Thank you, Carlota Perez
Is the Gilded Age of the late 1800's repeating itself, or are we still in the early innings of the information revolution?
Post Summary / TL;DR
For Schumpeterian economists like Carlota Perez, economics play out in cycles of boom and bust.
Perez organizes the cycles of technological revolution into two periods (installation and deployment) and four phases (irruption, frenzy, synergy, and maturity).
Defining where we are today in the context of her framework is up for debate and important to consider in the context of investing or starting new companies.
In his EOY 2019 letter to shareholders, which was written in March of 2020 after the US had begun to shutdown in response to COVID-19, Chamath Palihapitiya, the famous venture investor and founder of Social Capital, who has become more famous recently for his promotion of SPACs, opens with a question: "What the hell is going on?"
He asks shareholders to "imagine a time of incredible economic expansion and wealth creation punctuated by periods of class warfare, strife and political upheaval," and then makes a case that everything we witnessed in the first Gilded Age (1870-1900), we're witnessing again in what he refers to as the modern Gilded Age (1990-2020).
Here's an excerpt:
During the Gilded Age of the 1870s-1900 we saw all of these: rapid economic growth, wage growth, immigration and expansion of social programs like education with the standardization of primary schools and the emergence of high schools. At the time, the major industry of growth was the railroads which in turn led to technological expansions in factories, mining and farming. As is the case today, Wall Street played an important role during the Gilded Age as a financial intermediary and financed everything including a bubble in railroads which eventually burst. While this economic expansion was happening, immigrants fled to America in droves and a class division started to emerge with the 1% owning more than 25% of all property and the bottom 50% owning less than 4%.
If you replace ‘railroads’ with ‘technology’ and re-read these last few sentences, does any of this sound familiar?
He’s suggesting that history is repeating itself, and carries the hypothesis further, writing:
During the Gilded Age’s 30 year run, there were two major market shocks - both depression-level in their intensity and effect on the economy - The Panic of 1873 and the Panic of 1893. The post Civil War South remained economically devastated and its economy couldn’t functionally evolve away from low-value commodities. Politically, people were more active than ever with the two parties roughly splitting sentiment and votes. That said, the era was marked by a slew of forgettable Presidents with much of the focus on Congress and local governments even though Congress was largely impotent and stalemated.
If you replace ‘The Panic of 1873 and the Panic of 1893’ with ‘The Dot-Com Bubble and the Great Financial Crisis’ and ‘post Civil War South’ with ‘The Heartland’ does any of this sound familiar?
I’m in a book club with some friends and on our last call we discussed big tech and framed the conversation around the ongoing antitrust analysis from Ben Thompson and Benedict Evans, as well as Carlota Perez’s work on technological revolutions and financial capital.
The impact big tech has had on each of us is both extreme and hard to fully appreciate.
A few of the book club members work in finance, where big tech has produced a wave of story stocks that has carried the market for ~20 years.
A couple of folks work in technology, where big tech owns the playing field and defines the rules of the game.
And one person works in state government, where big tech represents a lightning rod in public opinion and, for many, the worm at the center of the core of American polarization.
But these are just shallow scans of the visible surface. Big tech's relationship with wall street, startups, government, and our day to day lived experience is deeply embedded within the majority of human culture and subculture. Below the surface, the water is murkier and the impacts are harder to see and parse.
Approaching life backward
Jim Harrison, one of my favorite novelists and a master of the novella, wrote in True North, "Clarence said a striking thing about rowing that I've always valued, the upshot of which was that he liked rowing because you were approaching life backward. You could clearly see the past, and you glanced quickly at the future over your shoulder mostly so that you wouldn't run into something destructively immovable."
When the lens through which we assess the impact of big tech is expanded across a couple hundred years, the complexity becomes more patterned. As Chamath argues, we’ve seen this movie before.
This isn't just because complexity is easier to understand in hindsight. It's also because Carlota Perez's work provides a framework for understanding the past and the future that has achieved impressive accuracy over the course of 5 major technological revolutions since the late 1700's.
This post is not about whether big tech should or shouldn't be regulated. This post is about Perez's explanation of the relationships between technological revolutions, financial capital, and lived experience.
Technological and Financial Revolutions
Perez traces 5 technological revolutions from the industrial revolution to the information revolution and shows that technological and financial revolutions are cyclical in nature and facilitated by predictable relationships between two types of capital:
Production capital - the capital that creates innovation and tries to build the future (e.g. startups, operating companies, entrepreneurs/operators, inventors, R&D, factories, labs, etc)
Financial capital - the capital that funds production capital (e.g. angel investors, family offices, venture capital, private equity, and the broader public markets, etc)
Perez argues that there are two main periods of every technological revolution: installation and deployment.
Within these periods are 4 distinct phases: irruption, frenzy, synergy, and maturity.
The irruption phase consists of intense funding of innovation in new technology that yields not only new inventions but entire industries that disrupt bulwark businesses that had before seemed invincible. In this phase, new inventions also yield the development of new infrastructure. Important to underline here is that financial capital is investing in technological innovation and is, therefore, closely coupled with production capital.
The frenzy phase ushers in a wave of speculation as financial capital, afraid of missing out, rushes in to capitalize on the new, adjacent possibilities created in the irruption phase. This phase leads to a decoupling of production and financial capital, which means that financial capital is invested more in financial innovation than in technological innovation. Financial innovations in the frenzy phase are often the output of new theories and metrics for valuing assets, whose prices have begun to look very expensive against older metrics of fundamental value.
In the synergy phase, asset bubbles burst (e.g. the dot.com bubble of 1999/2000), or the big winners of the irruption phase are regulated (e.g. Sherman Antitrust Act of 1890). Bubbles burst when financial capital and production capital recouple. This happens when financial capital decides that the price of an asset, or an entire sector, exceeds the underlying value by a margin that can no longer suspend disbelief. Governments regulate irruption-phase winners when the societal disruption caused by the tech revolution produces growing inequality and political unrest. This unrest often leads to populism, and in democratic states, the result is typically a mandate from voters to politicians for regulatory action.
In the maturity phase, the market for new technology has become saturated. By this point, business culture and societal culture have adapted to life with the new technologies. In the maturity phase, opportunities for investing financial capital seem much less available than they were in the irruption and frenzy phases. When this happens, financial capital searches out new sectors and regions where it can provide the financial foundation from which the next great innovation can emerge.
The last 5 tech revolutions
In each of the 5 technological revolutions since the late 1700's, Perez studies the new technologies produced and the new infrastructure that results from the application of the new technologies.
The most important social effects that emerge from each technological revolution are subject to debate. Here's a possible reduction.
What phase are we in today?
In Chamath’s letter to shareholders above, he argues that over the last 30 years, we’ve lived through the installation period. He’s also arguing that we’re living in the midst of a modern gilded age, which means we're likely living in the latter stages of the synergy phase within the deployment period and have likely entered the maturity phase.
Which is to say that financial capital must start looking for the next great wave of innovation.
If Chamath is right, that we've moved into the maturity phase, then Perez's theory maintains its accuracy from the standpoint of cycle lengths, given technological revolutions have historically played out over ~50-60 years, and the information revolution began in the 1970s.
But what if we were still in one of the earlier phases, and the information revolution still has a lot of room left to run?
In his popular post Debt is Coming, Alex Danco asks whether or not we've actually reached the deployment period yet, and goes on to posit that the answer is, yes and no, writing:
"Tech is not a monolith industry. Silicon Valley angels and VCs still live out in the speculative future, funding wild bets with out-of-the-money call options. At the same time, big tech incumbents can put capital to work at scale, with little guessing involved. Furthermore, we’ve entered the “let a thousand flowers bloom” era of online companies."
Danco goes on to further suggest that there are three tech industries today, two of which are in the deployment period and one of which is still in the installation period.
There are three tech industries today, and two of them are solidly in the deployment period. If you want to put $100 million to work, you could lend it to Andy Jassy or Sundar or Satya and say “Go build a data centre with this”. (Or, even better, securitize it.)
Or you can lend it to Shopify or Clearbanc or Stripe Capital and say, “Go arm the rebels with this.” If your business is making shoes and then selling them online, then you can go get funding that’s committed to help you make shoes and then sell them online. Small merchants are getting access to the same tools, and eventually the same capital, as big giants. There’s no speculation involved: the lender, the platform and the merchant all know pretty much exactly where the money’s going, and what’s expected of them. That's production capital.
Staring out into the future
The first Gilded Age was followed by the Progressive Era. It was also followed by WWI. If Chamath is right, then the next ten years are likely to see heavy regulation of big tech, a surge of progressive legislation, and the movement of financial capital into the next wave of potentially revolutionary technology.
If Danco is right, that we're living simultaneously in the technological installation and deployment periods, then the next ten years are harder to parse, and speak to the pluralism and novelty of a world being eaten by software. Though I didn't wade into it above, the larger point Danco makes in his piece is that the securitization of recurring revenue (e.g. debt is coming) may be the financial innovation that serves to recouple production and financial capital in ways that, as he says, “level up our ability to put capital to work.” Whether or not that would alter the accuracy of Perez' theory remains TBD.
In staring out into the next 10 years, Perez’s framework facilitates thinking about the future in the context of a cyclical past. The interpretation of where we are today and the application of her work to any thesis, whether it be a startup (e.g. production capital) or an investment in the stock market (e.g. financial capital) is a more personal exercise.
Links I appreciated over the last week:
“The past has been badly served by the podcast industry.... But in The Rest is History, Holland and Sandbrook go pirouetting off through the centuries.”
Mapping America’s biggest employers by state from Visual Capitalist
Interesting piece on humanity’s evolving relationship with the far-off future