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:¹

• 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:

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.

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 eventual transitions into a full-blown frenzy as speculative capital pursues increasingly fantastical commercial applications.

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. And, by extension, those two decades would seem to be the Golden Age of the “Deployment Period.” That certainly seems to be the case with technological dispersion: today 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.

Moreover, the “Capital” part of Perez’s theory seems to fit as well: some of the best returns over the last fifteen years have been in established public companies like Apple, Microsoft, Google, Amazon, and Facebook — “Production Capital”, in Perez’s nomenclature. Venture capital, meanwhile, which is theoretically speculative “Financial Capital”, has increasingly become professionalized and standardized, thanks in part to the rise of cloud platforms like AWS; building a new SaaS company to take on another old-world vertical certainly takes hard work, but the playbook is fairly well-known.

This was my thinking behind 2020’s The End of the Beginning; I wasn’t thinking of Perez when I wrote that, to be honest, even though I reached for the automobile example. It just seemed clear to me that the post Dotcom Bubble era had reached its natural endpoint as far as market structure was concerned; whatever came next would look significantly different.

Perez disagrees.

The Imminent Golden Age

While the introduction to Technological Revolutions and Financial Capital makes the case that the Dotcom Bubble was the Turning Point, Perez now thinks we are still waiting for the Golden Age — and that there may be another crash in the future (Perez now includes the Great Recession as part of the current revolution’s Turning Point).

Perez’s link is to the Financial Times’ Tech Tonic podcast; the pertinent part starts at the 3:48 mark:

The important thing is that the previous revolutions had the Golden Age after the recession that follows the crash. And we could now perhaps have a global sustainable Golden Age. I think it is perfectly possible with the current technologies.

What would be necessary to bring that Golden Age about? How do we need to tilt the playing field to make that happen?

Well “tilt the playing field” is the word. The first thing we have to understand is that every Golden Age has had to do with social-political choices made by governments, because capitalism really only becomes legitimate when the greed of some is for the benefit of the many.

I think in order to tell you what needs to happen next time I have to give you an example from the past, because otherwise we don’t learn anything from history, and that’s why it’s important to understand how revolutions happen before. The mass production revolution brought the post-War boom. Now what happened then? If we look at the 1930s, we have some similarities with today. We see xenophobia, we see a lot of people angry and following at that time fascism and communism, now all sorts of extremisms right and left, leaders that really offer heaven even though they cannot delivery, but the whole thing is that people are angry and disappointed.

But you also have something else which is very important, which is that there is an enormous technological potential which is not being used. Not enough investment is going in the possible innovations because there is not enough demand, and demand is normally created by some policies. But it has to be policies that are adequate for that particular revolution. So what was the previous revolution? It was about mass production. So what was the direction in which it was tilted?

Well, first of all it was the World War. And with the World War it was obvious that producing a lot of weapons made a lot of good business sense. They became cheaper and better and so on. But then at the end of the war, governments did something very important: they created a set of policies that favored suburbanization. Before the automobile you had railways, so you only had stations, and the land in-between was very cheap, it had no way of being used. But once you have the automobile you can build cheap mass-produced houses to put lots of electrical appliances inside and the car at the door. And at the same time governments made the welfare state so that workers could buy those houses. So you have home ownership and consumerism, that’s one of the directions, and the other direction was the Cold War of course, so that you had innovation going in the two directions.

If we had stayed in what was visible in the 30s, it was very difficult to imagine this Golden Age that came after the war. The same thing is happening to us now. In order to get the technologies to go in the right direction, you’ve got to tilt the playing field, and I hold that the most effective way of doing that today is tilting it towards ‘Green’.

Perez’s view on how a focus on “Green” policies could fuel a Golden Age are well fleshed-out in papers like A Smart Green ‘European Way of Life’: the Path for Growth, Jobs and Wellbeing; one insight that I find very compelling is that the demand that drives job growth is less about the technology itself and more about the new lifestyle that the technology enables (just like suburbanization drove the previous revolution).

It’s worth noting, though, that Perez has a somewhat darker interpretation of the 1930’s in Technological Revolutions and Financial Capital (emphasis mine):

Regarding recovery in the 1930s, one cannot look at the USA only. In Germany, with Hitler’s rise to power, the institutional framework was reoriented to facilitate the development of mass production (and later of mass destruction and genocide). The war economy that began after 1933 in Germany could be seen as a synergy phase of a sort. Fortunately, the Nazis failed to conquer Europe and lost the war; otherwise, National Socialist Germany might have been the center of a longer-lasting fascist world. At that same time, the Soviet economy too was developing very fast with another mode of growth that was also capable of intensively deploying mass production. This wide range of options for the deployment of that particular paradigm — including the Keynesian democracies that will have the USA as their core — is an indication of how much is at stake and how much is decided about the future of each country and of the world at the turning point of each surge.

This isn’t a throwaway observation; Perez’s chart of technological revolutions is clear that the U.S. and Europe were on different timelines:

The implication of this observation is that the “Synergy” phase is amoral; it is not guaranteed that the alignment of government with the new technological revolution and its resultant impact on people leads to a “better” outcome as far as liberal democracy is concerned. Perez noted in a footnote:

The mass-production revolution, which marked most of the institutions of the twentieth century, underlay the centralized governments and massive consumption patterns of the four great modes of growth that were set up to take advantage of those technologies: the Keynesian democracies, Nazi-fascism, Soviet socialism and State developmentalism in the so-called ‘Third World,’ each with very wide-ranging specificities.

Synergies are not always golden.

The China Model

Another observation from Perez is that new technological revolutions create the conditions for newcomers to “leapfrog”:

In periods of paradigm shift there is a window of opportunity for real catching up as well as for forging ahead. Belgium, France and the USA caught up in the installation period of the second surge; Germany and the USA forged ahead in that of the third. Most of Europe, Japan and the Soviet Union, caught up in the fourth (though the latter fell dramatically behind with the fifth).

This is where the absence of China from Technological Revolutions and Financial Capital is notable. The only mention is in the postscript:

Yet, in the globalized world of the present paradigm, demand is also global. The best promise of massive market expansion would seem to be in the incorporation of more and more countries to global growth, investment, production and consumption. Growth in the larger countries of the developing world, together with China, Russia and the ex-socialist group of Eastern Europe, could serve as a first tier to pull the others forward. It is quite obvious that these potentially huge markets are a very long way from saturation.

This was a view reflective of the era in which it was written, in which it was assumed that the Internet, in conjunction with globalization, would liberalize and ultimately democratize China. In 2000, President Bill Clinton, upon the occasion of the establishment of Permanent Normal Relations with China said in a speech:

When China joins the W.T.O., by 2005 it will eliminate tariffs on information technology products, making the tools of communication even cheaper, better, and more widely available. We know how much the Internet has changed America, and we are already an open society. Imagine how much it could change China.

Now there’s no question China has been trying to crack down on the Internet. (Chuckles.) Good luck! (Laughter.) That’s sort of like trying to nail jello to the wall. (Laughter.) But I would argue to you that their effort to do that just proves how real these changes are and how much they threaten the status quo. It’s not an argument for slowing down the effort to bring China into the world, it’s an argument for accelerating that effort. In the knowledge economy, economic innovation and political empowerment, whether anyone likes it or not, will inevitably go hand in hand.

Things obviously didn’t work out that way; if anything the Internet has allowed China to push its values onto Americans. What is worth noting, though, is that you can make the case that China has entered the Synergy phase in which government has aligned with technology to profoundly impact China’s citizens. That this entails mass surveillance, censorship, and propaganda doesn’t undo Perez’s thesis; it perhaps punctures her optimism.

There are signs a weaker, yet in some ways similar, form of synergy has happened in the U.S. as well; soon after the Dotcom Bubble came the Patriot Act, and while the political motivations were the 9/11 terrorist attacks, the implementation was very much about leveraging technology for government ends. The extent of this synergy only became clear in 2013 when the Snowden revelations exposed a vast web of surveillance conducted by tech and telecommunications companies in partnership with the NSA.

Then, over the last several years, there has been a concerted effort to push tech companies to increasingly limit misinformation on their networks, and post corrective information instead; it doesn’t take much squinting to re-label both efforts as censorship and propaganda. This is not, I would note, to pass judgment as to whether those efforts are right or wrong (although I am skeptical); merely to note that there may be more evidence of synergy between the government and tech than it seems. It’s all a bit dystopian, to be sure, but revolutions by their nature are unpredictable; it wasn’t a certainty that liberal democracy would triumph in the fourth revolution, much less the current one.

A Crypto Revolution?

As the tweet above makes clear, Perez relishes debate about her theories; I am one of many writers on the Internet who have had the distinct pleasure of getting an email out of the blue from Perez, and having a conversation where she pushes and prods to understand the other’s point of view, confident it will make her theses stronger.

And, in that spirit, I have to confess I’m not sure if this rebuttal to Perez’s current position — my sense that we are in the maturation phase of the technological revolution, complete with government synergy — is correct or not. Perez has noted that COVID-19 could end what she thinks is the elongated turning point era, much like World War II ended the elongated turning point era of the previous revolution (at least in the U.S.). It is notable, for example, that the tech industry has also been an essential element in various government lockdown strategies during the COVID pandemic, most obviously by making it possible for the economy to continue to function while people work from home, and also in enabling a work-from-home lifestyle via e-commerce and food delivery services, with all of the commensurate jobs entailed in providing these services. That is a fundamental change to society that is only getting started — perhaps a new Golden Era is in fact imminent.

At the same time, it is notable that crypto, the most obvious candidate for the next technological revolution is not — contra Perez — an obvious extension of the current era. The overarching story of Stratechery has been the rise and consolidation of the aforementioned Big 5 tech companies, and the entire premise of Aggregation Theory is the inevitability of centralization in a world of frictionless abundance. Crypto, though, is about the introduction of scarcity; its payoff is decentralization, at the cost, at least for now, of convenience and speed.

Perez writes in Technological Revolutions and Financial Capital about what the Maturity phase looks like:

This is the twilight of the golden age, though it shines with false splendor. It is the drive to maturity of the paradigm and to the gradual saturation of markets. The last technology systems and the last products in each of them have very short life cycles, since accumulated experience leads to very rapid learning and saturation curves. Gradually the paradigm is taken to its ultimate consequences until it shows up its limitations.

Yet, all the signs of prosperity and success are still around. Those who reaped the full benefits of the ‘golden age’ (or of the gilded one) continue to hold on to their belief in the virtues of the system and to proclaim eternal and unstoppable progress, in a complacent blindness, which could be called the ‘Great Society syndrome’. But the unfulfilled promises had been piling up, while most people nurtured the expectation of personal and social advance. The result is an increasing socio-political split…this is a time when deep questions about the system are being asked in many quarters; the climate is favorable for politics and ideological confrontations to come to the fore. The social ferment can become intense and is sometimes quelled with social reforms.

Meanwhile, in the world of big business, markets are saturating and technologies maturing, therefore profits begin to feel the productivity constriction. Ways are being sought for propping them up, which often involve concentration through mergers or acquisitions, as well as export drives and migration of activities to less-saturated markets abroad. Their relative success makes firms amass even more money without profitable investment outlets. The search for technological solutions lifts the implicit ban on truly new technologies outside the logic of the now exhausted paradigm. The stage is set for the decline of the whole mode of growth and for the next technological revolution.

That seems awfully descriptive of the current era, no? Products that break through reach saturation in record time (see TikTok reaching a billion users in three years, or DTC companies that seem to max out in only a couple of years), while the future of established companies seems to be quagmire in legislators and the courts, even as profits continue to pile up without obvious places to invest. And if the government’s response to the revolution has been disappointing, that also may be because of the revolution itself.

Moreover, to the extent the dystopian picture above is correct — that the real synergy has been between centralized governments and centralized tech companies, to the alarm of both those abroad and in the U.S. — the greater the motivation there is to make the speculative investments that drive the next paradigm, especially if that paradigm operates in direct opposition to the current one. To be sure this framework does imply that crypto is full of scams and on its way to inflating a spectacular bubble, the aftermath of which will be painful for many, but that is both expected and increasingly borne out by the facts as well. What will matter for the future is how much infrastructure — particularly wallet installation — can be built-out in the meantime.

For what it’s worth my suspicion is that the current Installation period for crypto — if that is indeed where we are — has a long ways to run, which is another way of saying most of the economy will remain in the current paradigm for a while longer. The time from the Intel microprocessor to the Dotcom Bubble bursting was 30 years (and, it should be noted, there were a lot of smaller, more localized bubbles along the way); Satoshi Nakamoto only published his paper in 2008. Thirteen years after 1971 was 1984, the year the Mac was introduced; the browser was another 9 years away. 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.

I wrote a follow-up to this Article in this Daily Update.

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1. This list is transcribed from the second Table 2.1 — there are two — on page 11 of 2014 paperback edition of Technological Revolutions and Financial Capital ↩