Wednesday, February 3, 2010

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.
by Mark Stahlman
… 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.)

…[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. …
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. … 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. … 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. … This culminated in the catastrophic meltdown of 2008 and a historic moment of shifting establishment priorities.
Every crisis ends in such a moment. The last crisis, which began with the stock market crash of 1929, ended with the Bretton Woods agreements of 1944. In each case, once the widespread debacle bottoms out, the speculators of the old era are reined in, expectations are reset, and new business and government elites start to rebuild the world’s governing institutions. After World War II, the locus of power and influence was the oil economy. … The symbols of elite power, including the Rockefeller-built World Trade Center, were all linked to oil.
Only with a similar restructuring can a new period of extended growth, a golden age, be ushered in. This time, the leaders will be linked to silicon. IBM, Intel, and Microsoft will be more important in the next two decades than Exxon or the World Bank. …
When deployment begins, gen­eral assumptions about business shift accordingly. Financial capital, which is relatively indifferent to particular technologies, becomes less of an economic force. Businesses depend more on industrial capital, derived from profits from the sale of goods and services. Executives with a greater interest in long-term stability than in rapid returns are placed in charge of global affairs.
There are clear signs that this is happening now. Financial regulations are being put in place around the world to improve market monitoring, limit leverage, and mandate heftier reserves. …
One telling indicator of this shift from speculation to real growth is the official attitude toward bubbles. In the 1990s, the U.S. Federal Reserve, under Alan Greenspan, took a hands-off approach to speculation. Now the Fed is discussing what actions it might take to cool off overheated markets in advance, and is admitting that its earlier ap­proach to bubbles and risk management was a mistake. New authority is being sought by regulators such as the U.S. Commodity Futures Trading Commission and its European counterparts. …
The Emerging Silicon Economy
Goldman Sachs will probably be part of the new Silicon Establishment, along with dominant enterprises in information and communications technology and others involved in deploying these technologies. For the first time in decades, a commonality of purpose and shared reservoir of knowledge will bridge the many differences among governing bodies. … Both customers and manufacturers have learned to factor life-cycle costs and long-term plans into their decisions.
The priorities of the new technology-based elite include access to larger groups of customers, such as those in emerging nations. Thus, one hallmark of the coming golden age will be its global inclusiveness. Although oppression and slavery may remain widespread, the social systems that reinforced a “haves” and “have-nots” status quo, holding back economic opportunities for the majority of the human population, will give way. …
A new global economic infrastructure is emerging, built on networked, shared computing re­sources and commonly called cloud computing. … A more responsible approach to the natural environment is also gaining ground, one that advocates using energy more efficiently and re­ducing pollution, greenhouse gases, and hazardous waste. Meanwhile, innovative new service offerings will displace entrenched but inefficient medical and financial practices.
…For those who would like to continue rolling the dice of global finance, a more planned and regulated future will feel like an attack on freedom. Adding a billion new people to the global middle class will add to the labor arbitrage that has already begun to affect many lawyers, journalists, software engineers, and accountants. It will now affect professionals in health, finance, and education. …
After a couple of decades, the silicon era will grow moribund, as the oil era did before it. Sometime around 2030, there will be a silicon equivalent to the oil crisis of the early 1970s. Then a new long cycle will emerge. This one will probably be based on the technologies just emerging now: biotechnology and nanotechnology, along with molecular manufacturing (the ability to cheaply build any material from scratch). Then the pattern of frenzied investment will begin again, with another cycle to come.

Author Profile:

  • Mark Stahlman is a Wall Street technology strategist who has been writing about tech-driven growth cycles for more than 20 years.