This book is hailed by famed venture capitalist Marc Andreessen as “the single best book to understanding how this [software] industry works.” Tech investor Fred Wilson (behind Twitter, Etsy, Coinbase) based much of his firm’s investment thesis on the concepts in this book.

Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, by Carlota Perez, lays a framework for understanding the boom and bust cycles of disruptive technologies. The model is built on the history of the last five technological revolutions, from the industrial revolution to today’s information age.

Written in 2002 after the dotcom crash, Technological Revolutions was remarkably prescient in predicting how the tech economy would evolve in the following two decades. If you understand this book, you’ll have a better grasp of the 2000 tech bubble, where growth will occur in the next decade, and why explosive industries like cryptocurrency behave the way they do.

As you read this summary, think about how well it applies to the arc of computing from 1980 to today – and muse about what the next technological revolution might be.

 

1-Page Summary of Technological Revolutions

• A technological revolution is a cluster of new technologies, products, and industries causing an upheaval in the economy and propelling a long-term surge in development.
• The five technological revolutions of the past 2 centuries, with their approximate start date:
  • Industrial revolution in 1771
  • Steam and railways in 1829
  • Steel, electricity, and heavy engineering in 1875
  • Automobile and mass production in 1908
  • Information and telecommunications in 1971
• Progress does not happen linearly and constantly. Instead, technological revolutions happen in predictable cycles, spanning ~50 years:
  • Installation
    • A new promising technology sees explosive growth as venture capitalists, seeking high profits, invest in new activities and firms.
    • Investments reach irrational exuberance level. Many early expectations will be disappointed, leading to collapse of bubbles created by financial speculation.
    • However, this boom installs the infrastructure that paves the way for…
  • Deployment
    • A robust growth occurs, built on the infrastructure of installation. The technology becomes widely adopted across the economy and leads to fundamental growth in a “new economy.”
    • In maturity, the technology sees diminishing returns. The main companies have merged and become oligopolies, reducing the ferocity of competition and a common interest in comfortable profit margins. Arthritis sets in for the new incumbents .
    • Attention shifts to the next generation of radical innovations, thus continuing the cycle

 

• Much is said about the evils of finance in propping up bubbles and profiting from technology. Instead, financial capital is crucial in the installation and deployment of new technology.
  • When the previous paradigm matures, it seeks radical innovations for growth.
  • When the new technological revolution appears, financial capital draws attention to it through (inflated) profits.
  • When the bubble bursts, it facilitates production capital in diffusing the new revolution.
• Society shapes the development of the revolution, through initial inertia from the previous revolution, then mass acceptance and diffusion of the new revolution.
  • To make way for the new revolution, institutional creative destruction will take place, dismantling the old framework and installing the new. This means changes in regulation, politics, and ideology.
• Understanding this framework can help you counter erroneous common wisdom at different phases.
  • During Frenzy, the common wisdom is that growth cannot stop and good times are here, leading to irrational exuberance. Yet a correction will likely occur.
  • During Deployment, the recession may cause pessimism regarding the full potential of the revolution. In reality, markets may be much larger, and costs lower, than anyone predicted. Thus you may benefit by envisioning the full potential of each revolution.
  • One cannot extrapolate any current period as the “new permanent” or the final crisis of capitalism.

 

Part 1: Technological Revolutions as Successive Great Surges of Development

 

Technological Revolutions and Techno-Economic Paradigms

A technological revolution is a cluster of new technologies, products, and industries causing an upheaval in the economy and propelling a long-term surge in development.

These technological breakthroughs spread far beyond the industries and sectors from which they originated – they cause broad jumps in productivity for a vast span of economic activities. Economically, the technology brings a shift in relative price structure that guides economic agents toward use of the new technologies. Hence Carlota Perez calls these “techno-economic paradigms.”

Even further, the technological revolution penetrates social practice, legislation, governance, and ideology. It becomes the general and shared “common sense” of the period, a new way of doing things that approaches the ‘ideals’ of the period, and new mental maps of all social actors and institutions.

There have been 5 technological revolutions in the past 2 centuries. We’ll give an overview, then dive further into how each one fits the above model:

 

Revolution	Core country	Big-bang event	Year
Industrial Revolution	Britain	Arkwright’s mill in Cromford	1771
Steam and Railways	Britain	‘Rocket’ steam engine for Liverpool-Manchester railway	1829
Steel, Electricity, and Heavy Engineering	USA and Germany	Carnegie Bessemer steel plant in Pittsburgh	1875
Oil, Automobile, and Mass Production	USA (and Germany)	First Model-T out of Ford plant in Detroit	1908
Information and Telecommunications	USA	Intel microprocessor announced in Santa Clara, CA	1971

 

Properties of Technological Revolutions

While the contributing innovations have often gestated for a while, a revolution needs a highly visible attractor to appear, symbolizing the new potential and sparking the imagination of pioneers. Often the attractor is not only a technological breakthrough, it is also cheap or opens new cost-competitive possibilities for industry [see Clayton Christiansen’s theory of disruption]. Perez calls this a big-bang. Often, these events can only be identified in hindsight, since at the time they’re obvious only to a narrow community.

The revolution often gestates in a particular region, and propagates from core to periphery. This means the dating of deployment is not the same for all countries and can be delayed by decades, and the full revolution globally may take a full century.

The new technologies prompting revolutions are not isolated; often many products had existed for some time playing minor roles, until the new technology offers it unprecedented value and scale. Oil and automobiles had both been developed since the 1880s, but the combination of them with mass production in the 1900s led to a revolution. Likewise, transistors and semiconductors were available in the 1950s, but the microprocessor made visible the potential of cheap microelectronics, “computer on a chip.”

Each revolution consists of several technology systems that develop at different rhythms and in a sequence depending on feedback loops. The information revolution began with chips and hardware, leading to software and telecom, leading to the Internet, leading to mobile. Each of these can appear as separate revolutions rather than interdependent systems under a wider umbrella – each smaller system benefits from the previous one, while also reinforcing it.

Revolutions often involve significant changes in direction, uninstalling what was previously installed, unlearning much of the old to learn the new, closing dead end paths as others are jumping onto new bandwagons. Thus often the radical innovations come from outsiders who have not been imbued with the previous paradigm.

The nature of the paradigm can favor certain comparative advantages. The fourth revolution of mass production favored large homogeneous populations, thus favoring the USA and the Soviet Union.

 

Society’s Role in Technological Revolutions

Society shapes technological revolutions by cycling between inertia and desire for growth. Each revolution is initially received as a threat to the established way of doing things in firms, institutions, and society – which have all optimized for the previous revolution. The new economy implies job losses, geographic displacement, and unaddressed regulatory challenges. The unfolding of the new revolution’s potential thus begins chaotically, causing a mismatch between the economy and socio-institutional systems.

• For instance, the Suez Canal eliminated ships from the route to India and cut travel time from 3 to 1 month, obviating the network of cargo depots in England and threatening big trading companies.
• Mass-produced automobiles displaced steam-powered trains and horse-drawn carriages, and all the associated industries (inns, veterinarians).

Political pressures begin calling for action to propel the required institutional changes to accommodate the new revolution. Often the financial collapse of the bubble of “irrational exuberance” is the most persuasive event to induce changes in regulation. This spurs adaptations in government, education, and social behaviors, until the revolution becomes the “new common sense.” Only when the revolution has this proper context in society can the ‘golden age’ of growth proceed.

 

As the revolution becomes the new prevailing paradigm, it favors compatible innovations and it excludes incompatible innovations. An innovation that fits in the natural trajectory of the prevailing paradigm is readily accepted by society, allowing progress. In contrast, incompatible innovations may be rejected by investors or consumers, and are instead adapted in a minor way to the current paradigm, even though they may very well be the focal point of the next technological revolution.

As the revolution matures, technological innovation shows decreasing returns and markets become saturated. Growth and profits are threatened. Social unrest reoccurs when the growth that was promised does not materialize. This is the point of greatest reception to radical innovations, and firms experiment with new technologies to revitalize themselves. Promising innovations attract idle capital, and the big-bang event kicks off a flywheel effect of capital and labor that leads to the next revolution cycle.

Thus, Carlota Perez maintains that society shapes innovation to occur in these predictable revolutionary cycles, providing both a propelling and dampening force at different phases.

When there is inertia in one sphere of change, unrest in another exercises enough pressure to induce changes. When there is inertia in technology, unrest in the financial sphere (from declining profits) and social sphere (from wealth inequality) prompts looking for radical technology innovations. Likewise, unrest in technology forces past the inertia in the social sphere.

[Technological revolutions occur every 50-60 years. Understanding the above, society may be a major constraint on the speed of revolution. In other words, revolutions don’t happen every 10 years because institutions and people take time to adapt to new paradigms, during which they exclude incompatible changes.

Another reason, explained later, is that the next technological revolution picks up in the maturity phase of the previous one – so different technologies may take different amounts of time to exhaust markets and begin looking for radical innovations.]

 

The Five Revolutions of the Past 250 Years

In Technological Revolutions and Financial Capital, Carlota Perez outlines five revolutions that each upended the economy. We’ll summarize the new technologies that appeared, the infrastructures enabling the revolution, and new principles that became common wisdom.

 

 

Industrial Revolution – 1771

New technologies and industries

• Mechanized cotton industry
• Wrought iron
• Machinery

New or redefined infrastructures

• Canals and waterways
• Turnpike roads
• Water power

“Common-sense” innovation principles

• Factory production
• Mechanization
• Productivity, time keeping, time saving – Taylor’s scientific management
• Fluidity of movement (through waterways)
• Local networks

 

Steam and Railways – 1829

New technologies and industries

• Steam engines and machinery (made in iron, fueled by coal)
• Iron and coal mining (now central)
• Railway construction
• Rolling stock production
• Steam power for many industries

New or redefined infrastructures

• Railways (using steam engine)
• Universal postal service
• Telegraph (mainly nationally along railway lines)
• Great ports, worldwide sailing ships
• City gas

“Common-sense” innovation principles

• Economies of agglomeration
• Industrial cities
• National markets
• Scale as progress
• Standard parts/machine-made machines
• Energy where needed (steam)

 

Steel, Electricity, and Heavy Engineering – 1875

New technologies and industries

• Cheap steel
• Steam engine for steel ships
• Heavy chemistry and civil engineering
• Electrical equipment industry
• Copper and cables
• Canned and bottled food
• Paper and packaging

New or redefined infrastructures

• Worldwide shipping in rapid steel steamships
• Worldwide railways
• Telephone (mainly nationally)
• Worldwide telegraph
• Electrical networks (for industrial use)

“Common-sense” innovation principles

• Economies of scale of plant
• Vertical integration
• Distributed power for industry
• Science as productive force
• Worldwide networks and empires
• Worldwide acceptance of London-based gold standard
• Universal standardization worldwide
• Cost accounting for efficiency

 

Oil, Automobile, and Mass Production – 1908

New technologies and industries

• Mass-produced automobiles
• Cheap oil and fuels
• Petrochemicals (synthetics)
• Internal combustion engine
• Home electrical appliances
• Refrigerated and frozen foods

New or redefined infrastructures

• Networks of roads, highways, airports
• Networks of oil ducts
• Universal electricity
• Worldwide analog communications

“Common-sense” innovation principles

• Mass production
• Mass markets
• Economies of scale of product and market volume
• Horizontal integration
• Standardization of products
• Synthetic materials
• Functional specialization
• Hierarchical pyramids
• Centralization-suburbanization
• Homogenization of consumption
  • First nationally, then as platform for international expansion

 

Age of Information and Telecommunications – 1971

New technologies and industries

• Cheap microelectronics
• Computers, software
• Telecommunications
• Control instruments

New or redefined infrastructures

• World digital telecommunications
• Internet and e-services
• Electronic mail
• High-speed physical transport links

“Common-sense” innovation principles

• Decentralized network structures
• Knowledge as capital – intangible value added
• Heterogeneity, diversity
• Segmentation of markets, proliferation of niches
• Personalization and customization, anti-mass market
• Economies of scope and specialization, combined with scale
• Globalization, interaction between global and local
• Instant global contact

 

[I find the social transformation from homogeneous mass consumption in the fourth revolution, to the heterogeneous micro-targeting in the fifth revolution, to be very meaningful. The current proliferation of niches and emphasis on diversity are really empowered by the zero-marginal cost character of information technology.

In the past, distribution used to cost a lot of money – newspapers had to be printed, retail stores needed rent. Thus producers benefited from large economies of scale, encouraging homogenization of consumption.

The internet made distribution nearly free, reduced startup costs, and enabled discoverabilty. Thus niches could thrive without needing mass economies of scale. In turn this develops into a general social acceptance of diversity and individuality. And thus technology shapes society.]

 

The Four Phases of Each Technological Revolution

At a high level, the four phases of each revolution look as follows:

• Installation period
  • Phase 1: Irruption
  • Phase 2: Frenzy
• Turning point
• Deployment period
  • Phase 3: Synergy
  • Phase 4: Maturity

 

We’ll dig further into each phase, covering the technological, social, and financial aspects.

 

Financial Capital vs Production Capital

In Technological Revolutions, Carlota Perez uses the term “capital,” she refers not to the actual capital, but rather to the agents and their motives in wealth creation.

Financial capital represents the agents who possess wealth in the form of money or relatively liquid assets. Their objective is to make money from money, and they perform actions that are most likely to increase their wealth. Financial capital reallocates and redistributes wealth.

Production capital represents the agents who generate new wealth by producing goods or services. These agents do this with borrowed money from financial capital and share the generated wealth. Their desire is to accumulate greater profit-making capacity by innovating, growing, and expanding.

Compare and contrast:

• Financial capital is mobile by nature, while production capital is tied to concrete products.
• Financial capital can invest in a firm without much knowledge of what it does, while for production capital knowledge about product and markets is the very foundation of success.
• Financial capital is footloose by nature and will flee danger, while production capital has to face every storm.
• Ironically, for radical change, incumbent production capital can become conservative, and it is the role of financial capital to enable the rise of new entrepreneurs.

 

Phase 0: Maturity of the Last Revolution

It helps to start from the end of the previous revolution, which offers the gestational environment for new innovation.

• The previous revolution approaches exhaustion of profitable opportunities.
• Society has accepted the new common sense of the prevailing paradigm.
• Firms and society have become conducive to the unfolding of any opportunity compatible with the paradigm (going from n → n+1)
• Core industries encounter market saturation and decreasing returns. Productivity and growth are threatened. Firms become receptive to radical innovations.
• Decreasing returns for the prevailing paradigm brings idle capital looking for profitable uses.
• Socially, these conditions cause inertia and become exclusionary for innovations that are incompatible with the existing framework.

 

Phase 1: Irruption

The big-bang event offers a visible attractor for investment, sparking the imagination of engineers and entrepreneurs. This technological breakthrough offers new cost-competitive possibilities in a sluggish landscape [and are classically disruptive in the Christiansen sense]. This is a 0 → 1 event.

• New products and technologies arise that show future potential.
• The powerful firms from the previous revolution will use the innovation as a new lease on life and become testbeds for the new technology.
  • Eg US auto industry adopted Japanese production methods (e.g. just-in-time) and microelectronics in both manufacturing and the car itself
  • But many innovators are likely to come from outside the prevailing paradigm, unfettered by holding to the past.
• The profit-making potential of the new revolution outstrips the prevailing paradigm, and financial capital develops a torrid love affair with the emerging production capital.
  • Old production capital has been facing diminishing returns since Maturity, and financial capital flees from it.
  • By proximity to the new entrepreneurs, the financial world adopts the technology itself.
    • Particularly communication technology to facilitate finance. Banks were early clients of the telegraph, telephone, and microcomputers.
    • The technology enables larger networks of banks.
      • Branch banks developed into national networks when railway and telegraph made it possible.
      • Then into international finance when instant global money became possible in the 1970s.
  • Financial capital develops new risk capital instruments particular to the era.
    • Large-scale railway and industrial projects required more sophisticated investment banking.
    • Internet companies requiring relatively small investments gave rise to venture capital in the Information Age.
  • Financial capital thus spreads the revolution.
• The prevailing paradigm is still wedded to the previous revolution. Thus, centrifugal tensions arise between:
  • the new industries and the mature ones
  • those trained in the new technology and those with increasingly obsolete skills
  • dynamic regions and stagnant ones
  • thriving new industries and the old regulatory system
  • countries that ride the wave and those left behind
• Unemployment is high, from sources like stagnation and technological replacement.
• Perverse price behavior is seen, leading to both deflation in the 1870-80s and inflation in the 1970-80s, depending on the institutional framework.

[Irruption is defined as “a forcible and violent rushing in” (as opposed to eruption, which erupts outward). This reflects Schumpeter’s notion of creative destruction, where the economic structure is revolutionized from within, destroying the old while creating the new.]

 

Phase 2: Frenzy

• The new paradigm becomes a significant force, overcoming resistance of the old paradigm.
• Intense technological exploration occurs. New markets are created and old industries are rejuvenated.
  • High technological velocity causes premature obsolescence, creating new products before users have learned or amortized their investment.
  • Despite the high rate of growth in these new sectors, its weight in the total economy is still small.
• The infrastructure begins to be laid out: suppliers, distribution channels, skilled labor, cultural adaptation. (This infrastructure is critical for the Deployment phase.)
• Financial capital takes over. Convinced it can thrive on its own, enthralled by its new magic rules for inventing a new sort of economy, it separates from production capital.
  • Financial capital becomes inebriated with the high levels of profit in the new industries and expects the same from all investments.
  • Financial capital is convinced it’s discovered a recipe for generating profits, which is then repeated over and over, without concern for fundamentals.
    • Thus canals were created in the 1790s from river to river with inefficient routing.
    • Thus railways were created in the 1840s where demand was doubtful and engineering difficult.
    • Thus real estate values in the 1920s were liberated from constraints of urban centers by the automobile, since any territory could be made valuable when connected by roads.
    • Thus dotcoms were created in the 1990s with little evidence of underlying demand.
  • Investment firms take center stage, even outperforming the production capital stars of the boom.
  • Finance diverts from wealth creation to finding whatever objects of speculation are at hand. This includes real estate, gold, art, etc.
  • Production capital has no choice but to adapt to the new rules. New and old producing firms must bend their decisions to provide the high short-term gains demanded by investors.
    • This includes pressure to commit fraud to maintain profit levels, as in Enron and Worldcom.
  • Because of limited diffusion, the real opportunities are relatively few, so financial capital develops sophisticated, speculative instruments to make money out of money. Derivatives, junk bonds, and other instruments bring in capital from wider sources, making “everyone an investor.”
  • A phase of frantic investment occurs, usually typified by a stock market boom. This is a period of speculation and unashamed love of wealth. Individualism reigns.
  • Financial capital thus generates a magnet to attract investment into the new revolution.
• The gap between paper values and real values widen. This is a structurally unstable acceleration of diffusion of the paradigm. Notions of the real value of anything are lost.
  • As assets increase in price, confidence grows that they will continue to do so. Excitement and feeling of prosperity is the overriding emotion. This is the new world, promising unending bliss.
    • [The disappointment of the previous revolution’s Maturity phase probably stokes this further. “This is my chance to reverse my many years of stagnation.”]
  • New and old firms come to the gambling house to play the capital gains game, without fulfilling strict profitability criteria.
  • New millionaires appear. They want to multiply their wealth at the same rate as which they made it, and so they redeploy idle capital with high pressure to generate profits.
  • Since profits are amazing, everybody – “including widows and orphans” – becomes aware of incredible possibilities. They enter an alien territory to get a piece of action.
  • Fundamentals are irrelevant in this new technological age, when the future is unknown and possibilities endless. So strange business plans are readily accepted. “Who really knew what was possible? It was a time to place bets.”
  • The newly rich believe it’s their own superior insight and intuition that led to growth, not the circumstances of the period.
  • Participants refuse to recognize the delusion that the bubble might be inflated.
    • [A few psychological effects likely at play here:
    • Fast adaptation to the new normal makes people acclimate to the new wealth level as normal. Thus, with dopamine unsatiated, they want only to reach the next high.
    • Wealth effect makes people behave and spend as though they’re rich.
    • Loss aversion prevents people from readjusting their behavior and having to come down from the high of being paper millionaires.
    • Ego about being an investment genius makes people unwilling to accept they are merely rowboats on a tide they can’t control.]
  • There are really “two moneys” at work here with rapidly changing values, making proper valuation difficult.
    • In the 1960s, five cars could buy one computer. In the 1990s, one car could buy twenty computers. So who’s to say that Yahoo is overpriced?
  • The increase in the volume of transactions and number of actors involved attracts even more money and more actors into the game. These are self-reinforcing virtuous cycle effects.
  • Possible indicators:
    • Separation of stock market values from GDP (which should show real growth)
    • Size of derivative economy relative to assets
• Ethics soften. The regulatory framework is impotent and even seen as hindering the way to a successful society.
  • Being rich is good – anything else is failure. People getting wealthy overlook ethics and due diligence.
  • This leads to a permissive attitude conducive to corruption and illegal activities. Social resistance to unethical activities is less organized. [Even regulators are likely getting wealthy from their investments, causing incentive problems.]
  • Easy wealth made with other people’s money becomes irresistible. Swindlers arrive.
• To avoid harmful price competition, the new firms move toward oligopoly/cartel-type agreements.
• Income distribution becomes polarized, as modern firms and regions accelerate past the sluggish incumbents.
  • Old industries, firms, regions that cannot take the modernization path deteriorate, causing a vicious spiral of lack of funds as investors pull money out to finance the new revolution, leading to lower growth.
  • Debtors that took loans to redeploy the established paradigm become fragile. The benefits of redeployment may be insufficient to amortize debt, especially as the new technological revolution takes hold and obviates the prevailing paradigm.
  • Increased foreign control in this time of weakness further weakens debt-paying capacity.
• Supply outstrips demand. Income concentration at the upper end becomes an obstacle for mass adoption and full economies of scale. Excess money is poured into furthering the technological revolution, including its infrastructure.
• The leading countries that feel threatened by free competition often take protectionist measures.
• Through all this, financial capital is unwittingly attracting the funds necessary to install basic infrastructure and facilitating social learning, paving the way for the full unfolding of the revolution during Deployment.

 

Break: Turning Point

The irrationally exuberant bubble bursts, causing a recession and social unrest. This is the trigger for regulatory and institutional change to adapt to the new revolution.

• Three tensions make the Frenzy impossible to sustain indefinitely and bring on the recession:
  • Real wealth cannot be produced at the same speed as paper capital gains.
  • Premature saturation: concentration of the new wealth in a small fraction of the population limits market size and prevents the economies of scale that enables further growth.
  • Social unrest: increasing wealth inequality causes anger and violence to erupt.
  • (Possible solutions to premature saturation: export markets, government spending for wars, income distribution.)
• Humbled by evaporation of paper gains and pressured by victims of semi-fraudulent practices, financial capital is more willing to accept regulatory safeguards.
  • Accountancy and disclosure legislation are common regulations.
  • Self-regulation can occur to avoid government supervision.
• Significant failures must happen for proper regulation – automatic parachutes cannot be universally deployed, otherwise financial capital will never abide by regulation.
• Institutions are set up to encourage diffusion of the new paradigm.
  • In the second revolution, legal frameworks allowed for safe and reliable participation in capital markets to fund large investments like railways.
  • Salaries, welfare, and unemployment enabled stability in consumer purchasing of mass-produced goods.
  • In the Age of the Automobile, institutions for international finance (IMF, World Bank) and protective agencies (FDIC, SEC) were created.
• Paper values are brought back in line with real values.
• The pendulum swings from individualism in Frenzy to collective well-being.
  • The state should promote income distribution, social safety nets, and restore real values over paper ones.
• The power shifts from financial capital to production capital.
  • It is production capital that is mainly interested in fulfilling the technological trajectory, to profit from the investment already made. Thus its incentives are aligned with diffusion of technology and mass expansion of demand.
  • In contrast, financial capital tends to prefer short-lived capital gains rather than long-term, dividend-producing capacity.
  • “Securities analysts believe that companies make money. Companies make shoes!” – Peter Drucker
• This recoupling is necessary for deployment and ushering in a golden age of more harmonious growth. Prior to this, too much tension exists to fully reap the fruits of the new growth potential.
• Institutional choices will shape the next two phases. Increasing social cohesiveness, social safety nets, and income redistribution can occur – or selfish prosperity will continue.

 

 

Phase 3: Synergy

Using the infrastructure developed in Frenzy and the regulatory safeguards in Turning Point, the technological revolution diffuses across the whole economy. A “good feeling” sets in with increasing coherence. Business is satisfied about its positive social role. Technology, and even finance, is seen as a positive force.

• The path to success has been successfully signaled. People can join the bandwagon with lower risk. 1 → n growth occurs.
  • Entrepreneurial activity moves “up the stack.” Where the excitement in Installation was in building infrastructure, much of excitement in Deployment is building the application layer on top of the infrastructure.
    • Eg during the installation phase of the auto revolution, the action was in building cars. In the deployment phase, the action was in the highway system, suburbanization, retail, etc.
• Financial capital and production capital recouple.
  • Production capital is now recognized as the wealth-creating agent, with financial capital as the facilitator.
  • Paper values and real values are more closely aligned, so growth and dividends are more real than in Frenzy.
  • Perez argues this may be the only period when aggregate statistics are reliable, since the economy is in relative harmony (and not in stark differentiation, as in Irruption).
  • Financial capital creates instruments of credit that facilitate the new paradigm.
    • The second revolution in the 1830s saw joint stock for large projects and growth of capital markets.
    • The third revolution from 1870s onward saw limited liability and legislation for giant industrial corporations.
    • The fourth revolution post-WW2 saw personal banking services and consumer credit for consumption of mass-produced home goods.
    • The fifth revolution sees challenges in intangible information as capital goods, and value of products with zero marginal cost. New instruments may include crowdfunding and cryptocurrency.
  • It serves to facilitate production capital, less exuberant than in Frenzy but still profitable and more stable.
• Feedback effects reinforce growth. The raw labor and supplies are readily available, distribution networks are in place, new products are intercompatible, social acceptance increases, cost of inputs and infrastructure is reduced – all driving a flywheel effect for diffusion.
  • Without roads, gasoline stations, and mechanics, people can’t use automobiles. Yet with a critical mass, enough automobiles are needed to make running a station profitable, thus making it easier to own an automobile, thus allowing more gas stations to exist. A virtuous cycle thus occurs.
  • Likewise, the decreasing cost of web servers in the 2000s prompted many more services to arise, thus enabling improvements in infrastructure (as in AWS) that further lowered cost.
• Institutional enablers like regulation, specialized education, and financial innovations continue diffusion of the paradigm.
  • Eg Traffic code and consumer credit for automobiles
• New means of expanding demand to successive layers of the population arise, involving the middle and working classes and enabling economies of scale.
  • This includes making the products user friendly, and cost reduction of inputs and infrastructure.
• Culture adapts to the logic of the technologies. Consumers accept the progression of innovation as normal.
  • The paradigm has diffused and proven its power sufficiently to be installed in people’s minds as the new best practice.
  • eg in the Information Age, progression from home PCs to laptops to mobile phones to apps. [I observed the remarkable pace by which Uber went from curious novelty to mundane utility within a year.]
  • This social momentum eventually becomes its own inertial force, rejecting innovations that disrupt the prevailing paradigm. This is itself helpful by allowing the full spread of benefits of the revolution and barring inopportune change.
• Accessory branches that help diffuse the paradigm also experience growth.
  • Eg construction, transport, trade accompanying the particular nature of the revolution.
• The new firms from the installation period are now giants.
• Employment rises steadily and (depending on the institutional framework) there can be a shared feeling of improving quality of life.

 

Phase 4: Maturity

Finally, the technological revolution begins to deplete its possibilities. Refer to Phase 0 above.

• This is the twilight of the golden age, “though it shines with false splendor.”
• Core industries experience market saturation and decreasing returns.
  • To increase market share, the dominant firms concentrate through mergers and acquisitions, turning into oligopolies.
  • Activities are migrated to less-saturated markets abroad, redeploying the prevailing paradigm. However, this exhausts relatively quickly because of the knowledge gained in earlier phases.
  • Recall Peter Thiel: “globalization is not the way to growth – new technology is.”
• Widespread market and production experience shorten the life cycles of later products because of very rapid learning and saturation curves.
• Those who reaped the benefits of the golden age continue to believe in the virtues of the system and “proclaim eternal and unstoppable progress in a complacent blindness.”
• But promises of constant progress and social progress are not met, leading to labor and political unrest.
  • The young and nonconformists stage rebellions and romantic protests.
• Firms amass money without profitable investment outlets, creating idle capital.
• Financial capital begins separating from production capital again, seeking more profitable or exciting things.
  • It supports investment in marginalized sectors and the periphery of the revolution.
  • Bad loans are granted to weaker creditors, particularly internationally.
  • Unorthodox practices like tax avoidance reign.
• Radical innovations are demanded to propel further growth. Firms lift the implicit ban on radical new technologies outside the prevailing, now exhausted paradigm.

 

Phases of Financial Innovation

Throughout the revolution, innovations in financial capital enable the diffusion of technology.

In Technological Revolutions and Financial Capital, Carlota Perez classifies financial innovations along six types, then illustrates when innovations in each type occur.

 

Type	Purpose	Examples
A	Invest in new products or services	Venture capital for radical innovations Joint stocks for large investments
B	Help growth or expansion	Production expansion domestically and abroad (bonds) Government funding (eg war, infrastructure investment)
C	Modernize financial services themselves	New service to clients (telegraph transfers, personal checking accounts, e-banking) Incorporation of new technologies (communications, transport)
D	Profit-taking and spreading risk	Attract small investors (mutual funds, bonds, IPOs) Facilitate risk taking (derivatives, hedge funds)
E	Refinance obligations or mobilize assets	Reschedule debts (Brady Bonds, swaps) Buy active production assets (mergers, takeovers) Acquire and mobilize rent-type assets (real estate, futures)
F	Questionable innovations	Legal loopholes (fiscal havens) Making money from money, taking advantage of incomplete information (FX arbitrage, leads and lags) Making money without money (pyramid schemes, insider trading)

 

Phase	Prevalent innovation						Characteristics of finance
	A	B	C	D	E	F
Irruption	X	X	X	X	X	X	Maximum intensity of real financial innovation
Frenzy				X	X	X	Escape control, attract funds, speculate, inflate assets
Synergy	X	X	X				Adaptive innovations to accompany growth
Maturity		X			X	X	Accompany outspreading, escape control and manipulate

This table refers to when innovation and invention happens – the application of the practices can last a long time afterward.

• In Irruption, there is differentiation in financial capital: part supporting the new paradigm (types A-C), part idle capital desperately seeking profits in the old (types D-F).
• In Frenzy, financial capital becomes entranced with itself, building a casino economy (types D-F).
• In Synergy, it shifts to adaptive innovations to accompany the deployment of the paradigm (types A-C).
• In Maturity, saturation and more idle money means funding of expansion of the prevailing paradigm (type B), consolidation of power (type E), and questionable propping up of profits in type F.

 

Concluding Points

Addressing Criticisms

In Technological Revolutions and Financial Capital, Carlota Perez addresses a few arguments against her model of technological revolutions.

This model doesn’t perfectly apply to this and that situation.

The four phases model is deliberately meant to be impressionistic. Each revolution has unique ideological, institutional, political factors that lead to particularities, but the general shape holds true.

For instance, in the third revolution, madness in the US stock market occurred more during 1903 and 1907 during a “frenzied Synergy” in a strong drive to forge ahead.

Further, the Great Depression in the USA after 1929 lasted especially long. Perez suggests that Roosevelt’s New Deal would have erected the structure for successful synergy, but these were opposed for fear of socialism and inordinate state intervention in the economy. It took the military-industrial complex in World War II to teach how state and capitalism could coexist. [Others argue that artificial wage floors suppressed employment and output, or that insufficient fiscal stimulus was applied.]

 

This model should show up in economic analysis and in aggregate variables like GDP.

There is no expectation of neat upswings and downswings in aggregate metrics like GDP. “Aggregate figures conceal more than they reveal.”

The model argues for increasing differentiation within the economy. Some branches grow at very high rates while others are stagnating. Maturity of the previous revolution is occurring in the background of Irruption of the new one. Whether the sum of these trends shows up in aggregate metrics depends on the relative weights and relative growth rates.

Furthermore, many measuring attempts use money values, but there are really “two moneys” operating under one. Given the rapid improvement in technology, it is hard to control the value of money across two periods. Money buying telecom today is not the same value as money buying furniture in the 1970s. Even for the same good, the decreasing prices and increasing volume make measurement difficult – how do you compare one computer in 1960 vs one computer in 2010?

Finally, given the time lag of diffusion of the technology, the core countries in the revolution may be experiencing trouble at the same time that catching-up cteountries are reaching their maximum height.

However, in the synergy phase, there should be stability of relative productivities in certain branches. This does not last long, as in maturity there is heterogeneity in dynamic growth of latecomer branches and sluggish growth in the now traditional core industries.

 

Cycles must be simultaneous worldwide phenomena.

Proponents of long-wave Kondratiev cycles expect coinciding worldwide progress.

Instead, diffusion tends to propagate in ripples, both across sectors and across geographies.

Between sectors, the most closely connected industries form very high synergy and intensive feedback effects. This establishes the paradigm and lowers cost of adoption for an ever-wider circle, until it penetrates the whole economy.

[Example in the information age: commerce and media were synergistic and developed quickly (selling people things enabled advertising which enabled media). Later, wide diffusion of the paradigm allowed for adoption of digital tools and devices in further industries like healthcare and government.]

Geographically, the process is similar. The paradigm spreads in the core country and then, as Maturity arrives and markets stagnate, propagates to the periphery. Through the life cycle of the revolution, the core country begins as a net exporter of the technology, then becomes a net importer as the paradigm reaches the periphery. Whether any particular country in the periphery adopts the new paradigm depends on its ability to take advantage of the opportunity.

 

This model doesn’t predict all bubbles.

Not all financial collapses are strictly connected with technological revolutions. All technological revolutions are characterized by the crash at the end of the frenzy phase. But other collapses may have other causal chains.

 

Remaining Questions

For the current information revolution:

• What phase are we in now?
  • Many in the tech industry, like Marc Andreessen, believe we’re in the deployment phase. “Software is eating the world.”
  • Carlota Perez disagrees, saying we’re still at a turning point, and the 2001 and 2008 bubbles were a double bubble. In her view, finance continues to be decoupled from production; inequality and hopelessness are still the popular ethos. If we were in a golden age, everyone would be feeling it, like in Deployment post-WWII.
• What industries are the best candidates for deployment?
  • Information-intensive industries only superficially affected by the internet to date – education, healthcare, law, government.
  • When will we transition into Maturity?
  • Many think it’s just getting started.

 

Predicting future revolutions:

• What are possible next technological revolutions? Remember that they tend to start with cheap disruption (like microprocessors) and allow cost-competitive innovations
  • Biotechnology
  • Nanotechnology
  • Artificial intelligence
  • Cryptocurrency (?)
• What technologies were hyped as the new wave that then faltered? In other words, what seeming “revolutions” were false positives? How do you tell these are false positives as they’re happening?
  • Green energy and John Doerr
• One might use asset inflations as a predictor of the next technological revolution to come. But again, what are the false positives – which asset inflations happened around a core technology that did not lead to a deployment period and a golden age?
• Britain was the center of the industrial revolution, but the center later moved to the US. Our thinking is typically US-centric – where might the next technological revolution arise, if not the US?
  • China may be leading the edge of gene editing
• The next technological revolution is incompatible with the current paradigm. What are disruptive technologies that would threaten today’s paradigm, and are thus resisted today?
  • Cryptocurrency threatening centralization of power
  • Gene editing threatening conceptions of what being human is like
• What technologies would make existing titan companies obsolete?
• Finance tends to adopt new technology early. Can you use financial innovation and new organizational models as harbingers for the larger technological revolution to come?
• When can you tell early on there’s a bubble? When can you tell where the peak is? Use crypto as an example.

 

Implications of possible revolutions:

• Consider the social upheavals of new paradigms.
  • Gene editing will upend the conception of parenting.
    • If your children are no longer organically produced from your DNA, what does it mean to be a parent?
    • Can people start purchasing standard models of children, like they do cars?
    • Will marriage weaken as an institution, since single people can now get children?
    • This will also enable large population studies on the influence of environment on humans.
  • Artificial intelligence will upend the paradigm of humans being the dominant being in the known universe.
    • Many fear mass unemployment and the need for social safety mechanisms like guaranteed basic income. The work that many currently do may be obsolete, and AI may progress far more quickly than humans can learn new AI-compatible trades.
• When spotting an early revolution, can you immediately seek to deploy it in further out countries profitably? Or might it be too early by 1-3 decades, if the infrastructure isn’t there?