The Rhythm of Economic History – The Basics of Technology Cycles

Throughout modern economic history, we’ve witnessed distinct cycles of technological innovation that fundamentally transform the economy. These aren’t merely incremental improvements but revolutionary shifts that remake industries, create new ones, and eventually touch every aspect of economic life.

Economic history is not a random series of booms and busts but follows a relatively discernible pattern tied to technological innovation. The brilliant economist Carlota Perez has developed the most compelling framework for understanding these patterns through her great technology surges model. This page outlines the basic components of technology cycles, how they shape the economy, and where we currently stand in the present cycle.

From the Ashes: How Tech Revolutions Are Born in Dying Industries

When titans fall, giants rise. The Information Age wasn’t born in a gleaming Silicon Valley laboratory—it emerged from the rusty remnants of America’s industrial collapse. While the 1970s economy bled jobs and the Rust Belt earned its name, a quiet revolution was brewing in the shadows of shuttered factories.

In 1971, as steel mills went cold and assembly lines ground to a halt, Intel engineers created something that would change everything: the microprocessor. Ironically, they built it for Busicom, a calculator company so insignificant it vanished within three years. Yet from this humble beginning, Intel forged its legendary partnership with Microsoft—a technological marriage that would eventually reshape human civilization.

This pattern is what economist Joseph Schumpeter called “creative destruction”—a ruthless economic wildfire that burns away the old while fertilizing soil for the new. Like technological predators, emerging innovations hunt in packs, “swarming” together to dismantle established industries. Though initially too weak to support the broader economy, these fledgling technologies attract venture capital like moths to flame, as investors gamble fortunes on glimpses of the future.

The Gold Rush of Innovation: When Financial Capital Gambles on the Future

The Gold Rush of Innovation: When Financial Capital Gambles on the Future

In the high-stakes poker game of technological revolution, financial capital doesn’t just ante up—it goes all in. During what economist Carlota Perez calls the “Installation Period,” investors transform from cautious skeptics into bold gamblers, pouring mountains of cash into emerging technologies with little more than dreams of future profits.

Betting on Tomorrow’s Winners

Investors abandon traditional metrics, dismissing trivial concerns like “actual revenue” or “profitability.” Instead, they chase the intoxicating potential of market domination and brand recognition. The trading floor becomes a casino, and all the financial houses desire a seat at the high-rollers’ table.

From Garage Hobbyists to Internet Empire

The personal computer revolution perfectly captures this wild ride. In the early 1990s, PCs were luxury items for the privileged few. Tech enthusiasts hunched over circuit boards in dimly lit garages, painstakingly assembling their own machines and connecting to primitive bulletin boards through modems that transmitted data at a glacial pace.

Then came America Online—AOL—with its iconic “You’ve Got Mail” greeting and carpet-bombing marketing campaign of free installation CDs. AOL didn’t just connect people; it became the poster child for the irrational exuberance of the dot-com era.

The $350 Billion Mirage

AOL’s meteoric rise culminated in January 2000 with the most spectacular corporate marriage in history: the AOL-Time Warner merger. In a breathtaking display of market delusion, the upstart internet company—essentially a glorified dial-up service—managed to claim 55% ownership of a media behemoth that owned everything from HBO to Warner Bros. studios. AOL’s Steve Case, suddenly finding himself atop a vast media empire, must have wondered if he was dreaming.

He was. By 2006, “AOL” had become such an embarrassment that it was surgically removed from the company name—a corporate amputation that marked the end of an era when financial capital’s fever dreams briefly seemed more real than reality itself.

The Turning Point: When Dreams Evaporate and Fortunes Vanish

Picture this: billions in market value disappearing overnight, once-celebrated CEOs suddenly unemployable, and “sure thing” investments becoming worthless paper. This financial carnage marks what economist Carlota Perez dramatically calls the “Turning Point” – the moment when economic fantasy collides with harsh reality.

In 2001, we witnessed this spectacle in technicolor as dot-com companies that had been valued in the stratosphere came crashing down to earth. The chart above highlights this bloodbath in ominous red. Previously lauded tech visionaries desperately scrambled for capital like passengers fighting for lifeboats on the Titanic. Most of their corporate vessels sank entirely, while others were salvaged as floating wreckage – acquired for mere pennies on their once-glorious dollar valuations.

This economic tragedy isn’t a one-act play – it’s a recurring drama throughout history. The 1929 crash opened the Great Depression’s devastating chapter, following the same script but with different characters. And the fascinating epilogue to our 2001 dot-com disaster? Wall Street, seemingly incapable of learning its lesson, simply changed casinos. Financial institutions redirected their gambling addiction toward mortgage-backed securities, engineering yet another spectacular bubble that would burst into the 2009 Great Recession.

Each cycle follows the same devastating choreography, but with costumes and scenery unique to its era – a grim economic ballet repeating through the centuries.

The Unprecedented Stagnation at Technology’s Crossroads

In what should have been a brief transitional phase, our technological revolution finds itself trapped in limbo. Perez’s groundbreaking analysis reveals that we’re witnessing something extraordinary: a Turning Point stubbornly refusing to turn.

The Financial Stranglehold

At the heart of this paralysis lies the global financial sector, now almost wholly divorced from productive reality. Like a casino that’s forgotten its original purpose, global finance has transformed into a self-serving game where:

• The wealthy 20% accumulate assets while the majority struggle with stagnant wages
• “Differential inflation” silently transfers wealth upward as asset prices soar while salaries crawl
• The middle class faces unprecedented contraction, hollowing out society’s core

See this link for more on the Great Middle-Class Contraction

The Perverse Economy of Our Time

Perhaps most disturbing is our new economic model: privatize the gains, socialize the losses. This twisted arrangement manifests as:

• Governments rushing to bail out financial institutions while production investment withers
• Tech billionaires pouring fortunes into space tourism and virtual worlds rather than solving real-world problems
• Critical needs in healthcare, education, and environmental protection are languishing for lack of investment
• Banks are leveraging government liquidity to create complex financial instruments (derivatives) instead of funding productive enterprises

Rather than deploying our technological prowess to address humanity’s most pressing challenges, we’ve created an economy that rewards financial engineering over actual engineering.

See Carlota’s paper on this phenomenon for deeper insights into these troubling dynamics.

Democracy Under Siege

The tectonic shifts in our economic landscape have unleashed a seismic political consequence: the eruption of angry populism across democratic nations. Despite clear technological and economic pathways to a sustainable “golden age,” political willpower remains elusive. Each passing day without intervention strengthens the grip of global finance, making it increasingly impervious to democratic control.

The delay’s architects are numerous and complex. China’s emergence as the world’s workshop breathed artificial life into an aging mass production model that should have evolved decades ago. The sudden integration of post-Soviet and Chinese labor markets flooded the global economy, disrupting natural innovation cycles. Perhaps most troubling is the emergence of a virtually impenetrable “glass ceiling” for digital natives whose revolutionary ideas remain trapped beneath layers of outdated thinking. The old guard—steeped in mass production mentalities—has stifled innovation, driving talented youth toward escapism rather than engagement.

What we witness today is precisely what Perez warned against: not a smooth transition to an equitable, sustainable economic model, but rather a protracted “Gilded Age” where democracy hangs in the balance, caught between obsolete systems and unrealized potential.

The highs and lows of each year for the Dow Jones Industrial Average spanning the entire 4th technology cycle are graphed with a trend line overlaid on top of it. As you can see, the curve is not theoretical.

The Deployment Period: When Production Capital Reigns Supreme

Picture this: after the storm of disruption comes the calm of construction. This is the Deployment Period in Perez’s technology cycle—where chaos gives way to order, and “creative destruction” transforms into “creative construction.”

The once-revolutionary technologies now silently power every corner of the economy. They’re no longer the shiny new toys, but the invisible engines driving unprecedented growth and innovation. Like electricity that went from marvel to mundane, these technologies become so integrated we barely notice their existence.

Our current cycle sits at the precipice of this transition, caught in the limbo of the Turning Point. To glimpse what awaits us, we must look backward to move forward. Since we are still in the Turning Point period of the current cycle, we must look back at the prior cycle for examples of the second half of a technology cycle. See the chart above.

During Deployment, the economic landscape undergoes a profound shift. Production capital—focused on building real-world value—wrests control from the speculative investor capital that dominated earlier phases. The technology survivors, battle-hardened from the Turning Point’s crucible, emerge as the new economic powerhouses, their innovations creating ripple effects of efficiency across industries.

The early Deployment Period resembles a high-stakes game of Monopoly. Cash-rich titans absorb their struggling competitors who bet too heavily during the speculative bubble. Consider General Motors—a corporate Pac-Man that swallowed independent manufacturers like Buick, Chevrolet, and Pontiac through the 1940s and 1950s. Chrysler followed suit by acquiring Dodge. The automotive landscape transformed dramatically—from a diverse ecosystem of over 100 car makers at the century’s start to a handful of dominant players controlling the roads.

When Giants Rise: Standardization and the Golden Age

The Deployment Period doesn’t just bring stability—it ushers in an era where the wild west of innovation gives way to order. Imagine the chaos of early automobiles: some with brake pedals on the left, others on the right; turn signals that varied from vehicle to vehicle; and speedometers that were considered optional luxuries. This anarchy couldn’t last.

As the automotive revolution matured, governments stepped in, forcing manufacturers to adopt uniform safety features and measurement tools. The industry’s winners—those companies that had outmaneuvered, outmarketed, and outlasted their competitors—now channeled their substantial profits back into their operations. This virtuous cycle of investment, growth, and reinvestment created corporate titans.

Why do historians dub these Deployment periods “Golden Ages”? The answer lies in their economic character. The frenzied speculation of earlier phases gives way to measured, productive investments. Growth becomes less explosive but far more dependable—like switching from a roller coaster to a luxury train journey.

Consider General Motors during the fourth Perez Cycle (1940s-1950s): the automotive behemoth we know today was constructed through strategic corporate acquisitions. Once-fierce competitors like Buick, Chevrolet, and Pontiac found themselves unified under GM’s expanding umbrella. Chrysler followed a similar playbook with Dodge. This consolidation was staggering—from over 100 independent American automakers at the century’s start to a handful of dominant players by mid-century. This pattern eerily mirrors our current cycle’s evolution from the 100+ PC manufacturers to a few tech giants dominating the digital landscape.

When Giants Fall: The Twilight of Technological Cycles

Innovation doesn’t die—it fades. In the twilight years of the Deployment Period, the once-revolutionary technologies that reshuffled economies and reshaped societies begin to lose their magic. The economic engine sputters, creating a paradoxical crisis: rising unemployment alongside stubborn inflation—a economic chimera that defies textbook economics where these forces typically move in opposite directions.

The marketplace transforms from a battlefield of ideas to a war of attrition. As creative differentiation withers, products become interchangeable commodities. International competitors—hungrier and leaner—seize the opportunity. The game shifts dramatically from “who can innovate best?” to “who can produce cheapest?” We witnessed this when Japan’s fuel-efficient compacts invaded American roads in the 1960s and 1970s, sending Detroit’s gas-guzzling cars reeling.

By the 1960s, the mighty internal combustion engine—once the thundering heart of economic vitality—had lost its revolutionary pulse. The economy wheezed into the 1970s with the debilitating condition economists would later term “stagflation.” In a tragic display of misdiagnosis, Nixon’s administration prescribed wage and price controls, equivalent to treating pneumonia with cough drops. They failed to recognize they weren’t facing a temporary economic illness but a fundamental technological metamorphosis that no policy Band-Aid could address.

Trapped in Digital Limbo: Our Economic Crossroads

We’re standing at a precipice of unfulfilled technological promise. Perez’s analysis reveals we’re stuck in a prolonged Turning Point of the Information and Communications Technology revolution—a digital purgatory of sorts. The building blocks for a technological utopia exist all around us, yet the political willpower and financial architecture needed to bridge us to the Deployment Period remain frustratingly out of reach.

History offers both comfort and warning. Each of the four previous Great Surges eventually blossomed into glorious Deployment periods and “Golden Ages,” suggesting our current stagnation isn’t permanent. But this extended detour comes with mounting costs. Every day, we remain trapped at this turning point, and the economic damage is compounded and widens society’s wealth chasm. And make no mistake—the mountains of debt accumulating now are essentially IOUs written against future prosperity. We’re raiding tomorrow’s financial yields before they’ve even been prepared.

This cycle theory isn’t merely academic—it’s a powerful lens that clarifies seemingly chaotic economic patterns and signals where the currents might take us next. By pinpointing our position in the larger technology cycle, we can navigate the treacherous waters ahead and position ourselves to catch the wave when we finally emerge into the Deployment Period of the Information Age.

More information:

To better understand technology cycles, the recommended next section describes the models’ history in greater detail.