doesn’t emerge or at least products of the new paradigm are not introduced, then industrial innovation will come to a halt at the time of decline of the quantum mechanics based industries after 2040. In my other articles, I explained how people working according to a dominant obsolescent scientific paradigm as did the European inventors who believed in Fluid theory in the 1800s who were able to invent important revolutionary products such as the telegraph. So maybe new energy and material manufacturing technology will be introduced by people who believe in quantum mechanics from the Plasmoid paradigm set that is the set of phenomena that was discovered in the last crisis period.
This economic model rests on a simple model of scientific paradigm changes in the field of physics that is described in much more detail in my book and articles online. In general, expect this depression era will turn more severe in the next few years for the average American and European although the economic leaders may gain great power and wealth in the world. The government and bank behavior may make this depression extend out for more years past the 12 or so years that seems to be regular for these kinds of depressions that occur during technological acceleration eras.