An integrated theory of the economic long wave

Abstract

Since 1975 the System Dynamics National Model has been the vehicle for the development of an endogenous, dynamic theory of the economic long wave. The model has now reached the point where an integrated theory of the long wave can be described. Simulations of the model are presented to show the wide range of empirical evidence accounted for by the model. In particular, the theory suggests the long wave arises from the interaction of two fundamental facets of modern industrial economies-the existence of physical lags in the economy, limited information available to decision makers, and bounded rationality in economic decision making creates the potential for inherently oscillatory behaviour; second, self-reinforcing processes involving many sectors of the economy exist which destabilize the inherent oscillatory tendencies of the economy, leading to the long wave. The relative strengths of these mechanisms, the amplification of the long wave through their interactions, and the linkages of the long wave theory to innovation, technological progress and political value change are discussed.