Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages

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Summary: Long-Term Techno-Economic Cycles
Review: Technological Revolutions and Financial Capital by Carlota Perez describes the interaction between the technical innovation and long-term economic cycles. Her book covers many of the same topics as The Innovators Dilemma (Clayton Christensen, Harvard) and Only the Paranoid Survive (Andy Grove, Intel). Professor Perez approaches the subject as an academic economist (University of Sussex, UK), using the early 20th century work of Nikolai Kondratiev on long economic cycles (40-50 years) as a point of departure, whereas Christensen and Grove focus primarily on the near-term (2-5 years) implications of innovation on the individual firm. Her main points are summarized below.

The world has experienced five major technical-economic cycles:
(1) 1771 - , The First Industrial Revolution in Britain, based on mechanization of the cotton industry.
(2) 1829 - , The Age of Steam and Railways
(3) 1875 - , The Age of Steel and Electricity
(4) 1908 - , The Age of Oil, the Automobile, and Mass Production
(5) 1971 - , The Age of Information and Telecommunications

The starting dates are all approximate and were selected based on some catalytic event or "Big Bang", such as the invention of Intel's first microprocessor in 1971. (Note to a scientist friend: I believe that Prof Perez chose the above dates and events based on their economic impact rather than their scientific impact. Thus, the 5th age could be dated from the invention of the vacuum tube or the radio but these events had less economic impact than the microprocessor. Also, these cycles certainly overlapped, with a new age gathering momentum as its predecessor lost it. Thus, the vacuum tube and radio were key predecessor events leading to the 5th age.)

Each age has followed a rough pattern of four phases:
(1) Irruption: Invention/development of the new technological paradigm, decay of the preceding paradigm, probably in conjunction with economic stagnation and unemployment.
(2) Frenzy: Rapid adoption of the new paradigm and intensive financial investment, often leading to irrational excesses and a financial bubble (e.g., 1998-2000).
(3) Synergy: The rationalization of the new paradigm and renewed economic expansion after a purging of the excesses of the bubble.
(4) Maturity: Market saturation and the gradual exhaustion of the potential of the new technology setting the stage for the next cycle.

Professor Perez also provides a useful description of the roles of financial (investment/portfolio) capital and production (operating) capital and their interaction over the course of the techno-economic cycle.

Economics is not an exact science. (I am a mathematician, not an economist, and suspect some economists might disagree.) One should not expect economic models to provide the same exact predictions as Newtonian mechanics, for example. Economics also suffers the disadvantage of not providing a mechanism for repeating an experiment to verify the results. With these disclaimers, I recommend Professor Perez's book as providing one of the best models available for understanding the long-term relationship between technological innovation and the economic cycle.