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 / Spring 2010 / Issue 58(originally published by Booz & Company)


The New Golden Age

The history of investment and technology suggests that economic recovery is closer than you think, with a new silicon-based global elite at the helm.

Recession. Depression. War. Terrorism. Unemployment. Enemies on the march. Every day the headlines remind us that there is plenty to worry about and more than enough real suffering to try our souls.

And yet, if we step back and take a longer view, we see that in­dustrial society has been here be­fore. The global economy is poised to en­ter a new phase of robust, dependable growth. Technological and economic historian Carlota Perez calls it a “golden age.” Such ages occur roughly every 60 years, and they last for a decade or more, part of a long cycle of technological change and financial activity. (See Exhibit 1.)

This doesn’t mean that the world’s political and economic problems will go away. But whereas the details of long cycles vary, the overall pattern of progress remains the same: An economy spends 30 years in what Perez calls “installation,” using financial capital (largely from investors) to put in place new technologies. Ultimately, overinvestment and excessive speculation lead to a financial crisis, after which installation gives way to “de­ployment”: a time of gradually in­creasing prosperity and income from improved goods and services.

This time, linchpins of the golden age will include the worldwide build-out of a new services-oriented infrastructure based on dig­ital technology and a general shift to cleaner energy and environmentally safer technologies. In the emerging markets of China, India, Brazil, Russia, and dozens of smaller developing nations, a billion people will enter the expanding global middle class.

The idea of sustained prosper­ity may seem implausible in early 2010. But no one would have believed, during the dark days at the end of World War II, that the global economy was heading for two decades of broad-based economic growth and relative peace, led by a new establishment of business and political leaders.

Tracking the Cycle

Long cycles of technology and investment have been tracked and analyzed by an impressive roster of scholars, including Perez, Joseph Schumpeter, and others. (See “Carlota Perez: The Thought Leader Interview,” by Art Kleiner, s+b, Winter 2005.) Five such cycles have occurred since the late 1700s. The first, lasting from the 1770s through the 1820s, was based on water power and introduced factories and canals, primarily in Britain. The second, the age of steam, coal, iron, and railways, lasted from the 1820s to the 1870s. The third, involving steel and heavy engineering (the giant electrical and transportation technologies of the Gilded Age), expanded to include Germany and the United States. This cycle ended around 1910, giving way to the mass production era of the 20th century, a fourth long cycle encompassing the rise of the automobile, petroleum-based materials, the assembly line, and the motion picture and television.

Our current long cycle, which began around 1970, is based on silicon: the integrated circuit, the digital computer, global telecommunications and the Internet. It may feel like this technology has run its course, but the cycle is really only half over. In a typical “technological–economic paradigm,” as Perez calls it, new technologies are rolled out during the first 30 years of installation with funding from fi­nancial capital. Investors are drawn in because they receive speculative gains that come, in effect, from other people making similar in­vestments. Gradually this leads to “frenzy”: Investors can’t be certain which inventions will succeed and which new enterprises will endure, so they bet wildly. As some bets lead to rapid gains, enthusiasm and impatience fuel a more widespread appetite for jumping on board, risks be damned. The consequence is irrational exuberance, a crash — and then a period of crisis.

The current crisis began in 2000 with the Internet bubble collapse. It was prolonged by the financial-services industry. Not wanting to give up easy profits, and applying the technological innovations that computer “geeks” had provided, traders continued to push for rapid returns. Ever more elaborate derivative instruments were concocted; increasingly complicated computer models replaced experienced judgment; and highly leveraged bets piled into such “sure thing” arenas as real estate. This culminated in the catastrophic meltdown of 2008 and a historic moment of shifting establishment priorities.

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