Financial Bubbles and Economic Crises

By Perez, Carlota; Rutherford, Jonathan | Soundings, Spring 2009 | Go to article overview

Financial Bubbles and Economic Crises


Perez, Carlota, Rutherford, Jonathan, Soundings


In your recent book Technological Revolutions and Financial Capital (http://www.carlotaperez.org/) you argue that it is possible to discern recurring historical patterns of major technical change, accompanied by cycles of financial turbulence - which could be understood as one explanation of the current difficulties of the neoliberal model. Could you briefly outline your main argument?

In the past 240 years, there have been five distinct great surges of development in capitalism, associated with five successive technological revolutions: the original 'Industrial Revolution'; the Age of Steam and Railways; the Age of Steel, Electricity and Heavy Engineering; the Age of Oil, the Automobile and Mass Production; and the Age of Information and Telecommunications. Each goes through a 'free market' period in the early decades, and a more oligopolistic one in the later period, when the state comes back actively. The switch between these periods happens after a major financial crash.

The 'free market' or 'Installation' period of each surge begins in a state of economic stagnation and falling profitability. The 'Age of Information and Telecommunications' began in the 1970s. As the old technologies of mass industrial production matured and exhausted their wealth-creating potential, new information and communications technologies (ICTs) began to revolutionise the generation, processing and transmission of information, changing the techno-economic paradigm for all industries. A new higher level of productivity became possible for all, including a change in optimal market profiles (from standardised to much more diverse), and a deep organisational transformation (from hierarchical pyramids to participatory networks).

During the Installation period, finance plays a crucial role in unleashing the economic potential of the new technologies. Credit and venture capital are essential to break the old industrial trajectories and make radical changes. Alongside the rising power of finance there is growing inequality and unemployment, caused by rationalisation and the higher productivity of the new technologies. Economic growth is uneven, and there is an increasing polarisation between new and old industries and regions.

Installation ends in a 'Frenzy' phase. In the previous surge - for the age of mass production - this was the 'Roaring Twenties'. In the current one it was the 'frantic nineties'. A casino economy takes shape, ramping up speculation and financial bubbles, and creating a super-rich elite. Individualism flourishes. There are significant levels of migration from poor to rich areas. New markets are created; most of the old industries are rejuvenated; others wane and die. The productive sphere is restructured. Speculation in the stock market rides on the success of the new industries. Such major technology bubbles are endogenous to capitalism, and perhaps inevitable. They are the way in which the market system assimilates successive waves of wealth-creating potential. They are Sombart and Schumpeter's 'gales of creative destruction', leaving in their wake new growth opportunities on the one hand, and suffering and losses on the other.

The transition from the old order to the new requires these two or three turbulent decades, after which the manias end in major busts: canal panic, railway panic, the crash of 1929, the NASDAQ collapse. During the transition asset prices decouple from fundamentals, and a breakdown becomes inevitable. It is the growing structural tensions in the system that eventually make it unsustainable. A post-bubble recession (sometimes a depression) then marks the Turning Point, a time for rethinking and reshaping the future that eventually leads to the 'Deployment' period. That period comprises the two or three decades - such as the Victorian boom, the Belle Epoque and the postwar Golden Age - when the new potential can be fully exploited across the economy, significantly increasing employment and gradually reversing the income polarisation of the frenzied bubble times. …

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