Technological Revolutions and Financial Capital

Book: TECHNOLOGICAL REVOLUTIONS AND FINANCIAL CAPITAL. The Dynamics of Bubbles and Golden Ages. Carlota Perez. Edward Elgar, Cheltenham, UK, 2002

URL = http://www.carlotaperez.org/Articulos/TRFC-TOCeng.htm

Introduction at http://www.carlotaperez.org/TRFCbook/TRFCintrod.pdf ; Conclusion at http://www.carlotaperez.org/TRFCbook/TRFCepilogue.pdf

Description

From a working paper that is very similar to the book:

"Ever since Kuznets published his review of Business Cycles questioning the sudden clustering of entrepreneurial talent that was supposed to accompany each technological revolution, Schumpeter's followers have felt uneasy about this unexplained feature of his model. Yet apparently no one has stopped to question Schumpeter's treatment of the clustering of 'wildcat or reckless banking', dismissing it as a random and unnecessary phenomenon to be excluded from his model, together with speculative manias.

Keeping Schumpeter's basic assumptions about innovations based on credit creation as the force behind capitalist dynamics, this chapter will present an alternative model of the process of propagation of technological revolutions. On that basis it will propose:

a) An explanation of the clustering and the spacing of technical change in successive revolutions;

b) An argument for the recurrence of clusters of bold financiers together with clusters of production entrepreneurs and

c) An interpretation of major financial bubbles as massive episodes of credit creation, associated with the process of assimilation of each technological revolution

The model is a stylized narrative, based on a historically recurring sequence of phases in the diffusion of each technological revolution, from its visible irruption after a long period of gestation, through its assimilation by the economic and social system to the exhaustion of its innovation potential at maturity. But it is not merely descriptive. It is constructed through the identification of possible causal chains between agents and spheres in capitalist society. What the model attempts to do is identify the repetition of certain underlying patterns and to propose plausible explanations. The reader is asked to keep this purpose in mind, together with the additional caveat that neither the evidence nor much subtlety can be included in the limited space of a chapter. Suffice it to say that this model is not a straitjacket to be forced upon history. Rather than ignore the immense richness of historical evolution, it emphasizes the uniqueness of each occurrence and recognizes the many irregularities and overlaps that cannot be captured by abstraction. Its only claim is to serve as a useful heuristic tool for historical exploration and as a framework for theoretical analysis." (http://www.carlotaperez.org/papers/basic-Finance-technology.htm)

Summary of the key ideas

Randal Jackson Wellington:

"The model is one of historically recurring phases in the diffusion of technological revolutions, through to their assimilation by the economic and social system to maturity.

Perez suggests that what distinguishes a technological revolution from an individual technology system is its all-pervasive character, its capacity to go beyond the industries it creates and to provide generic technologies that modernise the whole economic structure.

Historically, these revolutions have lasted around 50 years. Each becomes a standard only after overcoming the resistance of the preceeding model.

Perez lists the technological revolutions as: the industrial revolution, highlighted by the invention of the mechanised cotton industry, wrought iron and machinery, with associated infrastructure such as canals, waterways, turnpike roads, and water power; the second was the age of steam and railways; the third, the age of steel, electricity and heavy engineering; the fourth, the age of oil, the automobile and mass production; and the latest, from 1971, the age of information and telecommunications.

Finance is the driver. Decisions to invest are taken by entrepreneurs, often backed by financial agents.

The agents of production capital and those of financial capital will act in unison to fund growth and innovation as long as they are successful and profitable, Perez says.

Society, she says, influences the path taken by the revolution. The concept stretches far beyond the economy to encompass societal and even cultural change.

Perez says a financial bubble usually characterises the final phase of change: “canal mania” in the 1790s, “railway mania” in the 1840s, the “roaring 1920s” and the bubble of the 1990s.

The installation period ends with a financial collapse, having done among other things replaced old industries, until there is a general acceptance of common-sense criteria for best practice in the new paradigm.

New policies generally tend to regulate financial practices and to contribute toward the expansion of markets through public demand and income redistribution, she says.

Industries and technology systems of a revolution don’t meekly disappear when they reach maturity. Perez says they remain stubbornly fighting for survival during the installation of the next, and only gradually modernise, adopting the new principle when they are forced to by the market superiority of the new paradigm." (http://computerworld.co.nz/news.nsf/news/9109F8CC3AF9CCD3CC2574BD002AD38B)

Cycles of Technological Change

• The industrial revolution – 1780 • Steam and railways – 1830 • Heavy engineering – 1870 • Automotive and mass production – 1920 • Information and Communication – 1971 (microprocessor)

Next cycle

• Nanotechnology – 2050

Paul Budde:

"Listening to Professor Carlota Perez (http://carlotaperez.org) we can learn that what actually happens in these longer-term cycles. Our interpretation of this is that infrastructure development follows the principle of ‘build and they will come.

Carlota talks about three distinct periods with each of these revolutions;

• Installation • Transition • Deployment

INSTALLATION PERIOD – BUILD AND THEY WILL COME

At the start of any new technological revolution people see glimpses of the future; they see the massive potential of these changes. However, without the required infrastructure the real benefits of the emerging ‘techno-economic revolution’ cannot be achieved. What happens then is that those who can recognise the potential move into a frenzy of activity in what Perez calls the ‘installation period’ of that new technology cycle.

We are very familiar with this technology hype. It actually drives the installation phase and during this period paper-based fortunes can be made at the stock exchange. Without this initial financial stimulation either nothing at all would eventuate, or progress would be very, very slow. We only have to look at the slow pace of human development in prehistoric and early modern times.

TRANSITION PERIOD – GREAT UPHEAVAL

Most of the time the early frenzy and hype ends in a crash. Now intelligent intervention of the state is necessary to shift the reward structure from financial capital to investment capital that allows real deployment to occur. This heralds the start of the ‘transition period’. In order to move forward we now need to begin replacing the investment-driven installation phase with a manufacturing-driven ‘deployment’ phase. This involves replacing old technologies and transforming the old way of doing things.

This often generates periods of massive disruption, with great economic, political and social upheaval.

By the time the transition point is arrived at sufficient infrastructure for the new deployment environment to move forward will generally have been installed. This will allow the ‘builders’ in the society to take over, and new ‘real’ investments are made by real builders in what Perez calls the ‘deployment period’.

This is often assisted by over-investments in infrastructure that have been made in the installation period. Assets therefore can often be bought by the builder at a good price and the investment can thus be taken further.

These ‘new’ investments are no longer based on the creation of paper-based wealth – they are focused on earning dividends on the investment. Also, government funds are often now directed at these investments, which can lead to a full deployment that generates economic advances for the whole society, not just the happy few that were involved in the early installation period.

According to Perez, in order for a successful deployment period to start it is essential that the financial systems must stop rewarding financial capital and promote the use of capital to create infrastructure and move ICT into the deployments state.

Furthermore, she finds that there have been 4 transitions lasting between 2 and 13 years. We are now in the fifth that has lasted nearly nine years.

DEPLOYMENT PERIOD – REAPING THE REWARDS

To see what can happen in periods of transition we only have to look at the massive infrastructure projects that were undertaken during the depression in the 1930s, which followed the installation period (1908-1929) and, after WWII, which led to unprecedented economic prosperity in the developed world – the deployment period (1950-1970).

Installation periods are essential and because many people make enough money during such a period these will always attract new investments, despite the fact that many people will also lose a lot of money. Those who study and understand these long-term cycles are, in general, the people who do well; it is the uninitiated, attracted by the frenzy, who are often bitten.

What this shows is that both phases – the installation period, driven by financial gains, and the deployment period, driven by dividends – are necessary parts of the development of any techno-economic cycle." (http:www.budde.com.au)

Source: Paul Budde. Global - Investing in the Communications Revolution. 2008

More Information

Watch Carlota Perez on Technological Revolutions and Financial Capital