Mark Twain allegedly said that history doesn’t repeat itself, but it does rhyme.
Carlota Perez, a distinguished economic historian and author of the seminal “Technological Revolutions and Financial Capital” shows us what rhymes in the last 240 years of economic history.
Instead of history being in Winston Churchill’s words just “one damn thing after another,” Pérez shows us that we are actually living through repeating longer-term cycles. In this way, the options and consequences of different decisions become much clearer.
Five Technological Revolutions
Perez distinguishes between 5 technological revolutions over the last 240 years (following Schumpeter’s lead, rather than some other interpretations which count 2,3 or 4).
Beginning in the 1970s, we entered the 5th and current technological revolution. Perez argues we’re only half-way along in the diffusion path of this revolution.
Each of these revolutions has brought new lifestyles, new directions for innovation, and a huge potential leap in productivity for the whole economy. They have also brought major social and institutional shifts.
Regular historical pattern of diffusion
Perez argues that the historical record reveals a regular pattern in the diffusion process. Drawing on decades of research and data from the previous technological revolutions, she identifies a few key concepts:
2 types of capital:
- Financial capital: funding derived from investment and speculation. This is sometimes called “paper economy” or “paper value”.
- Production capital: funding derived from profits. This is also called “real economy” or “real value”.
2 periods or phases of the diffusion of a technological revolution, each typically lasting around 20-30 years.
The first phase is an installation period with the rapid growth of the new technological infrastructure and experimentation eventually resulting in a speculative frenzy that gives rise to one or several “bubble prosperities” - as in the late 1990s and mid-2000s when the financial sector and “casino economy” took over.
When the bubbles eventually burst and we have a recession - as we have now - history suggests it might last anywhere from 2 to 13 years or perhaps even more. That recession phase is what Perez calls the “turning point”, because is the time when the control of investment shifts from finance to production, usually with the aid of the State.
At the end of the installation period, two main outcomes have been achieved:
- the core infrastructure, paradigm, logic or “common sense” of the new technology has been firmly installed, paving the way for mass adoption
- the mass market is familiar with the technology and ready to fully embrace it in their lifestyles
The second phase is a deployment period or golden age characterized by strong growth, with widespread application of the new paradigm or technology. This phase in the past has been government-led. The reason is simple. After the recession, both the government and the business sector want social peace. To secure social peace, they have to improve the social conditions for the population to reach acceptable levels of wellbeing. This requires a hands-on government giving directions to society, business and the population, and becoming the main driver for innovation.
Perez shows in detail how this happened in previous technological revolutions. The loss of legacy jobs based on the previous technological paradigm was more than outpaced by the new job creation resulting from the changes in lifestyle enabled by the new paradigm. This restructuring of the labor market and financial capital needed strong government direction.
Once a deployment period reaches maturity and the “new economy” derived from this technological revolution slows down, with diminishing financial returns and productivity gains, the incentives for business to delegate power to the government decrease and the government is lobbied into a more hands-off, bureaucratic role. At some point, a new technological paradigm slowly starts emerging and enters the installation period.
Our latest cycle ended in the 1960s and early 1970s with the end of the mass production revolution and the emergence of the microchips as the next paradigm leading to the age of computers & IT. Governments in developed markets were pushed into a more hands-off role, letting the private market shape the economy.
Contrast this with the political economy of the post-war period between 1940-1970 where government action and the Second World War led to mass production and mass consumption.
Large numbers of people had access to relatively cheap products. Suburbanization made it profitable for firms to innovate for the family in the electric home and drive home-owners to mass consumption of new products. At the same time, the Cold War led to government investment in high-tech (including the invention of Arpanet, the precursor to the modern Internet). The reconstruction of Europe also stimulated economic growth and the demand for equipment and goods.
The government-led welfare state enabled mass consumption. At some point in the 1950s, the top-rate for taxes in the USA was 90%. The money went from tax-payers’ pocket, passed through the hands of the government and came back as a solvent demand for consumer goods and procurement. Firms prospered because they were able to pursue and agreed common vision of what “the good society” looked like and what innovation was needed to make it happen. Everyone was going to have a home with cheap appliances. Cheap credit was made available by banks and backed by the government, that enabled people to buy houses and goods; the first unemployment welfare was created by the government to ensure that even if someone would fall out of work, they could still finance their mortgage and keep their goods while looking for another job. It was an intelligent positive-sum game between government, business and society that led to the greatest economic boom in history until the modern re-emergence of China.
The current turning point and the new positive-sum game: green growth?
Now in 2020, we are in the middle of another turning point, as in the 1930s. As in the 1930s, we have structural unemployment, low investment, growing inequality, a sense of hopelessness, risk-averse finance with trillions of dollars sitting on the sidelines (with negative interest rates!!), feeble growth, social unrest, recessions, and talk of secular economic stagnation. Populist leaders find massive following precisely because of these issues. They exploit the rampant xenophobia against various sub-groups. COVID-19 is complicating things in its turn.
We are also facing environmental issues: not just global warming and pollution but also a scarcity of natural resources. We cannot give every Chinese and Indian person the American Way of Life: we simply don’t have seven planets.
Despite these problems, there was then, and is now, a huge underlying technological potential, but the potential cannot be realized without a clear common synergistic direction.
Perez argues that we could have a period of sustained global prosperity if appropriate action is taken. There are new possibilities for an intelligent positive-sum game, similar to the post-war period. The ongoing technological revolution based on computers and telecommunications has immense potential benefits for everyone, if designed and directed properly. Now is the right historical moment for the government to come back on the scene, boldly, actively and wisely. In a turning point, the government is not the problem: the government is the solution.
What to do? Perez argues we need to turn our environmental problems into economic solutions, worldwide.
We need to use IT to increase the proportion of intangible services available worldwide. We need Internet access everywhere, both universal and cheap. The direction for innovation is clear: smart, green growth. This tech-enabled change in lifestyle will generate new possibilities and new dynamic demand.
The hope is that the adoption of the new lifestyles may lead to sufficient job creation to replace the ones eliminated; and that the new jobs may enable more widespread prosperity.
Every tech revolution has changed the lifestyle. Lifestyle doesn’t just change in any direction. It changes in the direction that has been signaled by the young, by the educated and by the rich. Where the young point, the revolution will eventually go.
For a strong government role, the State in many countries has to regain the trust of its citizens worldwide. No one accused the USA governments in the 1950s of being bureaucratic or stupid. Only by regaining trust can governments attract the people that are creative and imaginative enough to help transform our society and play a new grand positive-sum game heralding a next global golden age!