Why it’s time to bring back –and modernize– government
by Carlota Perez

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Government lag

When Ronald Reagan said in the 1980s that “government is the problem”, he was right in only one sense: that the specific policies that were designed to enable the full deployment of the mass production revolution were inadequate for dealing with its exhaustion and decline. In fact, government did not yet know – and indeed could not know – how to deal with the emerging information revolution.

It was true, as Schumpeter would have said, that unfettered free markets were better suited for the period of experimentation with new Silicon Valley technologies; and open competition was more likely to persuade the old industry giants to modernize with computers and take-up the new organizational paradigm pioneered by the Japanese. However, it was unrealistic to expect markets to protect society from the ravages of creative destruction.

That should have been the role of government. But the Thatcher “TINA” dictum of “there is no alternative” turned off government imagination and condoned the suffering that spread across the working population.

Initiatives and consequences

Ironically, it was not a hands-off government but a proactive one that developed the internet, before handing it over to the private sector. Without the internet the real boom of the mid-1990s, could not have occurred. The information revolution became truly global and the process of creative destruction changed the face of the world economy.

This boom ended in a bubble that was followed by a crash, but this is typical of the creative destruction period of any technological revolution: it happened with canals, with railways, and with the construction boom of the 1920s. Less typical was the second bubble that followed in the 2000s.

After the NASDAQ crash, rather than reining in finance, governments and central banks provided easy liquidity, which was poured into massive off-shoring and housing speculation in a feast of synthetic financial instruments, using the new technology.

Whence now?

Today, after the subsequent crash, we are at a crossroads. As in the 1930s, the depression has revealed the underlying destruction of jobs and, in this case, the additional impact of industrial migration to Asia and elsewhere. Once more, there is an enormous technological potential capable of transforming the whole economy and of increasing productivity in many activities, but finance is not ready to take the risks. It remains entrenched in a casino economy, with trillions of dollars sitting inactive, sometimes in bonds with negative interest rates. Governments are mainly providing the QE that maintains the casino, apparently waiting for finance and ‘the market’ to solve the problems of growth, unemployment and inequality for them.

Worse still, instead of taking advantage of extremely low interest rates to invest and increase wealth production, jobs and, consequently, taxes with which to repay, they have adopted austerity on the budget side and largesse regarding the banks. Yet no amount of QE will move finance to fund the real economy of goods and services, if risk is not diminished.

In the 1930s, Franklyn D. Roosevelt tried out many of the policies that would later bring the post-war boom – but they were received with ferocious resistance from business and politicians, who were equally convinced of the magic of free markets. The prosperity of the “Roaring Twenties” was the source of their conviction, even though it ended in a precipitous crash – just as today. And markets can indeed, bring golden ages –rather than gilded ages– but only when the playing field is tilted by policy to provide a synergistic direction for innovation and investment.

Multiple directions

What happens in these post bubble-crash times, which I have called the ‘turning points’ of each technological revolution, is that there is a multiplicity of directions in which the revolutionary technologies can be taken – but none are sure to be profitable. At this point in the innovation path, after all the initial experimentation, the technological risk is minimal, but the market risk can remain huge. While the early decades of a technological revolution are supply-led, once the main new infrastructures are installed and the innovation paradigm of the new technologies has been learned, it is mainly demand that pulls the economy.

Welfare State as win-win game

That is why the Welfare State established after WWII brought the greatest boom in history. During the war, business discovered that with guaranteed demand, mass production would deliver high productivity and lower costs. They also found out that working with government was good business.

So, when high taxes were established to fund the highway system, suburbanization, the Welfare State and the Cold War, there was relatively little resistance. Mass production technologies were developed before the war, but it was only the application of these post-war directions for development that led to the creation of millions of jobs that turned semi-skilled personnel into middle income consumers.

With pressure from the labor unions and the support of the government, wages rose with productivity and the mass consumption society was shaped to fit the mass production economy. High taxes were accepted because they immediately turned into demand, either as military procurement or as unemployment insurance (guaranteeing continuity of monthly payments), subsidies for farmers (reducing food costs and increasing demand for machinery and chemicals) and pensions (to enable salaries to be spent without worry for the future). It was indeed a perfect institutional framework, suited to mass production within relatively closed national economies.

Diversity breaks the old model

We are now living through a very different technological revolution. It does not homogenize but rather diversifies production and consumption; it crosses borders invisibly and naturally leads to a global economy; it favors skills and creativity rather than semi-skilled repetition.

Globalization has moved production to where labor costs are lower and where new demand is growing; finance operates across the planet unhindered and global corporations establish interconnected value networks across several countries. In practice, the interests of global corporations no longer coincide with the interests of the societies where they originated. This results in stagnating wages, growing income inequality and low job creation in the erstwhile high-wage societies.

A role for government now?

Firstly, look at history, and discover that at this half-way stage of diffusion of each technological revolution, government has stepped in to create demand.

In the UK during the Victorian boom, the government used gunboat diplomacy to open the markets of Japan and China to British goods. In the Belle Époque, they supported or funded the creation of transcontinental railways, transoceanic telegraph, ports for steamships and railways in the countries of the Southern hemisphere, for truly global markets, whether part of the empire or not. In the post-war boom, all the Western democracies built up national consumption and procurement markets.

The next thing is to identify the trends that, if accelerated and supported, could bring forth massive innovation and investment.

I have suggested elsewhere that environmental problems can be turned into solutions, with the help of the current potential of the ICT revolution. Favoring ‘smart green growth’, understood as strongly reducing the tangible content in both GDP and lifestyles would provide a direction for innovation today.  As mass consumption did in the 1930s, it could spread across the whole economy, significantly increasing the productivity of energy and resources.

Catering to lifestyles geared to health, caring, creativity, learning, maintenance, recycling, reusing, and so on, would generate increasing numbers of jobs, countering those jobs replaced by new technology.

In the 1950s-60s, contrary to popular belief, it was not the manufacturing jobs in the new industries that provided all the jobs, but rather the services (including government ones) that arose because of the new lifestyles that these technologies allowed. The same is true today – as it has been in every previous technological shift. Silicon Valley is not the source of future employment, but the technology it provides has the potential to create a vast range of new activities.

Finally, governments need to engage in massive institutional innovation and self- modernization, with the boldness and imagination of Roosevelt and Keynes, and as adapted to our times as their ideas were to theirs. Living in the past has never boded well for business or government; what is necessary now is to proactively embrace the future.


About the author:
Carlota Perez is author of Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages. International consultant and lecturer, she is affiliated as Visiting or Honorary Professor at three UK universities –LSE, UCL and Sussex–, Academic in Residence of Anthemis, UK, and Professor at TUT, Estonia.

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