Каталог статей из сборников научных конференций и научных журналов- Value of the fixed capital replacement (renewal) in the economic cycles’ theories

А. Legostayeva Candidate of Economic Sciences, assistant professor,

Karaganda Economic University,

Karaganda, Kazakhstan

The urgency of the capital replacement, which is the material prerequisite for the reproduction process at the industrial stage of social development in the conditions of the transition to a post-industrial stage, is still valuable.

On the contrary, informatization, intellectualization and environmental processes make new demands to the capital recovery. They are associated with the saturation of the production processes with qualitatively new elements of the capital that contribute to such growth rate of labor productivity, which provides long-term economic growth.

The objective necessity for the capital replacement (renewal) process serves as the material basis and condition for the reproduction process. Its development is uneven and it is reflected in the theories of the economic cycles developed by A. Spiethoff, M.I. Tugan-Baraiovskiy, K. Marx, T. Veblen, W. Mitchell, J.M Clark, J. Hicks. John Maynard Keynes, Joseph Schumpeter, N. D. Kondratyev and others.

 It should be noted that the process of the theoretical doctrines of cyclic patterns personification in the social reproduction process development was contradictory.

Western economists have long been studying the economic system fluctuation as a subject of the economic cycle theory. The Soviet economists, as well as the foreign ones denied the existence of the crisis in socialism.

 However, nowadays no one can dispute the economic system fluctuation, regardless of the prevailing political and economic system.

Economic science has a number of different theories that explain the causes of the economic system fluctuations. For example, Paul Samuelson has identified the following business cycles theories:

- Monetary theory which explains the bank credit cycle of expansion (Hawtrey, etc.);

- The theory of innovation which explains the cycle as the use of important innovations in production (J. Schumpeter, E. Hansen)

- Psychological theory which treats the cycle as a result of pessimistic and optimistic mood waves covering population (A. Pigou, W. Bagehot, etc.);

- Underconsumption theory which explains the reason of cycles in the large share of rich and thrifty people’s income, compared with what can be invested (Hobson, Foster, Catchings, etc.);

- Theory of excessive investment, whose supporters believe that the cause of the recession is rather excessive than underinvestment (Hayek, Mises, etc.);

- Theory of the sunspot-weather-crop (W. Jevons. Moore) [1, p. 244].

Most of the economists highlight the following types of business cycles with regard to the contemporary social reproduction:

- N. D. Kondratyev cycles or long wave cycles, lasting for 40-60 years: their main driving force is radical changes in the technological basis of social production;

- Kuznets cycles’ duration is limited up to 20 years, driving forces are the changes in the reproductive structure of production, they are often called reproduction or construction cycles;

- Juglar cycles - intervals of 7–11 years, as the outcome of multiple monetary factors’ interaction;

- Kitchin cycles, lasting for 3–5 years generated by the dynamics of the relative value of inventory stocks at the enterprises;

- Private business cycles covering the period from 1 year to 12 years which exist due to fluctuations in investment activity [2, p. 14].

The theories of medium-and long-term economic cycles are of the greatest interest within the aspect of the capital replacement (renewal) problem. It is explained by the fact that the service life of the capital is one of the most important internal factors that give rise to cyclical fluctuations.

Thus, the existence of long-termbusiness cycles is connected with the operation of the passive part of the equity capital and medium economic cycle - with its active part.

The first objective study of the social reproduction cycles’ phenomenon can be found in K. Marx’s works.

Explaining the cyclical nature of economic development Marx paid a special attention to the excessive development of the industry producing the means of production, in particular the means of labor relative to the industry producing objects of consumption. Marx considered medium (industrial) cycles from the position of overaccumulation theory.

In the contrast to his theory many schools denied the business cycles inevitability or proved the possibility of overcoming cyclicality as the phenomenon within the traditional market mechanism. However, the further development of the economic science influenced by J. M. Keynes has led to the fact that economists have recognized not only cyclicality, but also developed the study of the cyclicality reproductive process.

Modern theories of business cycles consider crisis not as a social «evil» but as a form of economic development. Fluctuations in business activity are evaluated as one of the conditions for economy renewal and growth.

Research made in the 20–30s of the last century are of great interest recently, especially the works of N. D. Kondratyev and Francois Semian, who came to the same conclusions as the N. D. Kondratyev, but several years later.

N. D. Kondratyev explored long business cycles on the material of the 20–30ies in his works «The problems of economic dynamics» and «The main problems of the statics and dynamics». According to his theory, the cycles’ boundaries are represented as the joints of the old labor capacity exhaustion and the beginning of the construction and operation of the means of labor that can work on a new technical and technological, organizational and structural basis ensuring the creation of new wealth durables.

Subsequently, John Maynard Keynes in his book «General Theory of Employment, Interest and Money», repeats N. D. Kondratyev’s ideas that the reason for business cycles is «... a certain dependence on the length of non-expendable property service, and on normal rate of growth in a given historic period» [3, p. 465].

Along with the N.D. Kondratyev’s theory of long waves, the Austrian economist Schumpeter developed an innovative theory of long waves. A number of innovations of the theory were formulated by scientists back in the paper «Theory of Economic Development», published in 1911, long before N.D. Kondratyev’s works.

Subsequently N.D. Kondratyev created his own long waves integrated theory based on the fact that the main driving force of the long-time period fluctuations is a wave-like dynamics of technical and technological innovations.

Furthermore, this theory differs because of specific interpretation of a number of issues, as it is based on the passing burst of business activity as a result of scientific and technological progress activity, so the definition of essential and long-wave pattern is based on the primacy of psychological factors.

The following phases are identified in the business cycles: growth, boom («upward wave»), drop, slump («downward wave»).

The growth coincides with the moment when the accumulation reaches a state in which the cost-effective investment of capital to create new capital is possible. The growth is accompanied by complications provoking the reproduction mechanism destruction. The contradictions and distortions are accumulated in the social reproduction structure which lead to the economic crisis at a definite period of time.

The reproduction system should move to a new state further, and the slowdown of economic («downward wave») causes increased exploration in the area of advanced technology and concentration of capital in financial-industrial groups. All this creates a new background and is repeated again at a new stage of productive forces development. According to N. D. Kondratyev’s theory, new large economic cycle’s growth beginning happened in the middle of the 40-s, and the next one- in the middle of the 90-s.

The potential of the economics as a science is constantly enriched and updated. There are new theories, for example, the theory of self-organizing economic system – self-regulation (synergy), the basis of which was laid by A. A. Bogdanov in the early twentieth century. It was he who made the first attempt to create a universal organizational science – tectology which was based on the idea of equilibrium: static and dynamic.

According to the postulates of the self-regulation theory a self-organizing economic system is able to modify its internal relations, order and organization. It depends on the factors of influence which do not exceed the critical limit. Otherwise, the system will cease its existence.

As a rule, self-organized economic systems are open system which can be defined as market economic systems. Market mechanisms form a network of feedback loops through existing market laws that make the whole system able to adapt. It depends on the influence of, for instance, supply and demand.

There are also partially closed economic systems, which tend towards equilibrium. The result is the transition of the economy to a depression, and then to chaos. In this aspect former Soviet Union’s economy structure is the best example. The development stops in fully closed economic systems, such as an isolated tribe.

Modern scholars I. Prigozhin, I. Stengers, D.S. Chernyavsky, M. Golansky etc. developing a theory of organization created a general theory of development (evolution) using modern mathematical tools. The systems are considered in their historical development by identifying their evolution patterns and domestic sources development.

The theory of self-organization says that any system can only develop through crises passing through the so-called bifurcation points. According to the scientists the countries with developed market economies are going through the bifurcation points nowadays. The main products are information technologies which is innovative capital.

Nowadays the Republic of Kazakhstan’s economy which has long belonged to partially closed economic system is transforming into a new open economic system. According to Kazakh economists, this difficult transition is complicated by the fact that the following events coincided in time:

- mid-term crisis and the downward wave of Kondratyev cycle;

- chaos from transition to postindustrial civilization from industrial one;

- the destruction of a single economic, technological and cultural space of the former USSR.

Today’s realities put the necessity to restore the disturbed reproductive cycle at the forefront. It should be done through accelerated capital renewal at a new level.

But the problem of the fixed capital accelerated renewal in the period of market reforms in our country is complicated not only by the reasons mentioned above, but also by the fact that the crisis economic phenomena that occurred in our country do not fit into common theories of economic cycles.

The world experience of the economy fluctuation shows that when all the previous changes of the formations and even crises have led to fixed capital large-scale disposal and renewal. In the former USSR, Kazakhstan in particular, such a phenomenon has never been observed.

In this regard, we agree with V. Loginov that «... our economy has fallen into a chaotic state not because it began a new reproductive cycle but due to the destruction of its manufacturing base», [4, p. 72].

It is known that every crisis is finite, and its completion requires the transition of the economic system to a new equilibrium state or its complete degradation and decay. We need a favorable scenario for Kazakhstan’s economy further development, namely economic processes’ stabilization and it is necessary to make all the efforts to achieve it.

In the last quarter of the XX century countries with developed market economies experienced a global economic crisis which was accompanied by technological, economic, social, political and spiritual crises. Since the mid-90s, there has been a transition to Kondratyev cycle’s upward wave.

 For Kazakhstan, as well as for other post-socialist countries, the potential for Kondratyev cycle’s downward wave has not been used yet. In our opinion, one of the economic conditions which implement the existing potential for downward wave is an accelerated and innovative renewal of the fixed capital, particularly its active part.

Economists’ views on the problem of choosing the way for fixed capital’s renewal are contradictory. Some scientists believe that it is necessary to follow the evolutionary way («gradualism») eventually “getting rid” of the out-of-date capital. The others, such as radical liberals, advocates of «shock therapy», consider that it is necessary to eliminate the disproportion of the reproductive structure as quickly as possible and work out physically worn and obsolete fixed capital. Some of them consider it to be one third volume of the fixed capital, the others consider it to be two thirds, making reference to the experience of the U.S., Japan, Britain and Germany’s advanced economies.

Large-scale withdrawal of capital from the production process demonstrated the specific modalities and showed versatility of this process in countries with developed market economies during the energy crisis of the 70-80s of the last century.

Thus, in 1981 the process of full conversion or elimination of dozens of companies in automotive, textile and steel industry increased in the United States. Only from 1980 to 1985 250 textile enterprises were closed. From 1978 to 1987 700 plants, shops, sections were closed in the U.S. steel industry. Metalworking industries decreased to 25%. In the early 80-s the share of spending on modernization has increased to 70-80% of the total investment in fixed productive capital [5, p. 89].

Emergency laws have been adopted In Japan: in 1978 – «Special Emergency Law on structurally depressed industries», in 1988 – «Temporary law for the restructuring of a number of industries» according to which the special state five-year programs were adopted. Large-scale capital outflow was carried out on their basis. 14 branches were covered by the program. Moreover, 213 manufacturing facilities were liquidated only in the aluminum industry which accounted for two thirds of all the equipment, including pre-installed in the last 3–5 years [6, p. 32; 7, p. 45].

 A similar process also took place in the U.K., but it mostly occurred as modernization and mass introduction of energy-saving technologies. Modernization took place partly on the background of the «orderly winding out» and partly of the stagnant traditional industries «revival». In parallel, formation and development in particular advanced high-tech industries was taking place [8, p. 56].

The subsequent economic development of these countries has proved these decisions’ success.

However, it should be noted that fixed capital large-scale replacement lasted for more than a year, and took about 8-10 years to carry out all activities for fixed capital’s renewal. In addition, large-scale outflow of the old capital in technical and technological terms is justified only with sufficient investment resources, while ensuring compliance with the time of dismantling of worn out fixed capital including new elements of the fixed capital.

If this condition is not be observed, as a rule there are a series of negative effects, such as unemployment increase, increased budget burden due to no social assistance to the unemployed, industrial plants closure; some settlements’ stopped life. Germany has already had such an experience.

It is also necessary to take into account the fact that during a new post-industrial stage of social development cyclical fluctuations do not have a clear line as during the industrial stage, the cycle boundaries are increasingly blurred. Fluctuations duration mostly depends on moral rather than physical deterioration of the main elements of the fixed capital. In the conditions when the role of the intellectual labor increases, the loss of capital’s important properties to generate income is determined by its moral obsolescence, i.e. cyclic fluctuations take place. Overproduction of goods and services in the absence of effective demand is no longer a constraint. It is the depreciation of the dominant elements of the fixed capital on the existing basis of innovation.

In the context of the foregoing it is appropriate to recall the missive of the President N.A. Nazarbayev «Kazakhstan – 2030», which states that in order to achieve economic reforms success it is necessary to rethink the role of the government in the economy of the Republic of Kazakhstan.

The missive says: «The state must itself be a guarantee for free economy. Its task is to establish market rules and then enforce them» [9].

Therefore in order to avoid the negative consequences which have already taken place in the world, the process of the fixed capital renewal will have the greatest effect on the optimal combination of market-based instruments with active organizational impact of the state. When the elements of the updated fixed capital begin to operate and competitive products generate revenue, economic system will enter economic growth from the state of decline.

It is rather difficult to identify specific time frames for fixed capital renewal.

It is necessary to solve this problem from a position of a particular industry and in some cases from a position of a particular company.

This is due to the fact that the transition to a qualitatively new state of our country is accompanied by a number of problems. The reason is that the border-line cases and mechanisms of transition to new economic system of the Republic of Kazakhstan have been studied insufficiently.

In contrast to the earlier stages of development, the Republic of Kazakhstan’s economy is facing limited growth of factors of production expansion: labor force growth, investment, fixed capital, energy, etc. None of the existing economic cycles’ theories is not be able to answer all the questions because they are not universal. Each historical period brings numerous amendments and adjustments in various theories and social economic development concepts.

However, economic cycles’ theories and their postulates can help in studying and predicting the general patterns of the society’s socio-economic development.

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