A few weeks ago I met with Carlota Perez in New York. I first met Carlota, - a friend so I will refer to her by first name, - around the time of the publication of her 2002 book: Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages. In her book, as well as her many articles and lectures, she frames the turbulent times we are going through into a clear, historical perspective. Let me briefly summarize her views.
Over the past couple of centuries, we have had a technology revolution every 40 - 60 years, starting with the Industrial Revolution in 1771, which was characterized by the emergence of machines, factories and canals. This was followed by the age of steam and coal, iron and railways which started in 1829; steel and heavy engineering (electrical, chemical, civil and naval) starting in 1875; and the age of the automobile in 1908. Our present information technology and telecommunications age, whose starting point Perez pegs at 1971, is the fifth such major revolution in that span.
Each such technology revolution is composed of two very different periods, each lasting 20 - 30 years. The installation period is the time of creative destruction, when new technologies emerge from the lab into the marketplace, entrepreneurs start many businesses based on these new technologies, and venture capitalists encourage experimentation with new business models and speculation in new money-making schemes.
After the crash, comes the deployment period, the time of creative construction and institutional recomposition. The now well accepted technologies become the norm. Infrastructures and industries start getting better defined and more stable; and production capital drives long-term growth and expansion by spreading and multiplying the successful business models. New paradigms emerge for guiding innovation. Over time, these new paradigms significantly transform the economy and everything around it, as well as re-shaping social behavior and the institutions of society.
I saw Carlota several times after the implosion of the dot-com bubble, and asked her each time if we would soon be entering the deployment period, given the dot-com financial crash. She kept telling me that the real financial crash had not yet taken place. She felt that a major correction would happen at some point because investments continued to be focused on short-term gain instead of on long-term production and growth. There was too much idle money chasing and inflating assets like housing and not going into expanding the demand needed to soak up all the excess supply being produced.
The financial crisis or Great Recession that finally arrived around 2007-2008 proved her right. In this 2009 article, After Crisis: Creative Construction, she explains that “this time we have had the boom and crash in two episodes. The first was the Internet mania which was truly fueled by new technology and ended in the NASDAQ collapse of 2000. The other was the set of easy credit bubbles of 2003-08, when investors were pushed by an abundance of quasi-free money into finding anything but technology as an object of speculation (from commodity futures to securitized sub-prime mortgages). The enormity of this financial bubble was facilitated by the process of globalization and the capacity for computer-aided financial "innovation" acquired during the NASDAQ boom.”
Given the ongoing global financial crisis, sustained high unemployment in the US and other advanced economies, and generally gloomy times, I was curious to learn if Carlota believed that a golden age of prosperity was still ahead of us, as was the case with the previous four technological revolutions she has written about. I asked her when we recently met in New York. Yes, she replied, but it will take time. She reminded me that the 1929 financial crisis did not resolve itself until the advent of World War 2 in the 1940s.
It takes time for the economic and societal changes needed to usher in the next age of prosperity, sometimes longer than others. But, we already see those changes taking place. New financial regulations are being deployed to curb the excesses that led to the previous crisis. Given our globally interconnected economies, it is not enough to impose new regulations on individual countries, so a global financial architecture has to also be put in place. The real economy itself, that is, the economy of jobs and production, is in the middle of major structural changes which will take considerable time to play out.
Finally, and most important, the opportunity space for innovation has to emerge, that is, the interrelated forces of innovation that will eventually unleash the next age of prosperity. The notion of innovation opportunity spaces is a new concept that she has recently developed and explains in this recent presentation.
Innovation opportunity spaces are enabled by the revolutionary new technologies that were developed during the installation period and are now technologically feasible and in full production. What we now need to better understand are the demand drivers, that is, the range of innovations that are both economically profitable and socially acceptable. This is not longer a technical discussion, but a social, economic, cultural and political one. These innovation opportunity spaces lie at the confluence of what is technologically feasible, what is economically profitable, and what is socially acceptable.
In her presentation, she illustrates the concept of innovation opportunity spaces by explaining how advanced economies created the age of mass production and achieved prosperity in the decades after World War 2. The technology and infrastructure enablers for this post war era included cheap oil and many other abundant materials, universal electricity, and good road and airway networks.
Next you needed a set of innovations that made sense for society and business, that is, that would bring major benefits to society while enabling companies to make money. According to Carlota, the major drivers of innovation in the post war period were the rise of the suburbs in the US, and post-war reconstruction in Europe and Japan. The Cold War was another major innovation driver, creating many new products, industries and jobs.
But, these innovations would not have been successful without forces that helped them scale across society by enabling the mass consumption of all the new products and services being produced. The mass consumption was made possible by creating a large middle class. Relatively well paying jobs turned millions of workers into middle income consumers through a number of mechanisms, including well organized labor unions, the growth of government which provided a variety of new services to its citizens, the rise of the military-industrial complex supporting the Cold War which created many new jobs, and the development of consumer credit that enabled people to acquire many new goods and services that they would not have previously been able to afford.
In our present times, what are the equivalent such forces that might shape the innovation opportunity spaces and unleash the next age of prosperity? The technological and infrastructure enablers are clearly the availability of cheap information technologies and the Internet. These ubiquitous digital technologies and the widespread use of the Internet are then driving the next two major forces: full global development and a green, sustainable revolution.
As our world is becoming increasingly interconnected, globalization is now enabling tens of millions of workers to raise their standard of living, turning them into consumers and creating huge demands for products and services of all kinds, as well as energy, food and water. But, the benefits of globalization to individuals, nations and business will only be possible with an economy that is based on sustainable production and consumption patterns.
The post war production/consumption patterns were developed in an age of abundant, cheap energy and resources, so their efficient use was not an overriding concern. The situation today is very different as globalization is now helping billions to rise from poverty in the decades ahead. Creating such a sustainable production/consumption patterns is a huge challenge but also a major opportunity for innovation, as it requires the transformation of much of the economy. Information technologies and the Internet infrastructure are the main enablers of this transformation. This is already happening with the many smart initiatives being developed by companies and governments around the world.
So, as Carlota Perez concludes in the aforementioned presentation, “The technological stage is set today for the global golden age of the 21st century.” We should view the opportunity for global development not only as a humanitarian goal. “It is about healthy growth, markets and employment in the advanced, emerging and developing worlds.” Similarly, we should not think of green as being only about saving the planet. “It is about saving the economy and having a high (but different) quality of life. But it cannot happen by guilt or fear but by desire and aspiration.”
Unleashing the next age of prosperity will take time, longer than we would all like, but the ingredients are now in place. “It is up to business, government and society to agree on the convergent actions for making it a reality.”