Four Economic Schools of Thought and the Missing Dimension of Technological Change

Economists have spent generations attempting to understand why economies grow, why they enter crises, and what governments and financial institutions should do when those crises occur. Their answers have produced competing schools of thought, each emphasizing different economic relationships and offering different prescriptions for maintaining stability and encouraging prosperity.

Four influential traditions are examined here: Austrian, Monetarist, Keynesian, and Marxist economics. These are not the only schools of economics, and none can accurately be reduced to a single variable or policy prescription. Each developed substantial arguments about the forces driving economic activity, and each contributed insights that remain useful today.

Yet I believe there is a fundamental problem with relying upon these approaches as the principal explanation for long-term economic transformation. They were largely developed to understand economic relationships within the productive systems of their own times. Technological revolutions transform those systems themselves. They create new industries, reorganize labor, change the geography of production, alter financial incentives, and eventually reshape the institutions upon which entire economies depend.

Understanding a financial crisis therefore requires more than examining interest rates, government spending, money creation, or the ownership of capital. It also requires understanding what is happening to the productive economy beneath those financial events. Is a new technological revolution entering its speculative Installation period? Are established industries losing their technological advantages? Is capital financing new productive capabilities or increasingly supporting asset speculation? Are existing institutions adapting to the economic relationships created by emerging technologies?

These questions lead to Carlota Perez’s framework of great technological surges and to the broader field of evolutionary economics. My own research extends that perspective into six technology supercycles, each developing through five overlapping innovation waves. The sixth, Artificial Intelligence and Autonomous Systems, begins in 2022 and introduces another major transformation before the economic and institutional difficulties of the fifth revolution have been fully resolved.

Why the Technology-Cycle Perspective Matters

The relationship between economic growth and technological development changes as a revolution matures. During its early emergence, a new productive system requires research, experimentation, infrastructure, and substantial investment. Financial capital is attracted to the opportunities created by its extraordinary potential. As commercial success becomes visible, investment can accelerate beyond the productive returns that individual businesses are capable of generating.

The Information and Telecommunications revolution provides a particularly important example. The microprocessor helped establish an expanding system of computing, software, and telecommunications beginning in 1971. During the 1990s, investors poured enormous resources into Internet companies and the infrastructure supporting the digital economy. The resulting speculation produced the dot-com collapse of 2000–2002, even as the underlying technological capabilities continued to develop.

Financial risk subsequently accumulated through mortgage lending, securitization, and increasingly complex credit arrangements, contributing to the crisis of 2007–2009. These events also reflected monetary policy, financial regulation, incentives, and changes in lending practices. But a technology-cycle perspective asks an additional question: how did the financial expansion interact with an emerging digital productive system whose economic and institutional transformation remained unfinished?

During earlier technological revolutions, financial crises were followed by varying degrees of institutional adaptation and wider productive Deployment. The automobile and mass-production revolution eventually supported the broad postwar expansion of the 1950s and 1960s. Growing industrial capabilities, infrastructure, education, wages, and consumer purchasing power helped establish an expanding middle-class economy.

The fifth revolution has followed a more troubling path. Digitalization enabled companies to reorganize manufacturing, administrative work, and technical capabilities across international boundaries. Platforms acquired extraordinary control over access to customers and markets. Financial asset ownership became increasingly important to the distribution of economic rewards. Many established middle-class communities struggled to maintain the productive relationships that had supported their prosperity.

Meanwhile, the global middle class continued expanding as industrial development spread into emerging economies. The same technological revolution helped create opportunities for hundreds of millions of people while weakening the economic position of some established industrial communities. An adequate economic model must be capable of explaining both developments.

George Box famously observed that all models are wrong, but some are useful. That is an appropriate standard for examining the four economic schools below. Each offers valuable insights into particular economic relationships. The challenge is to incorporate those insights into a larger model capable of explaining how technological revolutions transform the economic environment in which those relationships operate.

For the broader historical interpretation, see The Six Technology Supercycles and Disruptions Dawn: From Steam to Silicon.