Financial Innovation: When Tech Revolutions Mature

This article is an excerpt from the Shortform book guide to "Technological Revolutions and Financial Capital" by Carlota Perez. Shortform has the world's best summaries and analyses of books you should be reading.

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What is financial innovation? In which phase of technological revolution does financial innovation happen and how does it work?

Financial innovation occurs when a technological revolution reaches maturity and then can explore wealth-building endeavors related to the revolution’s economic prosperity.

Read more about financial innovation and phase 4 below.

Phase 4: Maturity and Financial Innovation

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 the knowledge gained in earlier phases accelerates the deployment in new markets.

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. They insist on continuous progress of the current paradigm, 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 and leading to innovation in finance.

  • 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 innovation in finance are demanded to propel further growth. During the Synergy phase, innovations that disrupted the diffusing paradigm were rejected. Now, they are sought after by firms desperate for growth. 

Phases of Financial Innovation

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

Carlota Perez classifies financial innovations along six types, then illustrates when innovations in each type occur.

AInvest in new products or servicesVenture capital for radical innovationsJoint stocks for large investments
BHelp growth or expansionProduction expansion domestically and abroad (bonds)Government funding (eg war, infrastructure investment)
CModernize financial services themselvesNew service to clients (telegraph transfers, personal checking accounts, e-banking)Incorporation of new technologies (communications, transport)
DProfit-taking and spreading riskAttract small investors (mutual funds, bonds, IPOs)Facilitate risk taking (derivatives, hedge funds)
ERefinance obligations or mobilize assetsReschedule debts (Brady Bonds, swaps)Buy active production assets (mergers, takeovers)Acquire and mobilize rent-type assets (real estate, futures)
FQuestionable innovationsLegal 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)
PhasePrevalent innovationCharacteristics of finance
IrruptionXXXXXXHighest intensity of financial innovation
FrenzyXXXAttract funds, speculate, inflate assets
SynergyXXXSupportive innovations to accompany growth
MaturityXXXAccompany diffusion of paradigm, escape regulatory control

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.

There are several types of financial innovation, and when a technological revolution matures, this innovation in finance can occur.

Financial Innovation: When Tech Revolutions Mature

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Here's what you'll find in our full Technological Revolutions and Financial Capital summary :

  • What happened during the 2000 tech bubble and the 2002 crash
  • The 5 technological revolutions that reshaped society since 1771
  • How you might be able to predict and prepare for the next technological revolution

Carrie Cabral

Carrie has been reading and writing for as long as she can remember, and has always been open to reading anything put in front of her. She wrote her first short story at the age of six, about a lost dog who meets animal friends on his journey home. Surprisingly, it was never picked up by any major publishers, but did spark her passion for books. Carrie worked in book publishing for several years before getting an MFA in Creative Writing. She especially loves literary fiction, historical fiction, and social, cultural, and historical nonfiction that gets into the weeds of daily life.

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