A long-wave theory of technological and economic change suggests the financial malaise that began in 2007 may be about to end.
History doesn’t exactly repeat itself, but it does run in cycles. One of the most robust theories of such cycles was articulated by economic historian Carlota Perez, in her influential book Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages (Edward Elgar, 2002). It suggests that humanity can get through the current period of upheaval and economic malaise and enter a new “golden age” of broad economic growth, if the world’s key decision makers act in concert to help foster one.
This may seem far-fetched, but it’s happened four times before. We are in the midst of the fifth great surge (as Perez calls them) of technological and economic change since the Industrial Revolution. The last one, the age of oil, automobiles, and mass production, lasted most of the 20th century and still shapes many people’s attitudes. Our current surge started around 1970 and has rolled out information and communications technology around the world: It is the age of the computer and the Internet (see Exhibit 1).
Each of these surges follows the same broad pattern. First, there is a wave of major new technologies, leading to dramatic changes in industrial production and daily life. For about 20 to 30 years, in a period that Perez calls installation, these technologies are funded largely by speculative investment chasing rapid returns. This age of widening wealth disparity leads to a bubble, which bursts in spectacular fashion, and is followed by a crisis period that Perez calls the turning point. This phase of economic and social turbulence has varied in length from two years to 17. Many efforts to get back to normal are made, usually involving the regulation of financial excesses or the stimulation of production and employment. When the crisis ends, the third part of the cycle begins; it consists of 30 years or so of stable economic growth, with a high level of genuine return on investment, and an economy funded by production capital, not speculation. Perez calls this period deployment. It is experienced as a golden age: a wave of prosperity, lifting everyone’s fortunes, including those who felt left behind just a few years before. Eventually, the technological opportunities reach exhaustion, markets become saturated, and the cycle starts all over again (see Exhibit 2).