PDF Summary:Technological Revolutions and Financial Capital, by Carlota Perez

... Oil, Automobile, and Mass Production USA (and Germany) First Model-T out of Ford plant in Detroit 1908 </tr> Information and Telecommunications USA Intel microprocessor announced in Santa Clara, CA 1971 </table>

Properties of Technological Revolutions

The innovations that create the technological revolution gestate for some time before they make their huge impact. But 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. 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.

Geographically, the revolution often gestates in a particular region, and propagates from core to periphery. This means the time that the new technology is deployed is not the same for all countries and can be delayed by decades. Globally, the...

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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 earlier in the revolution 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.

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• Worldwide telegraph
• Electrical networks (for industrial use)

“Common-sense” innovation principles

• Economies of scale of plant
• Vertical integration
• Distributed power for industry
• Science as a 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
  • ...

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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.

As we’ll see, both financial capital and production capital have critical roles to play in the arc of each revolution.

Financial capital and production capital are different by nature:

• 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. 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 or perish.
• Ironically, as a revolution matures, incumbent production capital can become conservative and unreceptive to innovation. In this stage, it is the role of financial capital to enable the rise of new entrepreneurs.

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• Core industries encounter market saturation and decreasing returns. Productivity and growth are threatened.
• Firms that have stagnated become receptive to radical innovations.
• An environment with decreasing returns brings idle capital looking for profitable uses.

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*   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 enables and spreads the revolution.

Social Tensions in Irruption

The prevailing paradigm is still wedded to the previous revolution. Thus, tensions arise between:

• the new industries and the mature ones
• People trained in the new technology and people 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.

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• This includes pressure to commit fraud to maintain profit levels, as in Enron and Worldcom.

Because of limited diffusion to the broader market, 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.

A Growing Gap Between Paper Value and Real Value

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 are the overriding emotions. This is the new world, promising unending bliss. (Shortform note: the disappointment of the previous revolution’s Maturity phase probably...

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In Frenzy, financial capital separated from production capital and took on a life of its own. In the Turning Point, financial capital and production capital recouple. 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.

The Tone Shifts to Long-Term Growth and Diffusion

Institutions are set up to encourage diffusion of the new paradigm.

• In the second revolution of steam power and railways, legal frameworks allowed for safe and reliable participation in capital markets to fund large investments like railways.
• In the fourth revolution of mass production, salaries, welfare, and unemployment enabled stability in consumer purchasing of mass-produced goods. Institutions for international finance (IMF, World Bank) and protective agencies (FDIC, SEC) were created.

The social values pendulum swings from individualism in Frenzy to collective well-being in Deployment.

• The state should promote income distribution, social safety nets, and restore real values over paper ones.

Institutional choices will shape the next two phases....

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• The fifth revolution sees challenges in the paradigm of intangible information as capital goods, and of products with zero marginal cost. (Shortform examples: New instruments may include crowdfunding and cryptocurrency.)

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 with stark differentiation between old and new sectors, as in Irruption).

The Paradigm Diffuses throughout Society

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...

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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. During the Synergy phase, innovations that disrupted the diffusing paradigm were rejected. Now, they are sought after by firms desperate for growth.

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In Type A, the purpose is to Invest in new products or services. Examples include Venture capital for radical innovations, and joint stocks for large investments.

In Type B, the purpose is to Help growth or expansion. Examples include Production expansion domestically and abroad (using bonds), and Government funding (such as in waror infrastructure investment).

In Type C, the purpose is to Modernize financial services themselves. Examples include providing new services to clients (for example, telegraph transfers, personal checking accounts, and e-banking), as well as Incorporation of new technologies (such as communications and transport).

In Type D, the purpose is to Profit-taking and spreading risk. Examples include Attracting small investors (through mutual funds, bonds, and IPOs), as well as Facilitating risk taking (through derivatives and hedge funds).

In Type E, the purpose is to Refinance obligations or mobilize assets. Examples include Rescheduling debts (such as Brady Bonds, swaps), Buying active production assets (through mergers or takeovers), and acquiring and mobilizing rent-type assets (such...

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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 countries 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 worldwide progress coinciding in all sectors and geographies at once.

In reality, 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.

(Shortform 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...

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The location of the revolution can change. Britain was the center of the industrial revolution, but the US became the center of future revolutions. Where might the next technological revolution arise?

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?

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?