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By John De Goey, CFP, CIM
Special to Financial Independence Hub
Over the past number of months, I have become increasingly interested in a series of ideas put forward by a handful of economists who were both iconoclastic and influential in their time. It seems their ideas are experiencing a bit of a renaissance. Some of these economists achieved moderate fame, and some had more credibility than others.
Here I’d like to explore the related theories and ideas of Joseph Schumpeter, Nikolai Kondratieff, Simon Kuznets and Hyman Minsky.
Let’s begin with portraits of the four thinkers
Joseph Schumpeter (1883-1950) — His big idea was ‘creative destruction,’ the notion that capitalism advances through waves of entrepreneurial innovation that destroy old industries and create new ones, driving productivity growth though with upheaval for incumbents.
Nikolai Kondratiev (1892 – 1938) — Held the view that ‘long waves’ (lasting roughly 50–60 years) explain how economies experience ‘super cycles’ that are tied to major technological revolutions (e.g., steam/rail, electricity/chemicals, information) that reshape investment, growth, and prices. The current wave has been dominated by the internet and artificial intelligence and likely started in the mid to late1980s.
Simon Kuznets (1901 – 1985) — Wrote about structural change and long-run growth. He felt that the economy reorganizes itself across sectors and shifts in income distribution accompany growth. He was among the first to write about income inequality and the structural changes he identified matter for things like productivity and living standards.
Hyman Minsky (1919 – 1996) — Is best known for his financial instability hypothesis: stability breeds complacency; credit cycles move through hedge, speculative, and ponzi financing, causing systemic fragility and crises when optimism turns to debt distress, leading to a “Minsky Moment” when it all comes crashing down. Over-extended credit leading to a collapse in prices was a major factor in the dot.com crisis and the global financial crisis of 2007-09.
What these ideas have in common is intuitively obvious from an ‘eye test’ perspective. Still, the concepts are difficult to explain reliably using econometric data. In many instances, these men were mocked because their theories didn’t fit neatly into how the world was perceived, but all four have left a mark on how we interpret information in the 21st century.
The reason I’m running into their ideas more and more these days is that there’s as strong consensus among their adherents that their related theories are relevant again based on recent developments. They seem to be converging and so may ultimately amplify one another if the waves coincide.
The unifying theme is that growth is not just a smooth upward trend, but rather something that is driven by transformative forces that reorganize both production and finance. Innovation and technology have long been accepted as central engines of change, but their effects spill over into organizational forms, institutions, and credit. Furthermore, it seems long-run development is layered, meaning that broad technological shifts (i.e., long waves) interact with shorter sectoral shifts. The overlay of these disparate waves can amplify or dampen economic outcomes.
Bringing together four influential strands in economic thought, we can attempt to sketch a cohesive framework that explains long-run growth, structural change, and financial instability as different facets of a single dynamic process: innovations drive new opportunities, which reshape the economy’s structure and distribution, while finance amplifies and sometimes destabilizes that process.
The four thinkers illuminate different angles of a single dynamic: innovation drives growth and structural transformation; the financial system amplifies this process but can sow instability; long-run waves reflect broad technological revolutions, while distributional changes concern who benefits.
A cohesive Dynamic Innovation–Structure–Finance framework captures how technology, sectoral change, credit, and policy interact across time to produce growth, inequality, and crises. It suggests a prescription of balanced policies that nurture innovation while guarding against financial fragility. The economy evolves through the interaction of four interdependent engines: Technology/Innovation, Structural Change, Finance, and Policy/Institutions.
Let’s look at the mechanisms and phases in more detail
Long Kondratiev Wave:
Each wave is anchored by a broad technological revolution (historical examples include steam/rail, electricity/chemicals, information/communication: the latest is internet / AI). Each wave drives sustained investment, productivity gains, and demographic/urban changes.
Mid-cycle Kuznets Structural Shifts:
These involve a sectoral reallocation that changes relative growth rates and income distribution. Furthermore, the political economy of distribution (wages, profits, capital intensity) evolves with the sector mix.
Now add the Schumpeterian concept of Creative Destruction within the Kondratiev Frame:
Every long wave contains numerous waves of product and process innovations. Entrants disrupt incumbents, accelerating organizational changes and shifting market power.
Finally, we have a Minsky-inspired Financial Overlay:
Credit booms accompany optimistic long waves and lenders and borrowers push risk-taking. Notes that the accumulated debt in the United States is currently over US$38.7 TRILLION and growing by over US$2 trillion a year. Minsky says that financial fragility accumulates as leverage grows, asset prices inflate, and liquidity becomes more tenuous. Minsky says that crises (aka “Minsky Moments”) occur when debt dynamics collide with adverse shocks or policy shifts, leading to deleveraging and reallocation.
All of this seems eerily contemporary (and borderline terrifying)
The first thing we all need to do is stay calm and recognize that many of these factors have been in place for over half a decade, and nothing catastrophic has happened. Yet. As I wrote in my book, Bullshift: How Optimism Bias Threatens Your Finances, I believe the biggest risk is not what markets may do, but rather how individual investors may react. I fear today’s investors have been lulled into a false sense of security by an industry that has a commercial imperative determined to keep investors calm and feeling good. That, combined with the recency bias of having the downturns within our memory being relatively shallow and short-lived makes for a lack of vigilance. My hope in writing the book was that people would see the writing on the wall and act to proactively defend against a serious and prolonged drawdown.
The best antidote to that is to build diversified portfolios that have greater exposure to hard (sometimes called real) assets like infrastructure, resources, long / short strategies and gold and with less exposure to traditional financial assets like stocks and bonds. In terms of public policy, proactive regulation, investment in human capital, and countercyclical policy might also help to smooth out booms and busts.
There is no easy way to test or illustrate (i.e. prove or disprove) the ideas mentioned here. Historical case studies of major Kondratiev-like waves and related phenomenon have long been paired with corresponding financial booms and busts but identifying them in hindsight is of little value. That said, no one has figured out how to reliably identify them in advance. Indeed, I have been worried about this kind of major meltdown since I started writing Bullshift in early 2020. I still don’t think I am wrong to be concerned, although I have obviously, at a minimum, been ridiculously early in ringing the alarm.
I’m back to ringing the alarm now. It may be nothing. The undeniable confluence of thought leadership from four economists spanning just over one generation long, long ago may be nothing more than a coincidence. Then again, I may be back here in the future asking plaintively if you heeded my clarion call.
I’m worried that so few people seem worried. Are you?
John De Goey, CIM, CFP, FP Canada™ Fellow, is a Portfolio Manager with Toronto-based Designed Wealth Management. He is the author of three books on the financial industry: The Professional Financial Advisor, Standup to the Financial Services Industry and most recently, Bullshift. You can find John’s personal website here.
