Technological disruptions & financial cycles
The combination of new, disruptive technologies and financial capital looking for the next big thing come together from time to time to generate massive new changes in society. These changes are always accompanied by a financial bubble and subsequent massive crash.
Over the past couple of centuries, we had a technology revolution every 40 – 60 years, starting with the Industrial revolution in 1771. This was followed by the age of steam and coal, iron and railways which started in 1829; steel and heavy engineering starting in 1875; and the age of automobile in 1908. Our present information technology and telecommunications age is the 5th such major revolution in that span.
Carlota Perez of Cambridge University has demonstrated that each such revolution takes about half a century to spread around the world, and is characterized by two distinct periods: installation and deployment.
- The installation period is a time of creative destruction, when new technologies emerge from the lab into the marketplace, entrepreneurs start many new businesses based on these new technologies, and venture capitalists encourage experimentation with new business models and speculation in new-money making schemes. Inevitably, this all leads to financial bubbles and crash like the “canal mania” in 1793, the “railway mania” in 1836 or the “Internet bubble” in 2000. In all these cases the main objects of speculation, as defined in the Kindleberger model, happen to be of a technological nature.
- After the crash come the deployment period, the time of creative construction and institutional decomposition. The now well accepted technologies and economic paradigms become the norm; infrastructures and industries start getting better defined and more stable; and production capital drives long-term growth and expansion by spreading and multiplying the successful business models.
The financial bubbles that keep coming to light are therefore an integral part of the creative destruction popularized by Schumpeter to describe the process of transformation that accompanies radical, disruptive innovation. It results from the way technological revolutions are assimilated.