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

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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.

I think I've read almost all the books written on the long-term dynamics of technology. Most of them are quite predictable -- a long list of important inventions. This book by Carlota Perez is different. It is one of the most interesting histories of technology, if not the most informative, because it dwells on the dynamics of the technology/social/economic system itself. It takes a decided cybernetic view of technology by demonstrating that technology is a very large system that progresses through "paradigms." And like paradigms in science or the humanities, paradigms in technology exhibit step-like bursts of normal advancement punctuated by revolutionary change. This long cycle of ordinary improvement capped by rapid cataclysmic change and marked by the inevitable bubble phase and then productive recovery has marked all cycles of technology in the last two hundred years. That's Perez's thesis, and the book is very thorough in making a case for this.

Most tomes with theoretical goals like this are horribly dry, dense, wordy, and well... boring. This book is not. Perez writes with amazing vigor, and grace, not taking an extra unneeded word, and not repeating herself.

I tend to shy away from theories that depend on believing in long cycles or recurring forces, but in this case Perez has persuaded me that this cycle in technology is real. I am delighted by this surprise. According to theory laid in out TECHNOLOGICAL REVOLUTIONS we, in 2005, are in the last throes of a technological bubble and just preceding the next period of productive improvement and profit from the disruptive technologies in the 1990s. In other words, instead of the bubble signaling the demise of these recent technologies, it's really saying, we ain't seen nothing yet.

Perez is a careful scholar, but also a gifted communicator. Most importantly, she is an unorthodox thinker. This book is delightfully against the grain without being a bit flaky. It's radical influence is most evident in the small world of economic historians and macro economists who recognize its import. But, like a great many other seminal books, it is easily read by anyone truly interesting in how technology works.

This book is a must-read. As someone who has been involved with computer/networking technology for over 30 years and high-tech finance for more than 20, I'm confident that there is nothing that surpasses this work in capturing the times in which we live. This book is simply a modern classic.

With this book in hand you will find yourself saying, "How could anyone have missed the Internet 'crash' of 2000?" Of course it had to happen. Then you will be asking yourself, "When will we get past the frenzied hype about these technologies so we can finally make all this really useful?" Just as Perez has been asking.

Throughout the 1980's and 1990's as a Wall Street analyst following technology companies, I regularly polled economists about the impact of computers and networks. At first there was no response. Later, we all began to hear about the "New Economy" and how everything had completely changed in economics. Yes, this was a pretty transparent attempt to rationalize stock valuations that had gone into orbit. In many ways it was even worse than no response at all.

It wasn't until I read Technological Revolutions and began to look into why mainstream economists have had so little to say about technology, that I learned there was a fight over all this in the 1930/40s. Many were involved but Harvard's Joseph Schumpeter who authored Business Cycles in 1938 putting technology at center stage- was among the losers. Future generations of economists rarely delved into Schumpeter's heterodoxy. Fortunately, Perez revives the Schumpeterian tradition with a powerful reinterpretation and combines economics and technology with a clear and convincing voice.

History is a pattern, not an endless repeating cycle but a distinct and discernable pattern. Perez has given us the outlines of that pattern, making all our jobs a great deal easier. Whether you're in the technology business or in finance or policy or just trying to make intelligent choices in a complicated world, you will benefit and learn from this book. What comes next is going to be important, on many levels, and understanding that in the past others successfully faced similar challenges - not just once but with each technological revolution -- should help to give us courage to face our own.

There's a good reason this book costs almost as much used as new: Nobody who has read it wants to give it up.

As a writer on technology who often struggled to put the Internet bubble and bust into perspective, I found Ms. Perez's explanation of the path that technological revolutions take profoundly illuminating. It was especially useful for me in stories that I wrote because I could cite historical precedent to counter both the overheated initial expectations about the Internet's impact, as well as the overwrought backlash that assumed the dot-com bust meant the Internet would never amount to much.

History is not destiny, of course, and one can't slavishly follow the timing of past revolutions to determine exactly where we sit in the current revolution. But as I try to follow the evolution of various Internet technologies, I find myself constantly thinking back to the patterns that Technological Revolutions and Financial Capital lay out to put what I'm seeing today in context.

Anyone in technology, business or public policy needs to understand the dynamics revealed in this book.

This is a really terrific book. It provides a very thoughtful treatment of the big picture of large technological innovations like the rail road, autos, and the internet.

It is especially good for thinking about the linkages between technology and financial markets- again on a macro picture.

Having said that, it does seem like a straightforward application of Schumpeter to some historical events. Furthermore, there is almost no evidence to support the theory.

Despite this serious qualification it is a thoughtful book. Another book I would recommend as a companion to this is Frenzy, by Carl Haacke. The two would be a perfect if not essential combination. Frenzy, is more of a micro picture and much more complete with both data and interviews to put the framework in perspective.

Dr. Perez makes the very solid points that technology revolutions impart a pulsating character to economic growth. A technology revolution forms the basis for an "investment frenzy." When this has run its course, the economy faces a number of unpleasant possibilities, including serious recession, depression, and stagflation. The presence or absence of a technology-inspired investment boom is a crucial determinant of what result will follow from a given policy action. However, the state of technology is almost always ignored by policymakers. This may be a case wherein the lack of an easy way to deal with a problem leads to ignoring it.

I bought my copy of this book a while back; I just ordered a copy for my father, a retired History Professor, after discussing its ideas with him. Technology is always changing, but there are some patterns in the interactions of technological changes with economic and social change that have been seen before and can help us better understand our own era and the near future. In particular, by studying the impact of the railway on the history of North America in the 19th century we can better understand the continuing impact of the Internet on our times. Carlota Perez has made fundamental contributions to our thinking about such patterns.

I am not a Shumpeterian, and not much of a student of economics in general, but I was extremely impressed with Carlota Perez's "Technological Revolutions and Financial Capital". I have been involved with software development for the last 17 years, but had never read how other disciplines view the explosion of the computer revolution. Perez provides a robust argument for "long wave", neo-Schupeterian economic analysis of the 5 technological revolutions since 1700. (Note that Perez differs from Schumpeter especially in her views on how finance impacts the various technical revolutions.) If she is correct, we are on the cusp of a new "golden era" of the digital/computer revolution. Those of us involved in the daily toil of the computer revolution would do well to listen to Perez in order to understand where this revolution is going.

Definitely an analysis of yesterday, today and tomorrow. Everyone should read this book. Absolutely recommend it, A+++

Carlota Perez provides historical evidence to show how technology cycles are created and driven by financial capital. This book is immediately relevant to technologists and investors.