Technological Revolutions and Financial Capital: The Most Important Book About Capitalism You Probably Haven’t Read
Technological revolutions and capital growth often go hand in hand. What does our current tech revolution tell us about the future?
If you studied economics in college or enjoy reading about capitalism you’re probably familiar with the likes of John Maynard Keynes, Friedrich Hayek, and Milton Friedman.
And if you’re an armchair economist maybe you’re an avid reader of Thomas Friedman’s column or an ardent follower of Jim Cramer’s stock picks.
Chances are you haven’t heard of the British-Venezuelan economist, Carlota Perez.
In 2002 she published a book titled Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages.
I’m a nerd so I read books like this for fun. This is the first book I’ve read that explains economic cycles from the lens of technological advancement.
If you were educated in the American school system you probably learned that the economy is governed by an invisible hand. As a teenager that made sense but typing it out right now as an adult, it is preposterous to think people actually believe an invisible force is at play in our economy.
Perez offers a different viewpoint. One of cyclical change that happens not just in an economy, but across social and political institutions writ large.
This essay will give you a brief summary of her thesis and dive into the core takeaways from her book.
Overview of Technological Revolutions and Financial Capital
According to Perez, a technological revolution is “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.”
Basically, it’s a process of not just restructuring an economy but the social and political systems that govern it.
This is because technological revolutions also tend to have a magnetic relationship with financial capital. And as we all know, money makes the world go round.
The promise of new and greater profit entices capitalists to invest in new technologies when they emerge. Hence there’s a flow of capital to support the advancement of new technologies. Profit is created out of those technologies when they are successfully adopted by society.
As a result, technological revolutions are opportunities to generate individual wealth as much as they are instances where technological innovation improves — or hurts — the lot of everyone in a society.
This is the core argument Perez makes in her book. Advancements in society — both financial and technological — are the byproduct of a sequence of events, often aligned with the flow of financial capital.
Historically, these sequences of events have happened in cyclical patterns. Economic bubbles and golden ages, in other words, don’t just magically appear out of thin air. They are the result of a larger techno-economic paradigm.
That means we can understand socio-political shifts today as a result of a technological revolution. Not just the greed of a few wealthy individuals (ahem Jeff, Elon, Mark…looking at you fellas).
Key Takeaway #1: Technological Revolutions are Dynamic
Technological revolutions should not be thought of as static events. While an important invention can kick off a technological revolution, that invention in and of itself is not the culmination of it.
Instead, a technological revolution is the creation of an entirely new system that governs society. Think of it as the coalescence of politics, society, and the economy around that new technology — and the ecosystem it creates.
Take the iPhone as an example of this.
We can all agree the iPhone is arguably one of the most important inventions of the 21st Century. It made mobile computing possible and created an app-based economy that you could command with the tap of a finger.
Think about it: transportation, food delivery, and banking are now accessible instantly with a swipe and a tap.
But it wasn’t just the invention of the iPhone that enabled this. It merely initiated the transition to an economy powered by mobile computing.
The infrastructure built on top of this invention — primarily the App Store — made it possible for tech startups to proliferate. From there they were able to study and mold consumer behavior, reshaping society at large.
Think of the 2016 American election as an example of this. Without Facebook’s ad platform, the Trump campaign could have never hired Cambridge Analytica to influence the voting decisions of swing voters. Without Facebook’s mobile app, it could never have captured the data it needed for those ads to target the right people. Without the App Store, the Facebook app would have never existed.
All of this stems back to the iPhone. It was a “big bang” event that led to a technological revolution in mobile computing. It wasn’t a static event that happened in a moment in history. Rather it was a dynamic event that has since changed everything from hailing a cab, to employment, to voting in elections.
When you think of technological innovations — like Edison’s invention of the incandescent light bulb — it is often thought of as a static moment in history. It’s not common to interpret individual inventions within the context of a broader technological revolution. And it is even more uncommon to see how those events reshape politics, society, and the economy.
Perez’s definition of a technological revolution helps us understand how innovation impacts the world around us and how we exist in it.
Key Takeaway #2: The Economy is Cyclical
You might have heard about the business cycle. It’s basically a cycle of growth and contraction in an economy.
Business activity grows and recedes in predicted patterns. While things like recessions seem scary, they are actually quite normal.
Perez uses historical examples of technological revolutions to demonstrate that the economy is cyclical too, not just business. According to her analysis, there have been five different technological revolutions in modern history:
The Industrial Revolution, 1771
Age of Steam and Railways, 1829
Age of Steel, Electricity, and Heavy Engineering, 1875
Age of Oil, the Automobile, and Mass Production, 1908
Age of Information and Telecommunications, 1971
Again if you’ve been educated in the American school system you’re probably familiar with these revolutions. Railroads were the key to the growth of industry in America after the Civil War. Meanwhile, the production of Henry Ford’s Model T led to a radical transformation in transportation and the design of towns and cities.
Each of these revolutions has happened in a cycle spanning around 50 years or so. Within each cycle are predictable phases: a big bang event, irruption of new technology, a financial bubble, a turning point, the emergence of a golden age, and the maturation of the prevailing techno-economic paradigm.
Big Bang
The “big bang” is an invention that kicks off the new technological revolution. During the Third Revolution, it was the invention of the Bessemer process that enabled the cheap, mass production of steel. In the Fifth Revolution, it was the invention of commercially available microchip processors.
These “big bang” events catalyze innovation and create an opening for a new techno-economic paradigm to emerge.
Irruption
Irruption represents the decline of old industries. Prevailing technology becomes obsolete as modernization pushes the adoption of emerging innovations forward.
This is a difficult time for workers. Obsolescence leads to a rise in unemployment. The loss of work and the inability to care for your family undoubtedly leads to tensions in society and puts pressure on political institutions to take action.
The irruption phase is when everyone is trying to make sense of the new technological revolution that has emerged while charting out a course of action to take in it.
Financial Bubble
Also referred to in the book as a “frenzy,” this phase largely benefits early adopters of new technology. Think of the prescience of Jeff Bezos to create an ecommerce store just as the Dot Com Bubble surfaced in the early 2000s.
Perez views this phase as a gilded age. It leads to a massive influx of investment that creates new wealth. Millionaires are created almost overnight.
This phase creates a front that “gilds” over what is actually happening in society and the economy. It creates false expectations that lead to a recalibration of social and political norms, defined by Perez as a turning point.
Golden Age
Once the financial bubble bursts and norms have been reconciled, a golden age is ushered in. This is a period of growth, not just for capitalists but also for the middle class.
This phase is simply the continuation of the gilded age but through mainstream adoption. The 2010s kind of felt like this. The middle class flourished without a care in the world. It’s the last hurrah before the party finally comes to an end.
Maturity
This is the last phase of the cycle before it begins again. The good times end and reality sets in. The market under the prevailing techno-economic paradigm is saturated. Capital begins to sit idly, collecting dust. People become complacent while beginning to call the system into question.
This phase leads to socio-political unrest, not unlike what we are seeing begin to emerge presently. It indicates the old way of doing things is no longer working and a new way is needed. Thus capital begins to seek out new opportunities for growth and eventually it stumbles upon a new big bang that will usher in the next technological revolution.
Key Takeaway #3: A New Economy is Created With Each Cycle
The cyclical nature of technological revolutions leads to the creation of new norms. It is unsurprising, then, to come to the conclusion that technological revolutions are synonymous with the creation of new economies.
We can see this playing out right now. The invention of the iPhone and innovations in mobile computing led to the emergence of a creator economy that is still developing. Anyone with a smartphone can now monetize their lives thanks to a handful of social media platforms.
New economies are created because financial capital and human talent chase new opportunities. Especially when those opportunities promise greater profits. Capitalists don’t want to let their assets sit idly and individuals don’t want to get left behind.
Crypto is another example of how technological revolutions create new economies.
There’s a reason why large financial institutions like BlackRock and JP Morgan have either purchased large sums of digital assets or are in the midst of creating their own. They recognize a technological revolution is underway and are reallocating their capital to position themselves to capture the growth that comes from it.
Out of the emergence of a new economy comes the creation of new financial instruments. While this might be considered a good thing, it creates tension between the real economy and the paper economy.
Think of this in terms of the role of venture capital firms in facilitating startup growth today. In the past, someone like Andrew Carnegie bootstrapped their way into business. A business that had tangible assets and literally built cities.
Today a couple of 20 somethings with a slide deck and a proprietary algorithm can waltz into a boardroom in San Francisco and walk away with millions of dollars in venture capital.
The real economy produces profit-making capabilities while the paper economy invents it out of thin air. Hence tension. Think of it too in terms of ownership. In the real economy, individuals own assets and infrastructure. In the paper economy, individuals simply own securities.
Now you can see how this leads to bubbles and unequal distributions of wealth. The tensions that emerge out of the creation of new economies spill over into other aspects of society.
Specifically social norms and political institutions.
Key Takeaway #4: New Social Norms Are Created Too
When new technology is introduced and financial capital flocks to it, society is turned upside down. This is due in part to the emergence of the new technology itself and in part due to the allocation of financial and production capital.
The emergence of new technologies not only transforms the economy but the society it operates in. Look to social media as an example. In just a few years, we went from communicating through payphones and pagers to sliding into DMs.
Mobile computing made it possible to instantaneously respond to messages. But the economy that developed out of that — an economy based on digital ad revenues — prompted technologists to get better at predicting human behavior. To the point where they now manipulate it.
As a result, they created a more efficient, but highly addictive, form of communication. This changed social norms along with the economy. It’s not a coincidence that younger generations are more anxious and suicidal than ever before.
The adoption of new technologies and the transition to a new economy is fraught with peril. It leads to a change in society, fomenting unrest. This, in turn, spills out into political theater where a growing divide between the Haves and the Have Nots puts pressure on politicians to take action.
More importantly, the new economies that emerge out of technological revolutions change how people earn and spend money. A century ago workers labored in factories for an hourly wage. Today they tend to digital tasks on a computer screen for a fixed wage. Tomorrow workers may become the minders of artificial intelligence in virtual reality. Who knows.
This gets back to previously noted tension between the real and paper economy. America has a consumer capitalist economy. When workers begin spending money on securities rather than manufactured products, it changes the composition of the entire American economy. Notably a divestment from production capital in favor of financial capital.
As you can imagine, this strains the system. When that happens it calls into question the legitimacy of existing social and political institutions. As divisions grow people begin to take action.
New social and political norms have to be created out of technological revolutions as a result. The status quo is simply untenable. The technological dimension of this is important because those new technologies shape the new social order.
How we exist in community with one another is not just shaped by human intuition but by the new technological revolution that emerges.
Key Takeaway #5: Regulation is Vital
The final takeaway from Perez’s book is in regard to regulation. While many capitalists scoff at the idea of regulation, it is undoubtedly essential. Regulation creates the boundaries needed to steer new technological, financial, and social norms in the right direction.
For better or for worse, the institution most capable of doing that is the government.
That’s because capitalists are driven by self-interests. They will seek out profit at the expense of society’s collective well-being, no matter what.
Case in point: FTX.
The lack of regulation in nascent crypto markets allowed the proliferation of a digital frenzy to go unchecked. Sam Bankman-Fried effectively created Monopoly money for exclusive use on his platform that was not backed by anything and was tied to risky investments. This is not too different from the proliferation of mortgage-backed securities in the mid-2000s. And look how that turned out.
Regulation is essential to ensure technological innovations, capital, and society are all in alignment. Without a neutral arbiter, some members of society will be expended for the benefit of others. Very few people would sign up to participate in a world like that, further exacerbating unrest and conflict.
Final Thoughts
Technological innovations and financial capital have a codependent relationship. Depending on how well that relationship is regulated it can have a beneficial or destabilizing effect on society.
Implicit in Perez’s assessment of technological revolutions is the reality that these things happen beyond our individual — or collective — control. We can’t stop technology from advancing. Nor can we stop those with money from investing in it.
What we can do is set boundaries that delineate how we interact with it.
At the end of the day, your smartphone is only a smartphone so long as you power it on. Other than that it’s just a brick of glass, plastic, and rare earth minerals.
I think it’s important to keep that in mind as the Sixth Revolution unfolds around us. That revolution is largely going to be dominated by artificial intelligence which will have a massively destabilizing impact on our lives. It won’t just change how we earn a living or coexist with one another, it truly will test the limits of consciousness and human existence.
Knowing that this is a cycle like all other cycles that have come before it is somewhat comforting. The collective social anxiety and political unrest we are all experiencing right now is not new or unique. It just is.
Understanding how you fit into all of this can help you become more resilient as a person. And it can allow you to become financially wealthy if you harness the cyclical forces at play to your favor.
The book is Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Perez. Give it a read to broaden your horizon and get exposure to an interpretation of economic philosophy beyond John Maynard Keynes.