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Technological Revolutions and Financial Capital by Carlota Perez.
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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...

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Technological Revolutions and Financial Capital Summary Technological Revolutions and Financial Capital Guide 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 ...

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Technological Revolutions and Financial Capital Summary Technological Revolutions and Financial Capital Guide 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,...

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Technological Revolutions and Financial Capital Summary Technological Revolutions and Financial Capital Guide 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”...

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Technological Revolutions and Financial Capital Summary Technological Revolutions and Financial Capital Guide 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,...

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Technological Revolutions and Financial Capital Summary Technological Revolutions and Financial Capital Guide 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...

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Technological Revolutions and Financial Capital Summary Technological Revolutions and Financial Capital Guide 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....

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Technological Revolutions and Financial Capital Summary Technological Revolutions and Financial Capital Guide 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...

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Technological Revolutions and Financial Capital Summary Technological Revolutions and Financial Capital Guide 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...

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Technological Revolutions and Financial Capital Summary Technological Revolutions and Financial Capital Guide 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...

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Technological Revolutions and Financial Capital Summary Technological Revolutions and Financial Capital Guide 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...

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Technological Revolutions and Financial Capital Summary Technological Revolutions and Financial Capital Guide 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,...

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Technological Revolutions and Financial Capital Summary Technological Revolutions and Financial Capital Guide 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...

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Technological Revolutions and Financial Capital Summary Technological Revolutions and Financial Capital Guide 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...

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Table of Contents

  • 1-Page Summary
  • Technological Revolutions
  • The Role of Society in Technological Revolutions
  • The Five Revolutions of the Past 250 Years
  • The Four Phases of Each Technological Revolution
  • Phase 0: Maturity of the Last Revolution
  • Phase 1: Irruption
  • Phase 2: Frenzy
  • Break: Turning Point
  • Phase 3: Synergy
  • Phase 4: Maturity
  • Phases of Financial Innovation
  • Addressing Criticisms
  • Shortform Exclusive: Questions to Ponder