The Frontiers of Management. Peter F. Drucker

the no-growth theory based on the “Kondratieff long wave” (named after the Russian Nikolai Kondratieff, born in 1892 and executed sometime in the 1930s on Stalin's orders because his economic model accurately predicted that collectivization would cut rather than multiply farm output).

      According to the long-wave theory, developed economies enter a long period of inexorable stagnation every fifty years. The technologies that carried the growth in the earlier ascending stages of the Kondratieff cycle still seem to do very well during the last twenty years before the “Kondratieff bust.” Indeed, they show record profits and can pay record wages; being “mature,” they no longer need to invest heavily.

      But what looks like blooming health is, in effect, wasting sickness; the “record profits” and “record wages” are already capital liquidation. And then when the tide turns with the Kondratieff bust, these mature industries all but collapse overnight. The new technologies are already around, but for another twenty years they can't generate enough jobs or absorb enough capital to fuel a new period of economic growth. For twenty years there is thus a “Kondratieff stagnation” and “no growth,” and there is nothing anybody—least of all government—can do about it but wait it out.

      The smokestack industries in the United States and Western Europe do seem to conform to the Kondratieff cycle. In Japan, too, they seem to be headed the same way and to be only a few years behind. High tech also conforms: it doesn't generate enough new jobs or absorb enough new capital yet to offset the shrinkage in the smokestack industries.

      But the job creation by entrepreneurial and innovative businesses in the United States simply isn't compatible with Kondratieff. Or, rather, it bears a remarkable resemblance to the “atypical Kondra-tieff wave” of Germany and the United States after 1873—twenty-five years of great turbulence in these countries and of economic and social change, but also twenty-five years of rapid economic growth.

      This atypical Kondratieff wave was discovered and described by Joseph Schumpeter (1883–1950) in his classic Business Cycles (1939). This book introduced Kondratieff to the West; but it also pointed out that the Kondratieff stagnation occurred only in England and France after 1873, the period on which Kondratieff based his long wave. Germany and the United States also had a “crash.” But recovery began almost at once, and five years later both countries were expanding rapidly and continued to do so up to World War I. And what made these two countries atypical and made them the growth economies of the late nineteenth century was their shift to an entrepreneurial economy.

      There are massive threats in the world economy. There is the crisis of the welfare state with its uncontrolled and seemingly uncontrollable government deficits and the resulting inflationary cancer. There is the crisis of the commodity producers everywhere, in the Third World as much as on the Iowa farm. Commodity prices for several years have been lower in relation to the prices of manufactured goods than at any time since the Great Depression, and in all economic history, there has never been a prolonged period of very low commodity prices that wasn't followed by depression in the industrial economy. And surely the shrinkage of jobs in the smoke-stack industries and their conversion to being capital-intensive rather than labor-intensive, that is, to automation, will put severe strains—economic, social, political—on the system.

      But at least for the United States, the Kondratieff no-growth prediction is practically ruled out by what has already happened in the American economy and by the near-50 percent increase in jobs since the smokestack industries reached their Kondratieff peak fifteen or twenty years ago.

       (1984)

      CHAPTER THREE

      Why OPEC Had to Fail

      WHEN THEY MEET IN DECEMBER 1982, the members of the Organization of Petroleum Exporting Countries will decide whether they can hold their cartel together for another year, or whether their attempt to keep both prices high and all production going has failed. The OPEC countries produced in 1982 only about 60 percent of the oil they pumped before the quadrupling of prices in 1973, and by 1982 even prices were beginning to be under pressure. Indeed, a strong case can be made that OPEC is declining just the way cartels have always declined.

      To understand what is happening to OPEC, it is helpful to review the rules of cartel theory, first formulated in 1905 by a young German economist, Robert Liefmann, in his book Die Kartelle, and validated by all subsequent experience.

      The first of these rules is that a cartel is always the product of weakness. Growing industries don't form cartels: only declining ones do.

      At first, it was assumed this rule did not apply to OPEC. It was assumed that OPEC could raise prices so astronomically because oil consumption had been growing exponentially and was slated to grow even faster.

      But study after study since the price explosion of 1973 shows that the developed countries had previously been growing less dependent on petroleum. From 1950 to 1973, the energy required to produce an additional unit of manufacturing output in developed countries declined by 1.5 percent per year; since then the decline has been much more rapid.

      The story is the same in transportation. Since 1960 the energy needed for each additional passenger mile or revenue freight mile has fallen as the result of the switch to jet airplanes, to compact and subcompact cars, and to diesel bus and truck engines. Even in heating and air-conditioning, the third major consumer of energy, there has been no increase in the incremental input unit of energy since 1960.

      Perhaps most important, energy use in developed countries rose faster than GNP during the first half of the century, but since 1950 it has been growing slower than GNP. In the industrial countries, to produce one unit of GNP, it took 26 percent less oil in 1982 than it had taken nine years earlier.

      The relative decline in oil consumption suggests that during economic downturns the industry will drop more sharply than the overall economy but will recover less than the economy in every upturn cycle.

      According to the second basic rule of cartel theory, if a cartel succeeds in raising the price of a commodity, it will depress the prices for all other commodities of the same general class.

      When OPEC raised oil prices in 1973, it was generally believed that the prices of all other primary commodities—agricultural products, metals, and minerals—would rise in parallel with the petroleum price. But a year later, the prices of all other primary products began to go down. They have been going down ever since.

      Indeed, the share of disposable income that developed countries spend on all primary products, including oil, is lower today than in 1973. And the terms of trade are more adverse to primary producers than they were ten years ago. They are as unfavorable as they were in the great raw materials depression of the early 1930s.

      One surprising consequence of this is that Japan, the country most panicked by OPEC and the “oil shock,” has actually been a beneficiary of OPEC, while the United States has been OPEC's chief victim. Japan imports all its oil. But this amounts to less than 10 percent of its total imports, with the rest consisting mostly of other primary products such as foodstuffs, cotton, timber, metals, and minerals. Their prices have come down.

      Conversely, the United States is the world's largest exporter of nonpetroleum primary commodities, particularly agricultural products, whose prices are much lower than they would be were it not for OPEC.

      A cartel, according to the third rule, will begin to unravel as soon as its strongest member, the largest and lowest-cost producer, must cut production by 40 percent to support the smaller and weaker members. Even a very strong producer will not and usually cannot cut further. The weaker members will then be forced to maintain their production by undercutting the cartel price. In the end, the cartel will collapse into a free-for-all. Or the strongest member will use its cost advantage to drive the weaker and smaller members out of the market. OPEC has been singularly lucky. Its second strongest member, Iran, has been forced to cut output by more