Technological Revolutions and Financial Capital by Carlota Perez studies the intersection of technology and innovation, a field the author defines as “evolutionary economics”. Reading her feels a lot like looking at one of those images optometrists use to diagnose colour blindness; where before there was just a jumble of dots, patterns magically emerge.
Perez walks us through the five waves of innovation – “techno-economical paradigms” – that began in the late 18th century (and provides ample evidence to suggest that we’re currently on the cusp of a sixth). Each such paradigm is defined by a technological driver, which transform not only our physical environment but also the general zeitgeist.
The industrial revolution, sparked by Arkwright’s mill in 1771, led to ‘canal mania,’ a time when optimising movement and time captivated the public imagination.
Fifty years later “the Rocket” started trafficking the Liverpool-Manchester line and triggered the Age of Steam and Railways. This time the popular discourse was all about national markets, the novelty of standardised parts and a general fascination with interdependent movements (in machines as within the body politic).
Towards the end of the nineteenth century, gravity shifted from Europe to north america where Carnegie opened his Bessemer steel plant and gave birth to the Age of Steel & Electricity, during which the leitmotifs revolved around economies of scale, vertical integration, distributed power (electricity) and worldwide networks.
The big bang moment of the fourth paradigm was when the first model T rolled off the conveyor belt at Ford in 1908, and sparked The Age of Oil, during which such themes as mass production, standardisation, functional specialisation and centralisation were on everyones lips.
When Intel sold its first processor in 1971 it launched the Information Age, with its hype around decentralised networks, knowledge as capital, segmentation of markets (= economies of scope rather than scale) and interactions between the global and the local.
Each of these great surges have been ignited by an “epochal innovation” and typically caused some level of civil unrest in the early years. (The counter culture largely fuelled the information age. The storming of the Capitol is just one of many signs that we’re currently living at the dawn of the next surge, which will likely be driven by the CRISPR breakthrough). They’ve lasted roughly fifty years, and like waves they tend to overlap (the developments within electronics that eventually gave birth to the micro processor started happening already in the 1940’s, just like many of the key inventions behind the automobile was already in place in the late 1800’s).
Although new technologies are central to each wave, they aren’t sufficient drivers for change on their own, which is why the real impact is only seen a couple of decades into a surge. The automobile provides a clear example; only when the infrastructure of roads and gas stations was built out did the shiny new technology really start to make sense for the masses.
Along with this physical infrastructure, the new technologies can only really bring value to society as a whole once regulators have also caught up and start passing “the new common sense” into laws. Examples of institutional infrastructure include how checks were invented in Victorian England to allow instant long distant transfer of funds, as well how recent laws are putting citizens in control of their private data.
In the words of Perez:
What’s needed for the revolution to fully blossom are the thousand and one small details – sub-technologies, arrangements, architectures – to fall into place that adapt us to the new technologies and them to us. This takes time. And more than anything it defines the buildout period not as a period that merely exploits the earlier innovations, but as one that creates the arrangements that bring the new technologies into full use.
[…]Such massive economic transformations involve complex processes of social assimilation. They encompass radical changes in the patterns of production, organisation, communication, transportation and requires massive amounts of effort, investment and learning, both individully and socially. That is probably why the whole process takes around half a century to unfold, involving more than one generation.
I especially likes how Perez describes the interplay between production capital and financial capital, and how the rhythmical shift between these “two moneys” can be seen to explain much of the dynamics of the coming and going of techno-economical paradigms.
If Joseph Schumpeter was right to see capitalism as “that form of private property economy in which innovations are carried out my means of borrowed money” then it follows that the ease of access to risk-willing financial capital will be a leading indicator to technological leaps. Bursts of entrepreneurship actually do occur, but they do so in response to opportunity explosions.
In Perez’ words:
Financial capital can successfully invest in a firm or a project without much knowledge of what it does or how it does it. […] For production capital, knowledge about product, process or markets is the very foundation of potential success. The knowledge can be scientific and technical expertise or managerial experience, it can be innovative talent or entrepreneurial drive, but it will always be about specific areas and only partly mobile.
[…]
All these distinctions lead to a fundamental difference in level of commitment. Financial capital is footloose by nature; production capital has roots in an area of competence and even in a geographic region. Financial capital will flee danger; production capital has to face every challenge 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.
[…]
Yet, when maturity sets in and the next revolution is ready to emerge, it seems that only the uncontrollable drive of financial capital has the conditions to push the icebreaker across the frozen seas, intensifying the process of economic and institutional creative destruction.
[…]
The economic sphere is the scene of the growth process, where production and financial capital interact. More than merely interdependent, these two functional forms of the profit motive are indispensable to each other: real prodution supports paper wealth; borrowed money supports innovation and real investment.
All in all there’s much wisdom in this short book, little of which will be made justice from a short blog post. What really stays with me is how Perez is a lot more agile than the deterministic world view of Schumpeter (he of “creative destruction”), from whom she clearly draws a lot of inspiration. For Perez, the aim is not so much a matter of predicting the future as to help us deal with change:
Although no strong claims are made with regards to its predictive ability, the model does suggest that the near future is often not an extrapolation of the near past […] it is the power to recognize the turning points that will help economists, politicians and businessmen to prepare for the next war, not for the last.