Industrial/technological revolutions, economic cycles and the entrepreneurial State

By Deborah Liebart, in collaboration with Marco Manca. First appeared on DisputatioMagistrorum. DOI: 10.5281/zenodo.4771461

Licensed under the CreativeCommons BY-NC-SA 4.0

Last time we discussed risk management, proposing a parallel between the banking system crisis (2008) and the health crisis (Covid-19), and some of you contacted us asking for a follow-up of our article¹. So, here it is !

"Louisville Ky ~ Louisville City Hall ~ Pediment ~ Progress" by Onasill ~ Bill is licensed under CC BY-NC 2.0

Today we have chosen to dwell on industrial/technological revolutions and economic cycles. According to Carlota Perez works², (drawing upon Schumpeter’s theories), both are closely interconnected and opportunity explosions focused on specific industries, lead to the reccurence of financial crises. In other words, if and when new technologies creates an important financial bubble, it creates a temporary disastrous effect for global economy. Perez, by analizing History, (the age of railways, steel and electricity, channels for water transport, automobile mass production with Taylor’s and Ford’s theories, information revolution…), highlights major problems of our contemporary western society, by using and extending Schumpeter’s theories and Kondratieff’s models.

At the heart of Perez’s work, the disruption and technical-financial paradigm³, but also the central question of the role of institutions and the re-definition of a new social contract, fruit of this massive disruption, as a « mass democratization » emerging from technological and industrial revolutions. If, initially, according to Schumpeterian’s theory, technological revolutions, (whatever their nature), have a disruptive nature, (creative destruction⁴), they make it possible, once the pendulum is properly balanced between private interests and the common good, to create wealth and value to the population as a whole. Let’s stress that is only possible if and when, the capture of value and wealth in the hand of few, ends, i.e. when the financial bubble blows up, in reality.

Using the Long Cycle Theory⁵, Carlota Perez defines three periods, composed of two large periods separated by an inflection point :

1. a period during which empowering tech emerge, causing a major disruption of the contemporary model with intense financial investments, and creating a financial bubble in which monetary capture by a small number is at its peak. Disruption is a phenomenon causing sudden instability and whose main vector is innovation applied to the value chain. Economic sectors that cannot survive in competition are disappearing, creating a significant wave of unemployment.

2. the inflection point, which is the moment of rebalancing between private and collective interests, a change of context with an uncertain outcome in which institutions play a determining role. For Perez these inflection points have always been realized through wars or revolutions. It is an important point, for we still have to invent a way to see this transition happen without spilling blood.

3. a period of wider development taking advantage of the new technological paradigm leading to a « golden age » at one condition : the rebalancing between private and public interests.

If, on the contrary, this rebalancing does not exist, the « golden age » becomes impossible and only « the gold-plated age » remains, a period of great capture of wealth by an elite and a massive pauperization of the major part of the population not having access to the benefits resulting from the new technology (discovered or invented), in a world in full transformation and in which the main basic economic indicators show an ongoing decline.

What has changed in recent decades, compared to past centuries, in the technological process is the acceleration of time, one hundred years for the democratization of the automotive revolution and approximately ten years for the smartphone… Internet, social networks and big data have radically and very quickly changed our relationship to the world, space and time, and if IT was the business of IT specialists, digital technology is everyone’s business, as consumers but also as citizens with regard to its regulation by the competent authorities.

The transformation from the “gold-plated age” to the “golden age” may be achieved at one condition, the role played by the State, widely denounced by dominant contemporary economic theories. The 2008 crisis revealed that even the most orthodox liberals could convert to radical State interventionism, with The Economist then writing “Re-bonjour, Monsieur Colbert”.

French mercantilist variant Colbertism, which is an economic doctrine that bases wealth on the accumulation of gold and silver, State interventionism, protectionism and the establishment of commercial monopolies, is denounced as an obstacle to the freedom of enterprise and trade, according to liberal theoricians denouncing the monopolies of the Indian company, during the eighteenth century… If capitalism as an economic system has existed for a long time, it is important to note that like everything else it has adapted and changed over time, liberal capitalism, (“laisser-faire et laisser passer”), appearing only in the second half of the 18th century, previous periods experiencing more protectionist and more supervised systems.

In the same way, it seems important to recall here that finally one of the greater world thinker of capitalism, Marx, was neither a liberal theorist, nor a defender of the doctrine of the « laisser-faire » and that his work influenced greatly Schumpeter’s theory of creative destruction which, in reality, extends a concept pre-existing in Marx’s theory… Capitalism is adaptive and polymorphic, the one we are currently living in, particularly exclusive, built on constantly growing inequalities, could therefore not be neither immutable nor optimal, contrary to what the dominant contemporary neoliberal doctrine relays. Other paths could be explored, without jeopardizing the political, social and economic architecture of current Western societies.

In 2008, even the most liberal requested the intervention of the State to save the banking system, to save the company… Once again the re-use of the smart/trickster rhetorics of trickle down, despite it being long dead⁶… However, today, they denounce once again the interventionism of an hampering State, preventing the economy from functioning normally⁷…

If the State and institutions also undergo this phase of disruption and adapt to paradigm shifts, they seem to experience it later than the economic sector, perhaps because of their inertia. If the State and technology fail to match, the economy stalls, this moment of destructive creation having to be a moment of social consensus, or new social groups appear to replace the old ones : land aristocracy, industrial bourgeoisie, peasantry, working class…. In reality, this argument may be nuanced as we know the adaptability of certain groups to paradigm shifts⁸. What seems clearer is that in order to succeed in its transformation, each new economic cycle requires a cultural transformation and an adaptation of the institutional framework. This is the whole underlying issue of the American Civil War, the adaptation of the status of the worker to the industrial model. It is also the transformation of human geographies, the rural exodus and the creation of large industrial metropolises during the English and French industrial revolutions.

Why do economies seem to struggle so hard to find a balance? Is it really State interventionism that blocks the mechanism of innovation by overshadowing its development ? Let’s take a closer look…

In fact, if we take a closer look at the relationship between State and innovation, we see that far from hindering its development, the State is in fact the first of its supporters. How, you might ask ? Simply by the colossal sums invested each year by States in projects with high potential but also high risk, a risk that private investors do not want to support⁹. Still skeptical ? Ok, let’s move from theory to practice and look at the R&D investments made by governments in recent years.

If we ask you the common point between Google, Tesla, Space X, SolarCity, Apple, you will no doubt tell us that they are companies at the forefront of new technologies and the 4.0 revolution. You might tell us that these are the most profitable companies in the contemporary world ? If we tell you Moderna, AstraZeneca, BioNtech ? You will probably tell us that the common point of all these companies is to work on the development of a vaccine intended to end the contemporary pandemic… And all your answers will be correct, in part, but more widely, the real common point of all these companies being in reality a colossal investment of the States in their development and in their research, from their beginning and in their market with the advance contracts (with waivers for responsibilities about adverse events¹⁰)… Even vaccines whose public funding R&D component is officially low, were pursued in development because of large advance contracts by States.

Be careful, (we warn you ! :), we will break the myth of innovation ignoring the preponderant role of the State, the speech of some large companies denouncing the weight of taxation and accusing it of preventing them from investing in new projects.

So, let’s go ! To begin with, a small non-exhaustive list of cutting-edge innovations that have changed the world in the 20th and 21st century and the investors who assumed the original risk, without counterpart and without guarantee of success.

Internet ? Publicly funded : US Department of Defense, particularly DARPA¹¹ / CIA / NFS / CERN / Pentagon…

Silicon Valley¹² ? Publicly funded.

Tesla ? Solarcity ? Space X ? : publicly funded : 4.9 billion in public money¹³.

Covid-19 vaccine¹⁴ ? : publicly funded¹⁵.

How many companies funded by the Small Business Innovation Research public investment program ? More modestly in Europe, how many projects funded by the Horizon 2020 program ? So much investment in applied research that no one other than States want to take the risk for and that companies then use to generate colossal revenues…

Let’s come back to the covid-19 vaccine… The discoveries that have made it possible to understand some mechanisms against the virus are in fact the fruit of many years of subsequent research, also financed by the States¹⁶ and carried out, in part, in the American and European national health institutes. BioNtech for its work received $ 445 million¹⁷, Moderna received $ 483 million from the Biomedical Advanced Research and Development Authority, (BARDA)¹⁸, but also the Defense Advanced Research Projects Agency, (DARPA). AstraZeneca and Oxford received $1 billion in US public funds¹⁹, and millions in EU public funds²⁰, however, if “AstraZeneca has committed not to profit off any COVID-19 vaccines ‘for the duration of the pandemic’ and to sell the vaccine at cost, in a deal with Oxford University, another deal to develop a COVID-19 vaccine with Brazilian public research body Fundação Oswaldo Cruz (Fiocruz), recently revealed that AstraZeneca has given itself the power to declare the pandemic over as soon as July 2021²¹”. In reality, a non profit vaccine is deeply and precisely, a return on investment that citizen who finance these investment and research policies through their taxes or through the issuance of debt is entitled to demand.

Remember that most drugs were funded by the National Institute of Public Health (NIH), that is to say without risk capital, without even funding from the pharmaceutical industry…

However, during this time, it appears that between 2003 and 2013²², the 500 S & P 500 companies in the United States, spent more than half of their profits to buy back their own shares to make them rise artificially rather than investing in R&D… Pfizer, for example, has spent $ 139 billion on these stock market operations and Apple, $ 1 trillion since 2018. So, please, let’s stop stigmatizing State obstruction and think about what that implies in terms of results but also the nature of the State.

What is the real nature of Western States in reality, if not to be entrepreneurial States²³ ? Institutions that invest in high-risk projects, supporting fundamental and applied research. However, public investment is present to subsidize these projects which, when successful, generate significant economic development. Perhaps the path to be taken is that of state investment ? The Covid-19 crisis will show us the entrepreneurial logic of the pharmaceutical laboratory model²⁴.

Progress and research, yes, of course, funded by tax, the common good, yes, it’s ok, but not for the unique good of corporate account books, stock prices, or shareholders who increasingly resemble the figure of the “idle” widely denounced in the 18th century during the luxury debate which shakes up the Enlightenment, century in which “laissez-faire”-capitalism was theorized, seeking to define the concepts of wealth and value, today at the heart of our questions.

All of this discussion can really come down to one basic question : what is value ? Is it just the market price ? “Use value” ? Faced with these questions, we quickly realize that value is not easily objectively measurable in reality… and thus, we understand that public institutions that have no market price, have a value that greatly contributes to the general prosperity… and that perhaps its role is more important than it seems in the light of the development known during “Les Trente Glorieuses”, historic period in which the entrepreneurial State made a significant contribution to the GDP of the most developed economies. Maybe that’s what we should just be thinking about, actually… Next time, we will dwell on the « crisis exit » scenarios.

1https://disputatiomagistrorum.wordpress.com/2020/12/07/subprime-and-covid-19-black-swans-or-symbols-of-an-ineffective-risk-management-approach-the-cost-of-applying-the-normal-law-to-the-health-care-system/

2http://www.carlotaperez.org/pubs?s=tf&l=en&a=technologicalrevolutionsandfinancialcapital

3http://www.carlotaperez.org/pubs?s=orgchg&l=en&a=technologicalrevolutions

4https://en.wikipedia.org/wiki/Creative_destruction

5J. Schumpeter, Business Cycles, A Theoritical, Historical and Statistical Analysisof the Capitalist Process, 1939. In that work Schumpeter referred to cyclical movements of approximately fifty years in length as ‘Kondratievs’, after the Russian economist N. D. Kondratiev, who was one of the first writers to attempt to provide statistical evidence of such phenomena.