# Technological Revolutions and Financial Capital Author: [[Carlotta Perez]] ## Summary Perez describes a model for technological revolutions and how the behavior of financial capital relates to the phases of revolutions. Technological revolutions are a feature of capitalism that occur as successive techno-economic paradigm shifts. A techno-economic paradigm describes the organization of businesses and the economy using best practices that have been established as a result of a cluster of new technologies. The paradigm diffuses across the economy in phases and eventually creates a permanently higher level of productivity. The behavior of financial capital changes with each phase of the technological revolution, depending on the availability of capital, the needs of entrepreneurs and expectations of investors. Each phase also comes with social changes and pressures as a result of the changing economy and markets. ^f17c63 #### Historical Revolutions There have been 5 technological revolutions starting with the industrial revolution in the 18th century: 1771 - Industrial revolution, factory production and mechanization 1829 - Age of Steam and Railways, machine-made machines, standardization 1875 - Age of steel, electricity and heavy engineering 1908 - Age of oil, the automobile, and mass production 1971 - Age of Information and Telecommunications Each revolution has historically lasted 40-70 years and occurs in 6 phases with the end stages overlapping with the beginning of the next revolution: gestation, irruption, frenzy, synergy, maturity, peripheral diffusion. #### Maturity of the old & Gestation of the new paradigm There is a low rate of productivity improvement and an excess of capital is trying to find a home. Progress is slowing, capitalism is being questioned and unrest is growing (in particular among the young). With the exhaustion of the current paradigm there is an appetite for new ideas. This opens the door for the next technological revolution. This new appetite and excess capital allows financial capital to fund new entrepreneurs, speculative ventures and non-value added extractive financial schemes. The technology of the next revolution already exists and is gestating. Excess capital also finds its way into peripheral economies where the diffusion of the current paradigm can still create growth but also leads to future debt crises as some of the capital is not deployed productively. #### Irruption of the new & Peripheral Diffusion of the old paradigm As the last technological paradigm is still diffusing into the periphery, the new techno-economic paradigm starts to take shape and its successful applications are developed. The cluster of new technologies opens up a vast new design space creating new products and starts the reorganization of businesses and the economy. The financial world begins a love affair with the new paradigm. It will be one of the first to adopt the new technologies and will also (re)invent financial techniques in order to facilitate the growth of the new technology. Towards the end of this phase the market begins to expect this level of growth and profitability from all investments which kicks off frenzy, fraud and financial engineering. #### Frenzy The technologies are diffusing rapidly and a lot of money is being made by the newly rich (adopters), while the rest get left behind. There is a focus on individualistic wealth generating behaviour and ethical rules soften. The recognition of this new paradigm creates a frenzy in financial markets to realise all the new possibilities. These are the gilded ages in history, when speculation runs rampant and markets disconnect from reality. The high returns achieved so far result in a demand for ventures promising further high returns. This becomes a period of fraud and financial engineering in order to meet this demand. There is a mania in funding the new technology leading to overcapacity allowing the further dissipation of the technology in the future. #### Turning Point & Synergy After the frenzy comes a crash or a series of crashes. The evaporation of wealth leads to the introduction of regulation that ties financial capital back to productive uses in the economy. A number of frauds or highly speculative ventures collapse and ethical standards tighten. After financial capital is recoupled to productive uses comes the synergy phase, when the productivity improvements from the paradigm become widespread and socio-institutional frameworks are adapted to the paradigm. These become the golden ages in history. As the improvements in productivity slow and product adoption cycles are shorter and shorter, political unrest grows because expectations are not being met, transitioning once again to the maturity phase. #### Implications Throughout the revolution there is tension between private interests and public interests. Private interests and creative freedom allow for the creation of new technologies and the profit oriented proliferation, yet this hits a limit during the frenzy. After this society needs to ensure the fruits of individual achievement can become widely used. The dynamics and phases also facilitate the uprising of different economic theories and narratives depending on the phase of the cycle and what appears to be working at that time. We are seeing the emergence of MMT (and anti-capitalism) today at the same stage when Keynesianism emerged. On the other hand, free markets and individualism are popular during the irruption and frenzy stages when the possibilities of the techno-economic paradigm are widely explored. ## Review The model of technological revolutions was fascinating and provided a new perspective, for me, on changes in technology, markets and society. Generally when I read about historical periods I have a hard time seeing the overarching story. I have been seeking out narratives, frameworks and models that put a scaffolding under these disparate pieces of historical information. In that respect, this book provided a way of thinking about history I hadn't seen anywhere else, and some forecasts that have since come to fruition. I have spent a lot of time internalizing the dynamics of the model because I find it so insightful. My main criticism of the model is that it comes in the form of a stylized narrative, constructed from the author's deep knowledge of history. To build more confidence in this model I would like to see quantification of the diffusion of the successive paradigms, and more discussion of the historical episodes. ## Related - [[Frameworks and Theories on the Mechanics of Historical Change]] - [[Investing]] - [[Technology]] - [[Historical Dynamics]] - [[Dynamics of Technological Revolutions]] - [[Creative Destruction]] - [[Logistic function]]