I first met Carlota Perez in the mid-2000s when she gave a seminar at IBM based on her 2002 bestseller Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages. At the time, we had been living through a series of major changes, - the explosive growth of the Internet, the advent of the digital economy, the dot-com bubble, and the bursting of the bubble. In her excellent presentation Perez explained these turbulent times by positioning them within the historical perspective she wrote about in her book.
If you look at the historical big picture, patterns begin to emerge which serve as a good guide for understanding the past and thinking about the future. Since the onset of the Industrial Revolution we’ve had 5 major technological revolutions, each one lasting roughly 40 to 60 years. First was the age of machines, factories and canals starting in 1771. This was followed by the age of steam, railways, iron and coal, starting in 1829; steel, electricity and heavy engineering in 1875; oil, automobiles, and mass production in 1908, and our present information technology and telecommunications (ICT) digital age starting in 1971.
Technology revolutions are engines of growth, ushering new paradigms for innovation, rejuvenating and transforming the economy, and re-shaping social behavior and the institutions of society. To better understand the dynamics of a technology revolution, we should split it into two different periods, each lasting 20 to 30 years.
The installation period is the time of creative destruction, when new technologies emerge from the lab into the marketplace, entrepreneurs start new companies based on real world applications, VCs encourage business model experimentation, and the new ventures attract considerable financial capital. Inevitably, a speculative frenzy ensues, leading to a financial bubble which eventually bursts.
After the crash, comes the deployment period. Its initial phase is a time of societal recomposition. The now well accepted technologies and economic paradigms become the norm; new infrastructures and industries are better defined and more stable; and production capital drives long-term growth and expansion by spreading and multiplying the successful business models. Over time, the current technological era reaches its maturity phase, starts to fizzle out, and the next era begins to take root.
In a 2017 roundtable discussion Perez was asked to comment on the difference between our present digital era and the four previous ones, given that it’s been over 45 years since the advent of the ICT revolutions and 15 years since the dot-com bubble crash, - the longest such periods according to her theories.
“It’s probably also the deepest transformation of everyday life, and the one that has gone the furthest globally,” said Perez. “Also, given our longer life span, the older generation has taken longer to hand over power - in this case, to younger digital natives. Even after 40 years, the information and communications revolution is far from complete. It hasn’t fully changed our way of life, as previous technological revolutions had done.” In addition we’ve had two major bubbles to recover from, - the dot-com one in the late 1990s and the real estate bubble of the mid-2000s which led to the 2008 global financial crisis. We’ve still not finished recovering from the crash of these two recent bubbles.
In a 2016 article, Capitalism, Technology, and a Green Golden Age, Perez noted that ending a crisis has historically involved a paradigm shift in direction for the economy and society as a whole. She agued that “a radical change in policy is now needed to tilt the playing field strongly towards green growth and green innovation as the new direction for our age, and that such policies can bring back growth and jobs and reduce inequality.”
“What was especially remarkable about Carlota Perez’s Technological Revolutions and Financial Capital was its timing: 2002 was the middle of the cold winter that followed the Dotcom Bubble, and here was Perez arguing that the IT revolution and the Internet were not in fact dead ideas, but in the middle of a natural transition to a new Golden Age,” wrote technology and media analyst Ben Thompson in The Death and Birth of Technological Revolutions, the first of two recent articles on Perez’s work in his excellent Stratechery newsletter.
Thompson’s article started out with a very good explanation of Perez’s work, which he clearly admires. However, unlike Perez, he argued that the transition to the deployment phase of the ICT era has already started, and concluded that we are firmly into the synergy phase, with the economy and society being reorganized around the new digital economy paradigm. Let me summarize the three key arguments that Thompson gives as evidence for his conclusion.
Technological dispersion. Digital technologies, infrastructures, and applications have continued to advance since the dot-com bubble burst two decades ago. “[T]oday over four billion people have access to the Internet, and thanks to the global nature of the web, those in developing countries can consume and create on the same platforms as the most well off.” In addition, over 5 billion people around the world are using mobile phones.
We’ve reached the culmination of the current technological paradigm: Mobile + Cloud. In a 2020 article, The End of the Beginning, Thompson wrote that the digital technology era is best understood as a multi-decade transformation along three distinct technological phases: the initial batch-processing mainframe phase, the desktop/PC interactive phase, and the final mobile + cloud continuous-everywhere phase.“What is notable is that the current environment appears to be the logical endpoint of all of these changes: from batch-processing to continuous computing, from a terminal in a different room to a phone in your pocket, from a tape drive to data centers all over the globe.”
Financial Capital and Production Capital. “One of the most important principles in Perez’s model is the difference between Financial Capital and Production Capital and the roles they play in the Installation period versus the Deployment period,” wrote Thomspon in the second article on her work. “Financial capital is critical in the Installation period of a technological revolution. Because it is mobile and seeking a return it flows to new technologies that are just emerging; in the case of the current era that meant chips, then software, then services. Financial capital is also highly speculative, and provokes a frenzy that leads to a bubble, which is exactly what happened in the Dot Com era.”
“Production capital, on the other hand, is harvested from profitable businesses that re-invest their earnings to improve their products and expand their markets during the Deployment period. This has clearly been happening with the largest tech companies: one of the best investments one could have made over the last decade would have been stock in Apple, Microsoft, Google, Amazon, and Facebook, not because they needed investor capital, but because they were generating such exceptional returns from reinvesting their own profits.”
So, which is it? Are we still waiting for the deployment period of the ICT revolution, characterized by a green innovation on the way to a green golden age, as Perez contends; or have we already entered the deployment period characterized by production capital and investments, as Thompson argues? In the end, we don’t really know. Time will tell. As Ben Thompson wrote in conclusion: “It’s one thing to see the future coming; it’s something else entirely to know the timing. On that Perez and I can certainly agree.”
The BIG FIVE have created their big returns by investing in their companies. The green revolution will create non monetary returns „save the world by reducing the CO2 output“. I wonder how this can be transformed into real value of a company. Any idea?
Posted by: Horst Henn | January 15, 2022 at 10:43 AM