Book of the Week: Technological Revolutions and Financial Capital

30 Oct 2016

technological_revolutions_and_financial_capital This week I read Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Perez, because it was recommended by multiple sources. I had to pay money to purchase this book since it was not available at my local library. VC blogger Fred Wilson wrote about bitcoin in the Carlota Perez Framework. The book is divided into three parts. Part I talks about technological revolutions. Part II talks about financial capital in relation to technological revolutions. Part III talks about why this reoccurs. It is a difficult book to read when you have ADD, because it is easy to get lost in all the thoughts. Took me a lot longer than expected to get through the book. I think of the book is analogous to what happens when you crossing the chasm as a society due to technological changes. This isn’t an app you’re trying to get someone to use, but a large technological shift that is push and pulled by financial capital. The Sequence The sequence of technological revolution, financial bubble, collapse, golden age and political unrest is a consequence of capitalism, the interaction between technological revolutions and financial capital. It is not innovation, but how innovation spreads that causes this to be cyclical. You can decompose the sequence into 2 periods, each with 2 phases.

[caption id=”attachment_6303” align=”aligncenter” width=”840”]technological_revolutions_and_financial_capital Reoccurring phases for each great surge sequence[/caption] The problem occurs during the frenzy period, because you get over investment with financial capital becoming decoupled from production capital. Inequality grows and you have differences between paper wealth and real wealth. The bubble crashes and you get consolidation and reorganization. Things start making sense again and the conditions are setup such that financial capital is aligned with production capital. Times are good until you start running out of opportunities. Import and exports between core and developing countries change depending on the period. It starts with core exporting until turning point when the core is importing from developing countries when technology is mature and has reached mass adoption. Technological Revolution

A technological revolution can be defined as 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 and of propelling a long-term upsurge of development.

There were 5 technological revolutions from the 1770s to 2000s.

  1. The “Industrial Revolution”
  2. Age of Steam and Railways
  3. Age of Steel, Electricity and Heavy Engineering
  4. Age of Oil, the Automobile and Mass Production
  5. Age of Information and Telecommunications

The impact of a single innovator is weak. Henry Ford used the assembly to build cars. Now the assembly line has become common sense and everyone uses. The economic impact from everyone adopting is much bigger than a single pioneer. Companies suffer from the innovator’s dilemma when considering investment. Much easier to continue to be doing what you have been doing as long as you can extract value out of it. It keeps working until the day when it doesn’t anymore. Financial Innovations Technological innovation also affects finance. The flow of information of changed with telegraph, rail and now high frequency trading. Perez groups financial innovations into 6 groups ordered by most useful to least useful. Type

A | Instruments to provide capital for new products and services
B | Instruments to help growth or expansion
C | Modernization of the financial services themselves
D | Profit-taking and spreading investment and risk
E | Instruments to refinance obligations or mobilize assets
F | Questionable innovations
The types of financial innovations in use shift from phase to phase. Within each of the two periods (installation and deployment), it starts out with more useful capital and transitions to less useful innovations toward the end of the period.

Securities analysts believe that companies make money. Companies make shoes! —Peter Drucker

People who finance stuff have no idea what companies do, but they exert control with their wallets. Sometimes idle money leads to bad loans under the maturity period, which in turn increases sovereign debt. Intellectual Capital The 10% Entrepreneur talks about how to leverage your financial capital and intellectual for long-term gains. Perez makes an interesting point about how information, knowledge and experience is now capital. How do you encapsulate this capital, trade and move it around? Are recruiting companies the stock exchanges of the future? Would an AI be tradable asset?