INTRODUCTION: CARLOTA PEREZ AND EVOLUTIONARY ECONOMICS

Rainer Kattel with Wolfgang Drechsler and Erik S. Reinert

Any reader of Carlota Perez' work who has been following the global financial meltdown beginning to unfold in the Fall of 2008 must pinch herself as 'it' is indeed happening again. 'It' is not only a financial crisis of enormous proportions, but in fact, what Perez calls a turning point in the middle of the diffusion of a techno-economic paradigm. Such turning points have taken place rather regularly since the Industrial Revolution with roughly half-century intervals between them, and they consists essentially of two aspects: huge financial meltdown (think of the canal panic of 1793, the railway panic of 1847, or the great depression following 1929 stock market crash) followed by an institutional renewal of historic dimensions (think of the Victorian boom preceded by the repeal of the Corn Laws and introducing legislation to improve factory conditions and urban sanitation, professionalization of the civil service, etc., or the welfare state reforms and the Keynesian policies and institutions facilitating the post-World War II Golden Age). Accordingly, the Perez framework predicted that the turning point for the current ICT-led techno-economic paradigm should have taken place during the first years of twenty-first century. What started as a bursting of the dot-com bubble in 2000 ended in 2008 as a full-blown global financial crisis. This is, then, the turning point and thus, we are confronting the need for sweeping institutional changes to bring forth a golden age based on the global spread of the growth potential of the current paradigm based on information technology. Indeed, while successive technological revolutions and their techno-economic paradigms are, as Perez shows, the fundamental feature of capitalism after the industrial revolution, the turning points in the middle of these paradigms are historic occasions when capitalism is reconfigured to save itself from itself.

The fact alone that Perez' framework is proven to be accurate before our own eyes should give sufficient justification why we celebrate her 2009 round birthday with a scholarly homage – with a discussion of her work. However, in this brief introduction, rather than attempting a Gesamtschau of her work, let alone of its reception so far, we merely want show that her work, in particular her seminal 2002 book Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, has made significant and lasting contributions in three specific areas connected to Evolutionary Economics, and to show how she has contributed, and has the potential to contribute even more significantly, to the development of that school of thought. In doing so, we interpret Perez' work, inevitably, from our perspective and not from hers, so that it may very well be that she herself might be the most surprised by what we argue her work to mean, and to imply. According to our perspective, then, Perez' framework helps to explain, first, socioeconomic history since the industrial revolution on a technological basis without being deterministic; second, it creates a systematic theoretical framework to complement evolutionary economics with long-term macro- dynamics; and third, it shows how a viable methodological alternative to mainstream neoclassical modelling can be founded. In what follows, we will discuss, albeit briefly, her contribution to each of these areas and conclude with some perspectives her framework opens up for new significant research.

The Framework

We begin our discussion of Carlota's work with a brief summary of the concept of techno-economic paradigms. This is how Perez sums up the ideas of great surges and paradigms:

There has been a technological revolution every 40 to 60 years, beginning with the Industrial Revolution in England at the end of the 18th Century; each has generated a great surge of development, diffusing unevenly across the world from an initial core country. ... The great wealth creating potential provided by each of them stems from the combination of the new technologies, industries and infrastructures with a set of generic technologies and organisational principles capable of modernising the rest of the economy. The resulting best practice frontier is superior to the previous one and becomes the new common sense for efficiency – a new techno-economic paradigm – that defines the guidelines for innovation and competitiveness. ... The propagation is highly uneven in coverage and timing, by sectors and by regions, in each country and across the world. (Perez 2006)

The paradigms describe the direction in which technological change and innovation are most likely to take place (and are most profitable) in a given period: which organizational forms and finance are conducive to innovations, which technological capabilities and skills are needed or should be developed, and so forth. Table 1.1 summarizes these paradigms since the Industrial Revolution.

However, the surges consist of two halves, in which the paradigm develops and diffuses under very different conditions as shown in Figure 1.1.

The framework thus shows how a competitive free market economy is, first, necessarily driven by clusters of innovations and, second, how innovations in turn thrust economies into long surges of leaping productivity that enables the creation of new industries, jobs, products and services accompanied by the destruction of the old ones. Perez shows how this process of what Schumpeter called creative destruction repeats itself periodically in form but never in substance (there will not be another dot-com bubble, but there will be similar technology-driven bubbles) and how this repetitive character of the free market economy leads to periodic institutional renewal.

The framework is indeed so ambitious that it tries to explain the entirety of post-industrial revolution capitalism and to show why specific technologies, innovations and regions thrived at given points in time. It is, however, important to note that the framework is not deterministic; it does not, for instance, tell what will be at the core of the next technological revolution. The framework simply indicates that there will be another surge starting when the current paradigm reaches maturity, probably in 20–30 years time, followed in another quarter century or so by similarly upsetting financial troubles as the ones we are currently experiencing. In fact, what she suggests is that this repetitiveness is the very logic of capitalism (2002, 166).

The Perez framework fuses two very different schools of economic thought into something truly original. One the one hand, her framework builds on nineteenth-century cycle and crises theories that culminate in Kondratiev's work on long waves of economic development, and that at the same time paved the way for Keynes' thought. On the other hand, it is strongly rooted in (neo-) Schumpeterian or evolutionary research on innovation, technological trajectories and creative destruction associated with the names of Richard Nelson, Bengt-Åke Lundvall, Giovanni Dosi and in particular, Chris Freeman, with whom she has sustained a long-term collaboration – all of them contributors to the present Festschrift. The former scholars offered the questions and the historical long-term framework and the neo-Schumpeterians explained how innovations, working through individual companies and industrial sectors, end up changing whole economies.

In the neo-Schumpeterian camp, Chris Freeman is almost the only one to have tackled long-term structural change and macroeconomic issues. In his Economics of Industrial Innovation (1974) he discussed the development of New Technology Systems and in Technology Policy and Economic Performance: Lessons from Japan (1987) he introduced the concept of National Systems of Innovation looking at the interconnections between technology, economics and institutions. He also developed the notion of long waves, following on from Kondratiev and Schumpeter, using a historical approach (see 1982 with Clark and Soete, 1988 with Perez and 2001 with Louçã). He is rightly considered a leader in this field.

Full versions of Kondratiev's writings on long waves are available in English only since 1998. The 1935 publication in the Review of Economic Statistics was a heavily abridged version of the original and left the impression that Kondratiev did not explain why long waves of development actually take place (see also Perez 1983). However, in the original 1926 publication Kondratiev delves at length into the question of the causes of long waves (1998, 53–60). He explains that 'It is clear ... that the rising wave of a long cycle is associated with a renewal and extension of the main capital items, with radical changes and regrouping of the main productive forces of society' (1998, 57).

Yet, the dating of Perez differs from Kondratiev's by about 20 years, i.e., Perez surges or paradigms start about two decades earlier than Kondratiev waves (Kondratiev 1998, 36). While Kondratiev argued that before every rising wave significant technological revolutions are taking place, he dated the waves according to a few key aggregate economic data such as interest rates, trade volume, etc. According to him, during the rising half of the wave, all such aggregate indicators rise, and during the second half, they are respectively falling. Thus, Kondratiev's rising halves of waves represent, in fact, the deployment and maturity periods in Perez' paradigms (the decades after the turning point) when the potential of a technological revolution is being fully realized. However, this also (partially) explains why Perez does not use in her later writings the term 'Kondratiev waves' but rather great surges of development. What she means is substantially different from Kondratiev. The difference is the neo-Schumpeterian core of her thinking. She follows the whole trajectory of each technological revolution from its irruption as a promise in a basically mature industrial landscape to its full diffusion and final maturity, when it is in turn replaced. What she singles out is the sequence in the process of assimilation by the economy and society.

Around the same time of Perez' first publications on surges and paradigms (1983; referring to them as Kondratievs and 'styles'), Dosi (1982) had published his highly influential article on technical paradigms. That was the same year that Nelson and Winter (1982) published their seminal Evolutionary Theory of Economic Change where they referred to routines and technological regimes and when Freeman, Clark and Soete (1982) brought out Unemployment and Technical Innovation: A Study of Long Waves in Economic Development. The impact of the information revolution had obviously generated a fruitful academic ferment in the neo-Schumpeterian community.

Although Dosi's analysis focuses on individual technologies, it fully develops the notion of a directionality in technical change (see further Tunzelman et al. 2008). As later expressed by Dosi and Luc Soete (1988, 418): 'Technology ... cannot be reduced to freely available information or to a set of "blueprints": on the contrary, each "technological paradigm" with its forms of specific knowledge yields relatively ordered cumulative and irreversible patterns of technical change.' This will allow Perez to refer to her concept as a meta-paradigm, serving as an umbrella for the various individual trajectories.

Similarly, Nelson and Winter's (1982, 258–259) technological trajectories and regimes refer to sets of skills and technological solutions that in competitive environments obtain specific path-dependent characteristics and thus give rise to paradigmatic changes in specific companies and/or industries.

Freeman et al. (1982) go much further into the macro-level by analyzing new technology systems and focusing on massive processes of technological diffusion rather than on individual innovations or even single industries.

These concepts are highly valuable because they are developed bottom-up from individual skills and company-level behaviour towards a higher level of complexity and help to explain how Schumpeterian creative destruction shapes economies and competitive environments. They represent great advances in understanding how economies work, and they form the core of evolutionary theory today. Yet, in our view, evolutionary theory, despite its indubitable merits, has avoided certain questions. First, although it analyses radical innovations and their life cycle and even their clustering, it does not discuss the issue of why certain technologies and institutions emerge and prevail at specific points in history. Second, evolutionary theory has largely remained a microeconomic theory with ramifications towards the meso-level of industries, sectors and regional clusters. The most developed aspect at the macro-level has been the notion of 'National Systems of Innovation'. That concept has allowed the study of the interactions between firms, academia and the institutional context in the processes of innovation and its implications for growth and the dynamics of national economies. It has not systematically tackled the classical area covered by macroeconomics, neglecting in particular the connections with finance. Third, we would argue that there has not been a determined effort to develop a methodology for macroeconomics that is adequate to an evolutionary perspective. Instead, they have persisted in trying to put evolutionary thinking into mathematical models. This may have been inherited from Schumpeter himself, although not his interest in finance. Below we attempt to show that the framework developed by Perez is an important complement to evolutionary theory, which sheds light on how these shortcomings could be overcome.

Explaining History

Evolutionary theory, in particular the Schumpeterian kind, is often at its best explaining why and how a certain institution (for instance, patents) or a product (for instance, VCRs) came about and why it was successful in the given particular context – or the opposite (see also Janeway's contribution in this volume). Evolutionary theory is equally helpful, especially in its institutionalist version á la Thorstein Veblen or John Kenneth Galbraith, in bringing forth grand narratives about a particular age (further on institutionalism, see Hodgson 2004). What evolutionary theory lacks is the connecting theoretical edifice explaining how and why a particular product or institution is not simply an outgrowth of an isolated context but rather part of an interrelated process that can partly explain why it happened then and there. The lack of such an edifice is one of the shortcomings for economic policymaking based on evolutionary ideas: every successful case (company, region, country) seems highly idiosyncratic and unique. The Perez framework provides precisely such an edifice. We illustrate this by one brief example.