Lessons from Carlota Perez

Carlota Perez is a scholar renowned for her research on technological revolutions and their socio-economic impact.

The Nature of Technological Revolutions

On the definition of a technological revolution: "A technological revolution can be defined as a powerful and highly visible cluster of new and dynamic technologies, products and industries, capable of bringing about an upheaval in the whole fabric of the economy and of propelling a long-term upsurge of development." [1][2] This concept is central to her work, explaining that these are not isolated events but interconnected surges of innovation.
The five technological revolutions: Perez identifies five major technological revolutions since the late 18th century: The Industrial Revolution (from 1771), the Age of Steam and Railways (from 1829), the Age of Steel, Electricity and Heavy Engineering (from 1875), the Age of Oil, the Automobile and Mass Production (from 1908), and the Age of Information and Telecommunications (from 1971). [3][4]
Revolutions as a paradigm shift: Each revolution establishes a new "techno-economic paradigm," a new set of best-practice principles that guide innovation and investment across the entire economy. [1][3] This new "common sense" becomes the basis for organizing activities and institutions. [1]
The role of a "big bang": Each revolution is initiated by a "big-bang," a key event that makes the new technology and its potential highly visible, sparking the imagination of pioneers. [2]
Not just about technology: "They are major technical, social, and institutional shifts. That's why we call them revolutions, otherwise they wouldn't deserve the name." [4] This highlights the profound societal transformations that accompany technological breakthroughs.
A long gestation period: "The technologies that kickstart a revolution often have a long gestation period. The basic concept or idea can be around for years before it really takes off." [2] This points to the difference between invention and widespread innovation.
The importance of cheap inputs: Each revolution is propelled by the availability of a key input that is, or is perceived to be, of low and falling cost. [5] For the current revolution, that input is microelectronics and information. [5]
Creative destruction and renewal: Technological revolutions lead to the decline of old industries and the rise of new ones, a process of "creative destruction" that rejuvenates the entire economy. [3]
Opportunities as a moving target: "Technological revolutions make opportunities for development a moving target." [6] This implies that strategies for economic development must adapt to the changing technological landscape. [7]
Global nature of revolutions: The current technological revolution is the first to be truly global from the outset, with countries like China and India playing significant roles. [8]

The Phases of a Technological Revolution

Perez outlines a recurring pattern of two main periods for each revolution: the Installation Period and the Deployment Period, separated by a crucial Turning Point. [8][9]

The Installation Period: This is the initial phase where the new technology is introduced, and the necessary infrastructure is built. It is a time of creative destruction, where the new clashes with the old. [8][9]
The two phases of Installation: Irruption and Frenzy: The Installation period is further divided into "Irruption," where the new technologies emerge, and "Frenzy," a period of intense investment and speculation, often leading to a financial bubble. [2][10]
The role of financial capital in the Frenzy: The "Frenzy" is driven by financial capital, which, in its search for high returns, decouples from the real economy and fuels a "casino economy." [4][8]
Bubbles as a feature, not a bug: "That's the price we've historically paid for our ability to reach great booms. The collapse has to be disastrous enough to make it clear to everyone that the time when the stock market drives the growth of the economy is finished." [8] Financial bubbles, while disruptive, help to finance the infrastructure of the new revolution. [3]
The Turning Point: This is a critical period of recession or even depression that follows the collapse of the financial bubble. It is a time of uncertainty, social unrest, and a questioning of the established order. [8][11]
The shift from finance to production: The Turning Point marks a potential shift in leadership from financial capital to production capital, where the focus moves from speculation to the real economy. [12][13]
The Deployment Period: Following the Turning Point, the Deployment Period can usher in a "golden age" of synergistic growth, where the benefits of the new technology are spread throughout society. [8][14]
The two phases of Deployment: Synergy and Maturity: The Deployment period consists of the "Synergy" phase, characterized by widespread growth and social well-being, and the "Maturity" phase, where the potential of the revolution begins to be exhausted, and returns diminish. [2][10]
We are at the Turning Point: Perez argues that we are currently in the Turning Point of the Information and Telecommunications revolution. [8][12]
The longest Turning Point: "These have been the longest installation periods ever the longest turning point in history possibly because of having lost the opportunity to reign in finance in after the 2008 financial crash or because of the rise of China or because it's the first revolution that mechanizes mental work or maybe all of that." [12]

The Role of Finance and Capital

Two types of capital: Perez distinguishes between "financial capital" (money seeking to make more money through speculation) and "production capital" (money invested in creating goods and services). [13][14]
The dance of finance and production: "Financial capital and production capital have different behaviors and different time horizons." [14] Their relationship evolves throughout the cycle of a technological revolution.
Financial capital as the enabler: In the early stages, "freewheeling investment capital" is necessary to give momentum to new technologies. [8]
When finance takes over: "Soon we had a casino atmosphere that encompassed all investment." [8] During the Frenzy phase, financial capital can become detached from productive investment.
The necessary correction: The collapse of the bubble is a painful but necessary correction that paves the way for the "golden age." [8]
Finance as a facilitator, not the game: "Financial capital should be the facilitator, not the game itself." [13]
The need to rein in finance: A key challenge at the Turning Point is to redirect financial capital back towards productive investment. [12]
The danger of prolonged bubbles: Quantitative easing and other policies can prolong the "casino finance" era, delaying the transition to a sustainable golden age. [15]
Investing in the post-crash cycle: "The best returns on capital investment typically happen during the Synergy phase, where production capital...reigns supreme." [15]
The shift in investment focus: Venture capitalist Fred Wilson cited Perez's work as the basis for his firm's thesis to shift from investing in internet infrastructure to the application layer. [10]

The Role of the State and Society

The state's crucial role: "I think that market fundamentalism today is as much of an obstacle to world economic growth in the next decades as state fundamentalism was in the 1970s and '80s." [8]
Government as the solution: "In a turning point, government is not the problem: government is the solution." [4] The state has a critical role in navigating the Turning Point and enabling the Deployment Period.
Reinventing government: "Government needs to be reinvented, using as much imagination as it took to design the welfare state in the first place." [8]
Setting a clear direction: "Golden ages require the state to shape markets, not just fix them." [14] The government should provide a clear, synergistic direction for innovation and investment. [4]
The need for a positive-sum game: The state's role is to create a "win-win game" between business and society. [12][16]
Social resistance to change: "Each technological revolution, originally received as a bright new set of opportunities, is soon recognized as a threat to the established way of doing things in firms, institutions and society at large." [13]
The inertia of institutions: The socio-institutional framework has much greater inertia and resistance to change than the techno-economic sphere. [13] This mismatch is a source of crisis.
The need for new mindsets: "Whenever these technological revolutions have occurred in the past, the initial response has always been to try to shoehorn the new technology into old lifestyles and ways of thinking." [4]
Redefining the "good life": Each golden age involves a redefinition of the "good life," which in turn shapes demand and innovation. [17]
The importance of education and skills: Each revolution requires new skills and a transformation of the education system. [1]

The Path Forward: A Green Golden Age

The potential for a new golden age: "In an ideal world, we would smoothly enter a golden age of expansion and growth in the global economy — a time when the amazing, wealth-creating information technology paradigm lifts all boats and produces global welfare." [8]
The direction is smart, green growth: "The direction for innovation is clear: smart, green growth." [4] This involves using information technology to address environmental challenges. [5]
Turning problems into solutions: "We need to turn our environmental problems into economic solutions." [4]
Full global development: A sustainable golden age requires "full global development," not just growth in a few countries. [5] This creates demand for the products and services of the advanced world. [4]
Universal and cheap internet access: "Universal ICT everybody should have access to cheap and powerful internet all over the world that would be a basic thing for this model to work." [5]
A new European way of life: Perez has advocated for a "smart green 'European way of life'" as a model for future growth. [6][16]
The role of lifestyle changes: "The technology generates the new possibilities and the new needs provide dynamic demand." [4] A shift to more sustainable lifestyles is crucial.
A positive-sum game for all: A green golden age can create a "positive-sum game for business and society as before, but now also between advanced, emerging and developing countries." [4]
The urgency of action: "I expect the miracle now and if we don't have the miracle we're in hell. we don't really have an option because there is no way that business is going to make the changes." [12]
The power of a clear vision: "No country in history has made a leap to development without a strong clear and intelligent promotion of innovation by the state." [7] A shared vision is essential for navigating the transition to a new golden age.

Learn more:

Lessons from Carlota Perez

The Nature of Technological Revolutions

The Phases of a Technological Revolution

The Role of Finance and Capital

The Role of the State and Society

The Path Forward: A Green Golden Age

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