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The Death and Birth of Technological Revolutions


The Death and Birth of Technological Revolutions

Courtesy of Ben Thompson, Stratechery

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.

Note: the following is a woefully incomplete summary of what is a brilliant — and very readable — book. Jerry Neumann has written an excellent overview of Perez’s theory at Reaction Wheel; I highly recommend reading that first if you are unfamiliar with Perez’s work.

Perez’s thesis was based on over 200 years of history and the patterns she identified in four previous technological revolutions:

  • The Industrial Revolution began in Great Britain in 1771, with the opening of Arkwright’s mill in Cromford
  • The Age of Steam and Railways began in the United Kingdom in 1829, with the test of the ‘Rocket’ steam engine for the Liverpool-Manchester railway
  • The Age of Steel, Electricity and Heavy Engineering began in the United States in 1875, with the opening of the Carnegie Bessemer steel plant in Pittsburgh, Pennsylvania
  • The Age of Oil, the Automobile, and Mass Production began in the United States in 1908, with the production of the first Ford Model-T in Detroit, Michigan
  • The Age of Information and Telecommunications began in the United States in 1971, with the announcement of the Intel microprocessor in Santa Clara, California

Perez’s argument was that the four technological revolutions that proceeded the Age of Information and Telecommunications followed a similar cycle:

The lifecycle of technological revolutions

However, this process is usually disjointed; Perez writes:

In real life, the trajectory of a technological revolution is not as smooth and continuous as the stylized curve presented in Figure 3.1. The process of installation of each new techno-economic paradigm in society begins with a battle against the power of the old, which is ingrained in the established production structure and embedded in the socio-cultural environment and in the institutional framework. Only when that battle has been practically won can the paradigm really diffuse across the whole economy of the core nations and later across the world…

In very broad terms, each surge goes through two periods of a very different nature, each lasting about three decades.

Two different periods in each great surge

As shown in Figure 4.1, the first half can be termed the installation period. It is the time when the new technologies irrupt in a maturing economy and advance like a bulldozer disrupting the established fabric and articulating new industrial networks, setting up new infrastructures and spreading new and superior ways of doing things. At the beginning of that period, the revolution is a small fact and a big promise; at the end, the new paradigm is a significant force, having overcome the resistance of the old paradigm and being ready to serve as propeller of widespread growth.

The second half is the deployment period, when the fabric of the whole economy is rewoven and reshaped by the modernizing power of the triumphant paradigm, which then becomes normal best practice, enabling the full unfolding of its wealth generating potential.

What made Perez’s observation so trenchant in 2002 is that part in the middle: the turning point.

The Post-Dotcom Era

While the Installation Period begins with irruption as new technology emerges in pursuit of real world applications, it eventually transitions into a full-blown frenzy as speculative capital pursues increasingly fantastical commercial applications.

Recurring phases of each great surge

Reality, though, catches up, and the bubble pops.

This financial frenzy is a powerful force in propagating the technological revolution, in particular its infrastructure, and enhancing – even exaggerating – the superiority of the new products, industries and generic technologies. The ostentation of success pushes the logic of the new paradigm to the fore and makes it into the contemporary ideal of vitality and dynamism. It also contributes to institutional change, at least concerning the ‘destruction’ half of creative destruction.

At the same time, as mentioned before, all this excitement divides society, widening the gap between rich and poor and making it less and less tenable in social terms. The economy also becomes unsustainable, due to the appearance of two growing imbalances. One is the mismatch between the profile of demand and that of potential supply. The very process by which intense investment was made possible by concentrating income at the upper end of the spectrum becomes an obstacle for the expansion of production of any particular product and for the attainment of full economies of scale. The other is the rift between paper values and real values. So the system is structurally unstable and cannot grow indefinitely along that path.

With the collapse comes recession – sometimes depression – bringing financial capital back to reality. This, together with mounting social pressure, creates the conditions for institutional restructuring. In this atmosphere of urgency many of the social innovations, which gradually emerged during the period of installation, are likely to be brought together with new regulation in the financial and other spheres, to create a favorable context for recoupling and full unfolding of the growth potential. This crucial recomposition happens at the turning point which leaves behind the turbulent times of installation and paradigm transition to enter the ‘golden age’ that can follow, depending on the institutional and social choices made.

This certainly seems to describe the Dotcom Bubble, which was not only destructive to speculators directly but the economy broadly, even as its excesses, particularly in terms of broadband build-up, funded the infrastructure that would fuel the Internet over the next two decades…

Continue reading at Stratechery ->

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