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1-Page Book Summary of Technological Revolutions and Financial Capital

A technological revolution is a cluster of new technologies, products, and industries causing an upheaval in the economy and propelling a long-term surge in development.

The five technological revolutions of the past 2 centuries, with their approximate start date:

  • Industrial revolution in 1771
  • Steam and railways in 1829
  • Steel, electricity, and heavy engineering in 1875
  • Automobile and mass production in 1908
  • Information and telecommunications in 1971

Progress does not happen linearly and constantly. Instead, technological revolutions happen in predictable cycles, spanning ~50 years:

  • Installation
    • A new promising technology sees explosive growth as venture capitalists, seeking high profits, invest in new activities and firms.
    • Investments reach irrational exuberance level. Many early expectations will be disappointed, leading to collapse of bubbles created by financial speculation.
    • However, this boom installs the infrastructure that paves the way for...
  • Deployment
    • 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.”
    • In maturity, the technology sees diminishing returns. The main companies have merged and become oligopolies, reducing the ferocity of competition and a common interest in comfortable profit margins. Arthritis sets in for the new incumbents .
    • Attention shifts to the next generation of radical innovations, thus continuing the cycle


Much is said about the evils of finance in propping up bubbles and profiting from technology. Instead, financial capital is crucial in the installation and deployment of new technology.

  • When the previous paradigm matures, it seeks radical innovations for growth.
  • When the new technological revolution appears, financial capital draws attention to it through (inflated) profits.
  • When the bubble bursts, it facilitates production capital in diffusing the new revolution.

Society shapes the development of the revolution, through initial inertia from the previous revolution, then mass acceptance and diffusion of the new revolution.

  • To make way for the new revolution, institutional creative destruction will take place, dismantling the old framework and installing the new. This means changes in regulation, politics,...

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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:

Revolution Core country Big-bang event Year
Industrial Revolution Britain Arkwright’s mill in Cromford 1771
Steam and Railways Britain ‘Rocket’ steam engine for Liverpool-Manchester railway 1829
Steel, Electricity, and Heavy Engineering USA and Germany Carnegie Bessemer steel plant in Pittsburgh 1875
Oil, Automobile, and Mass Production USA (and Germany) First Model-T out of Ford plant in Detroit 1908
Information and Telecommunications USA Intel microprocessor announced in...

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, frictions mount. Political pressure begins calling for action to propel the required institutional changes to accommodate the new revolution. Often the most persuasive event to induce changes in regulation is the financial collapse of the bubble of “irrational exuberance.” This spurs adaptations in government, education, and social behaviors, until the revolution becomes the “new common sense.” Only when the revolution has this proper context in society can the “golden age” of growth proceed.

As the revolution becomes the new prevailing paradigm, it favors compatible innovations and it excludes incompatible innovations. An innovation that fits in the natural trajectory of the prevailing paradigm is readily accepted by society, allowing progress. In contrast, incompatible innovations may be rejected by investors or consumers, and are instead adapted in a minor way to the current paradigm, even though they may very well be the focal point of the next technological revolution.

As the revolution matures,...

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” innovation principles

  • Economies of agglomeration
  • Industrial cities
  • National markets
  • Scale as progress
  • Standard parts/machine-made machines
  • Energy where needed (steam)

Steel, Electricity, and Heavy Engineering - 1875

New technologies and industries

  • Cheap steel
  • Steam engine for steel ships
  • Heavy chemistry and civil engineering
  • Electrical equipment industry
  • Copper and cables
  • Canned and bottled food
  • Paper and packaging

New or redefined infrastructures

  • Worldwide shipping in rapid steel steamships
  • Worldwide railways
  • Telephone (mainly nationally)
  • 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...

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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, reducing the ferocity of competition and a common interest in comfortable profit margins. Arthritis sets in for the new incumbents .
      • Attention shifts to the next generation of radical innovations, thus continuing the cycle


In the next chapters, we’ll dig further into each phase, covering the technological, social, and financial aspects.

Financial Capital vs Production Capital

In Technological Revolutions, when Carlota Perez uses the term “capital,” she refers not to the actual capital (money), but rather to the agents and their motives in wealth creation.

Financial capital represents the agents who possess wealth in the form of money or relatively liquid assets. Their objective is to make money from money, and they perform actions that are most likely to increase their wealth. Financial capital reallocates and redistributes wealth.

Production capital represents the agents who...

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 become conducive to the unfolding of any opportunity compatible with the paradigm (going from n → n+1)
  • Socially, these conditions cause inertia and become exclusionary for innovations that are incompatible with the existing framework.

However, the previous revolution approaches the exhaustion...

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.

But many innovators are likely to come from outside the prevailing paradigm. They do not hold onto the past and so can explore unfettered.

The new revolution looks to have far higher profit-making potential than the prevailing paradigm. And so financial capital develops a heated love affair with the emerging production capital.

  • Old production capital has been facing diminishing returns since Maturity, and financial capital flees from it.
  • From the interactions with the new entrepreneurs, the financial world adopts the technology itself.
    • Banks were early clients of the telegraph, telephone, and microcomputers.
    • The technology enables larger networks of banks.
      • Local bank branches developed into national networks when railway and telegraph made it possible.
      • Then national networks evolved to international finance when instant global money became possible in the 1970s.
  • Financial capital...

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 engineering difficult.
  • Thus the automobile liberated real estate values in the 1920s from the constraints of urban centers, since any territory could be made valuable when connected by roads.
  • Thus dotcoms were created in the 1990s with little evidence of underlying demand.

Investment firms take center stage, even outperforming the production capital stars of the boom.

Finance diverts from wealth creation to finding whatever objects of speculation are at hand. This includes real estate, gold, art, etc.

Production capital has no choice but to adapt to the new rules. New and old producing firms must bend their decisions to provide the high short-term gains demanded by investors.

  • 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...

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 common regulations.
  • Firms can decide to self-regulate to avoid government supervision.

The significant failure of the bubble bursting is necessary for a regulatory change. Without these seismic shifts, financial capital would never abide by regulation.

The power shifts from financial capital to production capital.

  • It is production capital that is mainly interested in fulfilling the technological trajectory, to profit from the investment already made. Thus its incentives are aligned with diffusion of technology and mass expansion of demand.
  • In contrast, financial capital tends to prefer short-lived capital gains rather than long-term, dividend-producing capacity.
  • “Securities analysts believe that companies make money. Companies make shoes!” - Peter Drucker

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...

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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 second-order effects.

The new firms from the installation period are now giants.

Financial Capital

Financial capital serves to facilitate production capital, less exuberant than in Frenzy but more stable and still profitable.

Financial capital creates instruments of credit that facilitate the new paradigm.

  • The second revolution in the 1830s saw joint stock for large projects and growth of capital markets.
  • The third revolution from 1870s onward saw limited liability and legislation for giant industrial corporations.
  • The fourth revolution post-WW2 saw personal banking services and consumer credit for consumption of mass-produced home goods.
  • 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...

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 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...

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.

Type Purpose Examples
A Invest in new products or services Venture capital for radical innovations

Joint stocks for large investments

B Help growth or expansion Production expansion domestically and abroad (bonds)

Government funding (eg war, infrastructure investment)

C Modernize financial services themselves New service to clients (telegraph transfers, personal checking accounts, e-banking)

Incorporation of new technologies (communications, transport)

D Profit-taking and spreading risk Attract small investors (mutual funds, bonds, IPOs)

Facilitate risk taking (derivatives, hedge funds)

E Refinance obligations or mobilize assets Reschedule debts (Brady Bonds, swaps)

Buy active production assets (mergers, takeovers)

Acquire and mobilize rent-type assets (real estate, futures)

F Questionable innovations Legal 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)


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...

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 aggregate variables like GDP.

There is no expectation of neat upswings and downswings in aggregate metrics like GDP. Aggregate figures have a tendency to conceal what is really going on.

The book’s model argues for increasing differentiation within the economy. Some branches grow at very high rates while others are stagnating. Maturity of the previous revolution is occurring in the background of Irruption of the new one. Whether the sum of these trends shows up in aggregate metrics depends on the relative weights and relative growth rates.

Furthermore, many measuring attempts use money values, but there are really “two moneys” operating under one. Given the rapid improvement in technology, it is hard to control the value of money across two periods. Money buying telecom today is not the same value as money buying furniture in the 1970s. Even for the same good, the decreasing...

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 golden age, everyone would be feeling it, like in Deployment post-WWII.

If we are in deployment, what industries are the best candidates for deployment?

  • Information-intensive industries only superficially affected by the internet to date - education, healthcare, law, government.

When will we transition into Maturity?

Predicting the Next Revolution

What are possible candidates for the next technological revolutions? Remember that they tend to start with cheap disruption (like microprocessors) and allow cost-competitive innovations

What technologies were hyped as the new wave that then faltered? **In other words, what seeming “revolutions” were false...