Economist and author Carlota Perez provides a more positive technology-based spin on the "secular stagnation" theme outlined in my Tuesday column. While not underestimating the short-term challenges, the London School of Economics professor predicts the global economy is about to enter a new golden age.
Ms. Perez believes the era of the microprocessor, kicked off by Intel in 1971, is the fifth technological revolution of the past 240 years. The spread of digitization through the economy is following the same predictable pattern – financial boom, financial bust, then production boom – that created vast wealth and higher living standards during previous technological advancements.
In her paper The Advance of Technology and Major Bubble Collapses, Ms. Perez writes that technological revolutions occur in two stages. During the first, called the Installation Period, "investment is led by financial capital, which funds the technological transformation … until it decouples from the real economy [and] ends in catastrophic collapse."
The collapse of the technology bubble in 2000 is the obvious recent corollary of the theory. But Ms. Perez also includes the financial crisis of 2008 as a symptom of the end of current technological revolution. She writes, "Securitization of mortgage debt would never have been possible without computers and sophisticated software."
The good news is that, according to Ms. Perez's research, the painful part of the transition is largely complete and the second, Deployment Phase "has 20 to 30 years ahead, while serving as a platform for innovation in all sectors and for opening new radical paths in production and lifestyles …. The result is a quantum jump in innovation and productivity for all."
The politics surrounding expansion of the welfare state is a sticking point that might delay the transition from Installation Phase to the new golden age. Ms. Perez writes, "the last time around (after the crash of 1929) it took more than a decade and a world war to establish the Bretton Woods agreements and the welfare state, which were an appropriate framework for deployment of the mass production revolution."
The distribution of wealth in a global economy with rapidly improving productivity is a challenge governments face. Switzerland, for instance, is considering a program of guaranteed income that may provide a partial solution.
In the mid-term, Carlota Perez's outlook is an optimistic and plausible alternative to the dire forecasts that arise from the secular stagnation thesis. Investors have been confronted with so many violent market upheavals in recent years – the Asian financial crisis, the technology bubble and the financial crisis – that it's become all too easy to be pessimistic about the future.
Ms. Perez, with substantial historical backing, is suggesting that the worst is over and we're about to reap the benefits – a sustained period of wealth creation and rising living standards. Investors should be aware that we're talking long-term trends here. There's no hurry, even in the sectors Ms Perez believes will benefit most: biotech, bioelectronics, nanotech and new materials. Still, even if it's a couple of years off, it's a pleasant change to consider an economic environment with the wind at investors' backs.