Book SummaryTechnological Revolutions and Financial Capital, by Carlota Perez

1-Page Summary1-Page Book Summary of Technological Revolutions and Financial Capital

History is filled with examples of technological breakthroughs and consequent social and economic transformations. But how do these events actually play out? In Technological Revolutions and Financial Capital (2002), 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.

Perez is a researcher, scholar, and consultant specializing in technology and socioeconomic theory. She holds honorary or adjunct professorships in technology programs at University College London, University of Sussex, and Tallinn University of Technology. She has worked as an international consultant with organizations like the OECD, UNESCO, and the World Bank, and she’s also consulted for corporations like IBM, Cisco, and Mondragon. In 2020 she was named by Forbes as one of “five economists redefining everything.” In 2022, Technological Revolutions and Financial Capital was chosen by Foreign Affairs as one of the three “books for the century.”

In our guide, we’ll explore the definition and characteristics of technological revolutions, as well as the role society plays in their unfolding. Then we’ll examine the four phases of technological revolutions. Finally, we’ll outline Perez’s responses to criticisms of her model.

Technological Revolutions

A technological revolution is a cluster of new technologies, products, and industries that causes an upheaval in the economy and propels a long-term surge in development. These technological breakthroughs spread far beyond the industries and sectors from which they originated—they cause jumps in productivity for a broad span of economic activities. Economically, the technology brings a shift in price structure (often by making things significantly cheaper) that guides economic agents toward use of the new technologies.

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 something like the ‘ideals’ of the period. It creates new mental maps of all social actors and institutions.

Perez identifies five technological revolutions in the past 250 years:

• The Industrial Revolution in 1771
• The advent of steam power and railways in 1829
• The incorporation of steel, electricity, and heavy engineering in 1875
• The spread of the automobile and mass production in 1908
• The Age of Information and telecommunications in 1971

Let’s look at the common characteristics of technological revolutions.

Properties of Technological Revolutions

First, according to Perez, a revolution needs a highly visible attractor 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. 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 full revolution may take a century.

The new technologies prompting revolutions are not isolated; often many products had existed for some time before the new technology offered unprecedented value and scale. For example, oil and automobiles had both been in development since the 1880s, but their combination with mass production in the 1900s led to a revolution in affordable automobiles for the general public. Likewise, transistors and semiconductors were available in the 1950s, but the microprocessor made visible the potential of cheap microelectronics.

Additionally, each revolution consists of several technology systems that develop at different rhythms and in a sequence depending on feedback loops. Each of these can appear as separate revolutions rather than interdependent systems under a wider umbrella—each smaller system benefits from the previous mini-revolution, while also reinforcing the overall paradigm to which it belongs.

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

The nature of the paradigm can favor certain comparative advantages unique to a society or nation. For example, the fourth revolution of mass production favored large homogeneous populations, thus favoring the USA and the Soviet Union over more heterogeneous populations like Europe.

Next, we’ll explore how society both propels and restrains technological revolutions.

Society’s Role in Technological Revolutions

Perez maintains that society shapes innovation to occur in predictable revolutionary cycles, providing both a propelling and dampening force at different phases. Specifically, society shapes technological revolutions by cycling between inertia and desire for growth.

At first, society feels inertia and begins to long for a change. However, each revolution is initially received as a threat to the established way of doing things. Society has optimized for the previous revolution, but the new economy implies job losses, geographic displacement, and unaddressed regulatory challenges. This results in a mismatch between the economy and socio-institutional systems. For example, mass-produced automobiles displaced steam-powered trains and...

Technological Revolutions and Financial Capital Summary Technological Revolutions

A technological revolution is a cluster of new technologies, products, and industries that causes an upheaval in the economy and propels 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 broad span of economic activities. Economically, the technology brings a shift in price structure (often by making things significantly cheaper) 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 something like the ‘ideals’ of the period. It creates 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:

Technological Revolutions and Financial Capital Summary The Role of Society in Technological Revolutions

Society shapes technological revolutions by cycling between inertia and desire for growth.

At first, society feels inertia. 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 industries associated with either (economies of towns at train stops, veterinarians for horses).

As the technological revolution spreads through society,...

Technological Revolutions and Financial Capital Summary The Five Revolutions of the Past 250 Years

In Technological Revolutions, 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
• 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”...

Technological Revolutions and Financial Capital Summary 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: A new promising technology sees explosive growth as venture capitalists, seeking high profits, invest in new activities and firms.
  • Phase 2: Frenzy: Investments reach irrational exuberance level, as investors become excited about the profit possibilities of the new technology.
• Turning Point
  • Many early expectations will be disappointed, leading to collapse of bubbles created by financial speculation.
  • However, the boom from the Installation period installs the infrastructure that paves the way for...
• Deployment period
  • Phase 3: Synergy: 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.”
  • Phase 4: Maturity: The technology sees diminishing returns. The main companies have merged and become oligopolies,...

Technological Revolutions and Financial Capital Summary 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.

At the dawn of the new revolution, the previous revolution has played out.

• Society has accepted the new common sense of the prevailing paradigm.
• Firms and society have...

Technological Revolutions and Financial Capital Summary Phase 1: Irruption

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

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. 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.

• For example, the US auto industry (created in the previous revolution of the automobile and mass production) adopted Japanese production methods and microelectronics in both manufacturing and the car itself....

Technological Revolutions and Financial Capital Summary 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.

The infrastructure begins to be laid out: suppliers, distribution channels, skilled labor, cultural adaptation. (This infrastructure is critical for the later Deployment phase.)

Financial Capital Becomes Exuberant

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...

Technological Revolutions and Financial Capital Summary 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, bringing 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.
  • (Possible alleviations of premature saturation: export markets, government spending for wars, and income redistribution.)
• Social unrest: increasing wealth inequality causes anger and violence to erupt.

Financial Capital is Humbled

Paper values are brought back in line with real values.

Humbled by the evaporation of paper gains and pressured by the victims of semi-fraudulent practices, financial capital is more willing to accept regulatory safeguards.

• Accountancy and disclosure legislation are...

Technological Revolutions and Financial Capital Summary 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.

Financial Capital and Production Capital Recouple

Production capital is now recognized as the wealth-creating agent, with financial capital as the facilitator.

Production Capital

For entrepreneurs and people working in the new revolution, 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.
  • For example, 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, and other...

Technological Revolutions and Financial Capital Summary 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 the knowledge gained in earlier phases...

Technological Revolutions and Financial Capital Summary 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.

Technological Revolutions and Financial Capital Summary Addressing Criticisms

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. (Shortform note: 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...

Technological Revolutions and Financial Capital Summary Shortform Exclusive: Questions to Ponder

Knowing the concepts, consider where we are now.

The Current Information Age

Which of the four phases 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...