S+B: Why was that important?
Perez: For each technological revolution to flourish, you need a lot of new investment in infrastructure. If you don’t have railroads, who can build locomotives? If you don’t have roads or electricity, how can you sell cars or refrigerators? But if you don’t have enough cars or refrigerators, you can’t justify the roads or power plants. The solution comes through asset inflation. As money flows into new technological stocks, investors make capital gains by reselling them. It doesn’t matter if there are no profits or dividends yet — the money keeps coming. Many of the canals and railways of the manias in the 18th and 19th centuries were completed years after their stock market boom ended, and many of the dot-com and telecom companies never realized any benefit from their investment. But the frenzy left enough infrastructure in place for everyone to benefit.
Of course, there is also an incredible amount of fraud at this point. So much wealth is running around, and decisions are made at such high speeds, that questionable ethics are commonplace. There are speakeasies and numbers runners in the 1920s, drugs and illegal weapons dealers in the 1990s. Work, entrepreneurship, and imagination are no longer seen as the source of wealth. Instead, wealth accrues to the cunning, the people who were smart (or lucky) enough to put their money in the right place. Meanwhile, the euphoric atmosphere and the extreme pressure for high profits every quarter push companies to doctor the books “just this once”…and we know how that ends.
S+B: Has such a pattern of frenzy appeared in every surge?
Perez: Every time. And it serves its purpose. By the time the bubble collapses, the old ideas are gone; the new networks become “normal.” The Internet, mobile phones, and computers are already taken for granted, just as railroads, electricity, and highways were after previous periods of frenzy. Bill Gates’s Microsoft is no longer a Harvard dorm room; Intel is far from being a bunch of innovators in Silicon Valley, IBM is rejuvenated, Google is a huge company. These and other information and communications technology, or ICT, giants are ready to serve as engines of growth for globalization.
If General Motors CEO “Engine Charlie” Wilson could say in the 1950s that “what’s good for the country is good for GM and vice versa,” we could say today that “what’s good for the world is good for ICT and vice versa.”
The Euphoria of Deployment
S+B: What happens next?
Perez: Well, in an ideal world, we would smoothly enter a golden age of expansion and growth in the global economy — a time when the amazing, wealth-creating information technology paradigm lifts all boats and produces global welfare. Instead, as in every previous surge, there is a difficult interim period: a time of uncertainty, instability, and economic recessions or even depression. In my book, I called this interim period the Turning Point. Maybe the Turning would have been a better name, because it can last years.
As every surge is unique, so every “turning” is different. It can be very short. It took less than two years after the railway panic in England in the mid-18th century for the Victorian boom to take off. But it can also be very long, as after the crash of 1929. It might have happened sooner if American business had embraced Franklin Delano Roosevelt’s New Deal, but they resisted it as “Communism.” Instead, the industrial momentum went to Adolf Hitler’s Germany, where a mass-production economy flourished after 1933, with autobahns, automobiles, tanks, weapons — and later, mass extermination. In his own horrible way, Hitler engineered economic expansion through government–business cooperation. Fortunately, he was defeated. In the West, the postwar golden age of mass production — with its Keynesian policies and its welfare state plus international stabilizers such as the Marshall Plan and the Bretton Woods international framework — only took off after the experience of World War II showed the benefits of government intervention to boost demand in the economy.