The birth and death of technological revolutions, and their implications for the world of cryptocurrency

Author: Ben Thompson, renowned tech blogger and founder of the tech blog Stratechery
Translator: Leo Young

The book "Technological Revolutions and Financial Capital" by Venezuelan-British economist Carlota Perez is particularly significant due to its timing of publication: 2002 was the lowest point of the internet bubble's winter. Perez specifically points out that the IT revolution and the internet have not died, but are transitioning into a golden age.

Author's note: Perez's book is highly readable, and the following summary is not exhaustive. Jerry Neumann has a precise review of it on Reaction Wheel, and it is recommended to read it first if you are unfamiliar with Perez's work.

Perez's theory is derived from a summary of four technological revolutions over the past two hundred years:

• The Industrial Revolution began in Great Britain in 1771, marked by Arkwright establishing the first textile mill in Cromford, England.
• The age of steam engines and railways began in England in 1829, marked by the completion of the "Rocket" steam engine test between Liverpool and Manchester.
• The era of steel, electricity, and heavy machinery began in the United States in 1875, marked by the establishment of the Carnegie-Bessemer Steel Works in Pittsburgh, Pennsylvania.
• The age of oil, automobiles, and mass production began in the United States in 1908, marked by the production of the Ford Model T in Detroit, Michigan.
• The information and telecommunications age began in the United States in 1971, marked by the birth of the Intel microprocessor in Santa Clara, California.

Perez argues that the first four technological revolutions follow similar cycles:

However, this process is often not very orderly. Perez writes:

The development path of technological revolutions is not as smooth as shown in Figure 3.1. Each time a new socio-technological economic paradigm begins, it conflicts with the power of the old world. This conflict is rooted in existing production structures, affecting the social cultural environment and institutional framework. Only when the new paradigm wins this conflict can it spread throughout the overall economy of countries and continue to the world…

Broadly speaking, each outbreak goes through two different stages, each lasting about thirty years.

As shown in Figure 4.1, the first half is the initiation stage. This is the phase where new technologies emerge in mature economies, breaking existing structures with a violent force, forming new industrial networks, establishing new infrastructures, and spreading entirely new relationships. In the initial stage, the substantial development of the revolution is minimal, but the expectations are high; ultimately, the new paradigm forms a tremendous force, overcoming the resistance of the old paradigm, and is about to drive widespread growth.

The second stage is the deployment stage, where the modernizing power of the successful paradigm reshapes the economic structure, becoming the accepted norm for everyone and fully realizing the wealth creation effect.

The precision of Perez's observation in 2002 lies in its timing: a turning point in internet development.

The Era After the Internet Bubble

In the initiation stage, new technologies emerge, seeking practical applications in the real world, ultimately leading to rampant speculative capital chasing various whimsical business applications.

The reality is that this is soon followed by the bursting of the bubble.

Financial frenzy plays a crucial role in promoting technological revolutions, especially in infrastructure construction and even the development of new products, industries, and general technologies. The subsequent success pushes the new paradigm to the forefront of society, shaping it into an ideal source of vitality for contemporary life. Financial frenzy also drives institutional changes, at least producing disruptive effects in creative destruction.

At the same time, as mentioned earlier, this frenzied development can polarize society and widen the wealth gap, making it difficult to be accepted on a social level. Due to the imbalance in growth on both sides, the economy becomes unsustainable. One aspect is the imbalance between demand and potential supply. Investment-intensive economies concentrate income at the top, becoming an obstacle to the growth of any specific product and ensuring the scale of the economy for all. On the other hand, there is a discrepancy between book value and actual value. Therefore, this system is structurally unstable and cannot guarantee sustained growth.

The economic collapse that follows leads to recession, sometimes depression, bringing financial capital back to reality. During this process, social pressure causes institutional restructuring. In this tense atmosphere, many social innovations emerge, gradually taking shape in the initiation stage, potentially leading to new regulatory measures in the financial sector and creating an environment conducive to growth. This restructuring is crucial and usually occurs at the turning point after the initiation stage, followed by institutions and society choosing to follow, transitioning the paradigm into a golden age.

This seems to describe the internet bubble, which not only caused significant losses for speculators but also dealt a broader devastating blow to the economy. However, the excess investments during this period, such as in broadband infrastructure, laid the foundation for the internet's development over the next twenty years. The subsequent two decades represent the golden period of the deployment stage. This is the process of technological development: today, most people live in affluence, with four billion people using the internet for consumption and creation on platforms.

Additionally, Perez's theory on capital is also quite fitting: the most profitable publicly traded companies in the past fifteen years are Apple, Microsoft, Google, Amazon, and Facebook—what Perez terms "productive capital." At the same time, with the emergence of cloud platforms like AWS, speculative financial capital risks are becoming increasingly professionalized and standardized.

This is my reflection after the 2020 article “The End of Beginnings”. Even when discussing the automotive industry at that time, I did not think of Perez. I just felt that after the internet bubble, the market structure had clearly developed to a turning point, and the subsequent development would be different in any case.

Perez's view is somewhat different.

The Upcoming Golden Age

Although the opening of "Technological Revolutions and Financial Capital" points out that the internet bubble is a turning point, Perez believes that the golden age has not yet arrived; we are still in the waiting period—perhaps there will be another market crash in the future (Perez now sees the "Great Depression" as the turning point of the current technological revolution).

She stated in the Financial Times podcast Tech Tonic podcast:

It is important to note that previous technological revolutions reached a golden age after experiencing a downturn following a market crash. We may now be experiencing a global persistent golden period. I believe it is entirely possible in the current wave of technology.

What necessary conditions will bring about a golden age? How should we adjust the market to promote its development?

"Adjusting the market" is a good phrase. First, we must understand that each golden age is related to the socio-political choices made by the government, because capitalism only gains legitimacy when the greed of a few benefits the masses.

To tell you what will happen next, we must start from history; otherwise, we will not learn any lessons from history, which is the significance of understanding previous technological revolutions. The mass production revolution brought post-war prosperity. So what will happen now? If we look at the 1930s, there are many similarities to today. Xenophobia is prevalent, and many people are discontented; back then, it was fascism and socialism, now it is the far right and far left. Leaders like to promise beautiful futures that are fundamentally unattainable, with the main root being public anger and disappointment.

But there are other very important aspects, namely, the enormous technological potential that has not been developed. Insufficient investment in potential innovations is due to a lack of demand, which is usually driven by policy. But there must be sufficient policies to facilitate specific technological revolutions. So what were the previous technological revolutions? That was mass commodity production. What direction should the policies lean towards?

First, there are world wars. The obvious thing about world wars is that weapon production creates many good business opportunities; weapons become cheaper and better. But after the war, the government made significant changes: a series of policies supporting urbanization were established. Before the automobile era, people had railways, so as long as there were train stations, the roads between cities were rudimentary and not heavily used. But with cars, affordable mass housing could be built, many electrical appliances could be arranged, and cars became available. At the same time, the government shifted towards a welfare state, allowing workers to purchase homes. So you have home ownership, combined with consumerism, which is one direction. The other direction is the Cold War, which encompasses both of these innovative directions.

If we were in the 1930s, it would be hard to imagine the arrival of the post-war golden age. The same situation could happen now. To ensure that technology develops in the right direction, the most effective way is to adjust the market. I believe that the most effective approach now is to support green and sustainable development.

Perez's view on how green policies can promote the development of a golden age is also discussed in the article "Smart Green European Lifestyle: Pathways to Growth, Employment, and Prosperity." A very convincing point is that the demand driving job growth is not the technology itself, but the new lifestyles brought about by technology (just as urbanization drove previous revolutions).

It is worth noting that Perez's "Technological Revolutions and Financial Capital" contains a rather dark description of the 1930s:

When discussing the recovery of the 1930s, one cannot only look at the United States. Hitler came to power in Germany, and the government organizational framework was redirected to promote mass commodity production (which later led to large-scale destruction and genocide). The war economy that began in Germany in 1933 can be seen as the collaborative phase. Fortunately, the Nazis failed to conquer Europe and lost the war. Otherwise, Nazi socialist Germany could have become the center of a long-term fascist world. At the same time, the Soviet economy also developed rapidly in a different model, which could also have destroyed mass production. The widespread selection of specific deployment paradigms, including the Keynesian democracy predominantly chosen by the United States, indicates the determination of every country in the world to develop at each turning point.

This is not a conclusion drawn arbitrarily. Perez's charts on technological revolutions clearly indicate that the development timelines of the United States and Europe differ slightly.

This conclusion indicates that the collaborative phase is not uniform. Government support for technological revolutions cannot be guaranteed, but as long as there is free-style democracy, it will ultimately lead to better outcomes. Perez writes in the notes:

The mass commodity revolution is characteristic of most political systems in the twentieth century, forming the basis for centralized government and mass consumption, with four growth models utilizing these technologies: Keynesian democracy, Nazi fascism, Soviet socialism, and the developmentalism of what is called the "Third World." Each model has its broad characteristics.

The collaborative phase is not always a golden age.

The Crypto Revolution?

As previously suggested, Perez enjoys debating her theories. I have had the privilege of communicating with Perez online, and she strives to understand others' viewpoints; I am confident that her theories will continue to improve.

The difference between Perez's view and mine is that I believe the technological revolution has entered a mature stage and has completed its collaboration with the government. I am not sure if my view is correct. Perez notes that COVID-19 may terminate what she considers an extended turning point (at least in the United States). It is noteworthy that technology companies played a significant role in various government regulatory policies during the COVID-19 pandemic, especially in enabling people to work from home while keeping the economy running, and promoting a work-from-home lifestyle through e-commerce and delivery services, ensuring that services matched these jobs. This fundamental change in society is just beginning, and perhaps a new golden age is on the horizon.

At the same time, it is important to note that the next theme of the technological revolution is clearly not an extension of existing technologies. Stratechery has long focused on the ups and downs of the five major tech companies, and the basis of aggregation theory is that in a world where friction is minimal, centralization is inevitable. Cryptocurrency aims to bring scarcity, and the trade-off is sacrificing (at least for now) convenience and speed for decentralization.

Perez discusses the mature stage in "Technological Revolutions and Financial Capital" as follows:

This is the dawn of the golden age, although it is filled with false prosperity. It is the driving force that pushes paradigms toward maturity and gradually perfects the market. The lifecycle of the final technological systems and products in each stage is short because the comprehensive experience leads to rapid learning and improvement curves. The paradigm gradually approaches its endpoint until it reaches its limit.

All prosperity and success will continue to have an impact. Those who reap all the benefits of the golden age continue to hold onto the belief in systemic advantages, driving development forward; this arrogance can be termed the "Great Society Syndrome." Although most people wish for social and personal development, the number of unfulfilled promises continues to grow. The ultimate result is social and political division. The current era is a moment when the world system is being questioned. Environmental issues have become the forefront of politics and ideology. Social unrest becomes tense, and sometimes social reform is needed to calm it.

At the same time, in a world dominated by large companies, the market gradually saturates, technology matures, and profits begin to decline. People start seeking breakthroughs, often through mergers and acquisitions, or exporting and migrating to less saturated markets. Relatively successful entities can gain more profits without physical investments. Seeking technological solutions allows new technologies to find development space outside the existing saturated paradigm framework. This stage is destined to see a decline in the overall growth model, paving the way for the next technological revolution.

This seems to describe our current era, doesn't it? Breakthrough products reach saturation (TikTok reached a billion users in three years, and direct-to-consumer companies saturate in just a few years), while mature companies face regulatory scrutiny; company profits increase but have nowhere to invest. If the government's response to this technological revolution is disappointing, perhaps it is a problem with the technological revolution itself.

Moreover, the reality is that the collaboration between centralized governments and centralized tech companies has already begun in the United States and other countries, and the likelihood of this dystopian scenario becoming a reality is increasing. The speculative investments driving the next paradigm shift will become stronger, especially when the new paradigm's development direction differs from the current paradigm.

Of course, the development of cryptocurrency is filled with scams and speculative bubbles, which will bring pain to many, but these are all within the expected and tolerable range. What is important for the future is how much infrastructure development can be achieved now, especially user-friendly wallets.

I believe cryptocurrency is currently in the deployment stage, and if so, there is still a long way to go. This means that most economies will remain in the current paradigm stage for a long time.

It took thirty years from the Intel microprocessor to the internet bubble (notably, there were many small bubbles during this period). Satoshi Nakamoto only published the Bitcoin white paper in 2008. The Apple Mac was released thirteen years after the Intel microprocessor in 1984, and nine years before the browser appeared. Foreseeing the future is one thing; timing is another. This is a point where I agree with Perez.

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