This book was written by Carlota Perez and published in 2002.
Using the last 200 years and five most recent revolutions as her fieldwork, Carlota explains why technology leaps in revolutions, why it divides society, and why each great technological surge first irrupts, then collapses and finally deploys a new way of life.
As she says, “each technological revolution brings with it, not only a full revamping of the productive structure but eventually also a transformation of the institutions of governance, of society and even of ideologies and culture.”
The world organises itself around the technology of the day, not the other way around. By understanding the phases through which that happens, it becomes easier to make sense of what’s happening in the world.
That’s why you should read this book.
My notes are ordered as follows:
If you're looking for more of an analysis of Perez's framework, this is excellent.
A technological revolution can be defined as a powerful and highly visible cluster of new and dynamic technologies, products and industries, capable of bringing about an upheaval in the whole fabric of the economy and of propelling a long-term upsurge of development.
It is a strongly interrelated constellation of technical innovations, generally including an important all-pervasive low-cost input, often a source of energy, sometimes a crucial material, plus significant new products and processes and a new infrastructure. The latter usually changes the frontier in speed and reliability of transportation and communications, while drastically reducing their cost.
Each revolutionary cluster irrupts in a particular country, sometimes even in a particular region. Lancashire was as much the cradle and the symbol of the key industries of the first industrial revolution as Silicon Valley has been for the microelectronics revolution.
In fact, each technological revolution originally develops in a core country, which acts as the world economic leader for the duration of that stage.
This is particularly important because, although the surges of development propelled by each technological revolution are in the long run worldwide phenomena, the propagation of change occurs gradually, moving from core to periphery. This means the dating of deployment is not the same for all countries and can be delayed as much as two or three decades in some cases.
The technologies and products involved are not only those where the major breakthroughs have occurred. It is often the interlinking of some of the new and some of the old that generates the revolutionary potential. In fact, many of the products and industries that came together in the new constellation had already existed for some time, either in a relatively minor economic role or as important complements for the prevailing industries.
So every revolution combines truly new industries and products with others that are redefined. It is when the critical technological breakthroughs articulate them into a powerful, interacting and coherent set of profitable business avenues, influencing the whole economy, that their joint impact can become truly all-pervasive.
The irruption of a set of powerful and dynamic new industries accompanied by a facilitating infrastructure will obviously have enormous consequences both in the industrial structure and in the preferred direction of investment in that period.
But more than that, the old organizational models cannot cope with or take full advantage of the new potential. The new possibilities and their requirements also unleash a profound transformation in ‘the way of doing things’ across the whole economy and beyond – a new techno-economic paradigm is born.
The techno-economic paradigm is a much more elusive and difficult concept to grasp than that of technological revolution. It is nonetheless as powerful, if not more, in guiding the major transformation that follows each big bang.
The logic of a paradigm reaches well beyond the economic sphere to become the general and shared organizational common sense of the period. It could then be called an organizational paradigm. Eventually the socio-institutional frame work that will accommodate and enable the full deployment of that technological revolution will follow those basic principles.
As an example, one could observe the process of organizational change brought by the information revolution. Until the 1980s, the prevalent organization was the one that served as the optimal framework for deploying the mass-production revolution: the centralized, hierarchical pyramid with functional compartments. This structure was applied in the economy by almost every corporation, but was also replicated in any other organization confronted with a large and complex task in government, in hospitals, in universities, in trade unions and political parties.
It is important to note that the techno-economic paradigm serves both as a propeller of diffusion and as a delaying force.
It is a propeller because it provides a model that can be followed by all, but its configuration takes time about a decade or more after the big bang and, given that each revolution is by definition different from the previous one, the new principles will have to be socially learned. This learning must overcome the forces of inertia that stem from the success of the previous paradigm. Its prevalence is the main obstacle for the diffusion of the next revolution. These counteracting forces, these battles between the new and the old, are at the core of the whole model discussed here.
Thus, the range of transformations induced by technological revolutions goes far beyond the economy, penetrating the sphere of politics and even ideology. These, in turn, will influence the direction in which the potential is deployed. This mutual influence between technology and politics does not happen by chance, but by necessity.
Societies are profoundly shaken and shaped by each technological revolution and, in turn, the technological potential is shaped and steered as a result of intense social political and ideological confrontations and compromises. It is precisely this systemic characterthat makes the whole question of technical change so crucial in understanding capitalist development.
Each technological revolution is received as a shock, and its diffusion encounters powerful resistance both in the established institutions and in people themselves. Hence, the full unfolding of its wealth-creating potential at first has rather chaotic and contradictory social effects. Later, it will demand a significant institutional recomposition.
This will include changes in the regulatory framework affecting all markets and economic activities as well as the redesign of a whole range of institutions, from government, through financial regulation, to education, as well as modifications in social behaviors and ideas.
Thus, each technological revolution brings with it, not only a full revamping of the productive structure but eventually also a transformation of the institutions of governance, of society and even of ideologies and culture, so deep that one can speak about the construction of successive and different modes of growth in the history of capitalism.
The first 20 or 30 years of diffusion of each technological revolution leads to an increasing mismatch between the economy and the social and regulatory systems. The latter were developed to fit the requirements of the previous paradigm and cannot cope with the new conditions.
In addition, the changes occurring in the techno-economic sphere imply a huge social cost in loss of jobs and skills as well as in geographic displacement of activities. The previous framework is unlikely to be prepared to absorb or counterbalance those costs. Thus, as the mismatch increases, centrifugal tensions and decoupling processes rip apart the fabric of the economy, leading to problems of governance and to questioning the legitimacy of the established institutional framework.
There can be persistent social demands or violent outbreaks, which can take many different forms as was seen in the 1848 revolutions in Europe or much later in the various revolts, the coups d’état and the acute social tensions of the 1920s and 1930s. The demonstrations against the global free market policies of the World Trade Organization (WTO) in their Seattle meeting, in November 1999, may well have marked the beginning of growing to chance the open international political pressure to change the so-called ‘Washington consensus’.
Once the new ‘match’ has been achieved through the articulation of an appropriate mode of growth, a process of recoupling and convergence ensues. The following 20 or 30 years witness the full deployment of the new paradigm in intensity and extension, from sector to sector and across regions and countries.
By statistical measures these ‘eras of good feeling’ are not necessarily the times when rhythm of growth is highest, yet they are the periods generally felt and accepted as ‘golden ages’, for they represent a more harmonious growth process, involving most sectors of the economy.
They can also be a time of improvement in the lot of larger and larger groups of the population, especially in those countries centrally involved in the diffusion of the paradigm and where the most appropriate institutional frameworks have been set up.
Technology evolves by revolutions because the prevalence of a specific paradigm, with its vast interrelated opportunities, induces deep social adaptation to its characteristics. This creates powerful inclusion-exclusion mechanisms, which avoid radical departures from the prevailing paradigm until the huge potential of that revolution has been spent and approaches exhaustion.
It is then that entrepreneurial abilities of the sort that nurture radical innovations are more likely to be in demand. However, just as there is a high likelihood that the successful candidates to become the new paradigm in a particular science might be found by practitioners from another science, so the radical new departures in technology are likely to come from ‘outsiders’, from technologists or entrepreneurs who were not imbued with the previous paradigm, who may well be young and outside the powerful established firms like Carnegie or Alexander Graham Bell, Edison or Ford, Noyce, Steve Jobs of Bill Gates.
Favorable conditions of the prevailing paradigm become a powerful exclusion mechanism for all possible innovations that are incompatible or not well geared to the existing framework.
Attempts to introduce such innovations could be rejected by investors or customers or, as often turns out to be the case, could be successfully adapted in a minor way to the prevailing paradigm.
Such adaptations can nevertheless lead to the growth of important industries that will become central in a future paradigm. For the moment, they grow restricted to whatever uses fit well in the existing fabric of the economy before their most important uses are even surmised.
The most conspicuous exception to the exclusion mechanism is war-related expenditure. The application of political and military criteria, rather than economic logic, opens avenues of research, technology and production that could lead far from the reigning techno-economic paradigm, usually involving extravagant costs that could not be normally recovered in the market.
When the war takes place in the maturity phase of the paradigm, these voluntaristic excursions into new technological territory could become a seedbed for the next technological revolution.
As the low-risk investment opportunities in the established paradigm begin to diminish, either in innovation or in market expansion, there is a growing mass of idle capital looking for profitable uses and willing to venture in new directions. Thus, the exhaustion of a paradigm brings with it both the need for radical entrepreneurship and the idle capital to take the high risks of trial and error.
Under these conditions several strands of innovation come together, some from the big firms overcoming obstacles, others from novel entrepreneurs with new ideas and others associated with the many underutilized or marginalized innovations that had been introduced before. These are likely to incorporate part of the vast pool of applicable knowledge waiting in the wings or to bring forth new knowledge.
Eventually, the necessary breakthroughs are made – recognized – and brought together with other new or redefined technologies to conform the next technological revolution. From then on, financial capital is even more widely available for entrepreneurs to innovate exploiting the novel trajectories of the new paradigm. New financial instruments are developed at this time to accommodate the peculiarities of the new products and their diffusion.
Each surge goes through two periods of a very different nature, each lasting about three decades.
The first half can be termed the installation period. It is the time when the new technologies irrupt in a maturing economy and advance like a bulldozer disrupting the established fabric and articulating new industrial networks, setting up new infrastructures and spreading new and superior ways of doing things.
When the core products of a technological revolution start coming together, they inevitably clash with the established environment and the ingrained ways of doing things.
These threats take time to become a reality and resistance from those affected may prolong the transition. But the fact is that once a truly superior technology is available, with higher productivity and clear growth potential, the outcome in the medium term is practically inevitable.
This is all the more so, given that these revolutionary developments generally occur when the profitable investment opportunities attached to the previous paradigm are nearly exhausted.
Thus, the irruption of the technological revolution also signals a cleavage in the fabric of the economy along several lines of tension:
Gradually, as the rich and the successful get richer and more successful, while the poor or weak get poorer and weaker, the legitimacy of the established political regimes comes increasingly under question and pressures for reversing the centrifugal trends become stronger and clearer.
Hence, the first two or three decades of creative destruction after the big-bang are increasingly turbulent and the benefits of growth are very unevenly distributed. These spells of tense coexistence of two paradigms have historically lasted from 20 to 30 years. They begin with the big-bang of the revolution and usually come to an abrupt end with a crash or a panic.
The second half is the deployment period, when the fabric of the whole economy is rewoven and reshaped by the modernizing power of the triumphant paradigm, which then becomes normal best practice, enabling the full unfolding of its wealth generating potential.
During the period of deployment, a process of internal catching up takes place within the economy. The dynamic pioneers of the revolution slow down, from sheer size, while those now joining the paradigm band wagon accelerate. It is a question of relative weights and rates.
The new industries that had developed explosively in the installation period are now giants growing at a ‘normal’ rhythm, whereas later industries, products and systems within the revolution – or those modernized or induced by it – may be reaching the same or faster rates of productivity increase and market growth.
So employment rises steadily and, depending on the institutional framework set up, there can be a shared feeling of pending improvement in the general quality of life, very different from the centrifugal fortunes of the installation period.
Towards the end of the installation period, there is a phase of frantic investment in the new industries and the infrastructure, stimulated by a stock market boom that usually becomes a bubble that inevitably collapses in one way or another. This frenzy involves an untenable acceleration of the diffusion of the paradigm. The recession creates the conditions for institutional restructuring and for re-routing growth onto a sustainable path.
With the collapse comes recession – sometimes depression – bringing financial capital back to reality. This, together with mounting social pressure, creates the conditions for institutional restructuring.
In this atmosphere of urgency many of the social innovations, which gradually emerged during the period of installation, are likely to be brought together with new regulation in the financial and other spheres, to create favorable context for recoupling and full unfolding of the growth potential.
This crucial recomposition happens at the turning point which leaves behind the turbulent times of installation and paradigm transition to enter the ‘golden age that can follow, depending on the institutional and social choices made.
To accommodate each technological revolution many changes need to occur at different levels. In the first place, the new technologies will require the establishment of a whole network of interconnected services such as the specific infrastructure and the specialized suppliers, distribution channels, maintenance capabilities and others that provide the territorial externalities to facilitate diffusion.
Without roads, gasoline stations and mechanics, people cannot use automobiles, yet only enough automobiles on the road will make it profitable to run a station or a garage. So diffusion occurs through intricate feedback loops.
Then, there is the cultural adaptation to the logic of the technologies involved. A vast learning process must take place among engineers, managers, sales and service people and obviously consumers, about the production and use of the new products.
Finally, there is the wider set of institutional enablers, involving rules and regulations, specialized training and education, standards, supervisory bodies, financial innovations and so on.
Financial capital represents the criteria and behavior of those agents who possess wealth in the form of money or other paper assets. In that condition, they will perform those actions that, in their understanding, are most likely to increase that wealth.
Production capital embodies the motives and behaviors of those agents who generate new wealth by producing goods or performing services. These agents do this with borrowed money from financial capital and then share the generated wealth. If they are using their own money, they are then performing both functions. Their purpose as production capital is to produce in order to be able to produce more. They are essentially builders.
These distinctions lead to a fundamental difference in level of commitment.
Financial capital is footloose by nature; production capital has roots in competence and even in a geographic region. Financial capital will flee danger; production capital has to face every storm by holding fast, ducking down or innovating its way forward or sideways.
Yet, though the notion of progress and innovation is associated with production capital – and rightly so – ironically when it comes to radical change, incumbent production capital can become conservative and then it is the role of financial capital (whether from family, banks or ‘angels’) to enable the rise of the new entrepreneurs.
In the period immediately following the big-bang that announces a technological revolution, financial capital begins a passionate relationship with the emerging production capital.
The new revolutionary entrepreneurs soon outstrip the profit-making potential of all the established production sectors and there is a rush of financial capital towards them, readily developing new appropriate instruments whenever necessary. The agents of financial capital (brokers, banks and other financial institutions) widen their range of operations, in particular those associated with are quick to adopt whatever innovations facilitate and communications and transport.
Old production capital is facing diminishing returns to innovation as well as market saturation. By comparison with the new sectors, its profits become uninteresting and financial capital tends to flee from them. This deepening techno-economic split was behind the ‘stagflation’ experienced by the advanced countries in the 1980s.
Soon, however, it becomes clear to financial capital that no matter how high the rate of growth of the new sectors they are still only a small fraction of the economy. Yet the habit of obtaining high yields has caught on and become the normal level of expectations. In order to achieve the same high yield from all investments as from the successful new sectors, financial capital becomes highly ‘innovative’. Imagination moves from real estate to paintings, from loans in faraway countries to pyramid schemes, from hostile takeovers to derivatives or whatever.
The basic task of institutional recomposition involves creating the conditions for expanding markets and putting production capital in control. The length of the recession will depend on the social and political capacity to establish and channel the institutional changes that will restore confidence and will put the accent on real wealth creation.
The new economy that emerges with each technological revolution consists of radical changes in the patterns of investment, production, trade and consumption.
These new patterns and the distinct categories of goods and services involved lead to new market behaviors and require appropriate forms of dealing with them. The different nature of the new products and technologies does change certain aspects of the functioning of the economy for that particular surge, but it does not overcome its capitalist nature or its basically cyclical character.
In the current information revolution, several authors have developed interpretations of the new economy based on the strong contrast between tangible and intangible goods, between ‘atoms and bits’.
Some claim that this new economy is different enough to require a new economics for its study and management. This may very well be so and is wholly within the logic of the present model.
For the previous paradigm, John Maynard Keynes developed a new economics, providing both a different understanding and a whole new set of policy tools. Although the debate still rages, these policies, where applied, pretty much achieved their purpose of tempering the business cycle and supporting smooth growth, full employment and consistent investment, for the duration of the deployment period of the fourth great surge.
That set of policies and that vision of economics lost effectiveness when the economy of the mass-production revolution, for which it was designed, became exhausted at the end of the 1960s.
Once productivity stopped growing and investment opportunities dwindled, the whole basis of the model broke down and stagflation, that unusual combination of inflation with unemployment, rendered its main policy tools impotent.
This made it easier for finance capital to make a systematic assault on state intervention and regulation and for the monetarists to move to pre-eminence in the economics profession. Soon, the successful flourishing of the microelectronics revolution and the wave of real competition that characterizes the early installation period, facilitated the unearthing of the laissez-faire philosophies and the neo-classical theories in economics, championed by the Thatchers and the Reagans. The process of creative destruction taking place in the economy was accompanied by the demolition of the old edifice of state intervention and regulation, which had stopped being effective in that specific form.
In the present model there is no expectation of neat upswings and downswings in GNP or in any other economic aggregate. This coincides with Schumpeter’s view that aggregate figures conceal more than they reveal.
In fact, it is not even likely that the turbulent process by which new paradigms are assimilated should lead to regular up and down trends in the economy as a whole.
The phenomenon being analyzed can only express itself in the inner workings of the economy, where increasing differentiation takes place.
This divergence would slowly decrease during Frenzy, as more and more firms adopt the paradigm. Whether the sum of these differing trends comes out as a ‘downswing’ or not depends on the changing relative weights and relative growth rates.
A further complication arises from the fact that most of the measuring attempts use money values (sometimes with constructed ‘constant’ values). This is not valid for a simple reason: the quantum jump in productivity brought about by a technological revolution leads during the period of installation to the coexistence of two moneys’ operating under the guise of one.
Rates of inflation or deflation during installation periods are chaotic and all statistical efforts to construct constant money series, in spite of their sophistication, are doubtful to say the least. Volume, which is the usual way of attempting constancy, is an elusive measure in many cases.
How do you compare one computer in the 1960s with one in the 1970s, in the 1980s and now? How do you measure the volume of communications? In the nineteenth century, was money paying for transport by railway comparable to that by horses? Was telegraph or telephone to India comparable to mail by ship? When costs are violently decreasing and qualities increasing and changing, comparability is quite impossible and aggregates are disparate.