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)

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