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I just finished this book by Carlota Perez, written in 2002, and I highly recommend it to anyone that is interested in how technological revolutions play out over time. 

A couple of months ago Fred Wilson mentioned it on his blog and it was out of print. I had to buy it used. But probably due to his recommendation it’s now available new on Amazon.

The book seems to be accurate and provides very good insight as to where we are now in what Ms. Perez calls the current revolution, the “microprocessor revolution”.  According to her, the microprocessor revolution started in 1971 and is still playing out.

Each technological revolution takes roughly 50 years from beginning to end with a new technological revolution starting and overlapping the end of the previous. 

It starts with the Irruption phase, where financial capital shifts from the previous revolution to what is the beginning of a new revolution. 

What follows is a Frenzy.  For the microprocessor revolution, think 1990’s, where huge amounts of investment moved into internet based companies.  There is a divorce between real value and paper value (the paper millionaires of the late 1990’s).

Inevitably, a crash occurs.  Ms. Perez calls this the Turning Point.  In a follow-on response to an e-mail (see below), she claims that we are still in the Turning Point phase.  This phase can go on for years, as it did in the “mass production revolution” from 1929 to 1940.  And there can be multiple crashes within a Turning Point phase. 

In the Turning Point, financial reform is also required to create a shift of investment methodology from short-term gain to long-term sustainable profits. Financial Capital (fast moving money, think hedge funds, private equity firms, large financial firms) realigns itself with Production Capital (investment capital, slow moving, usually in the hands of corporations, long-term investments for future profits).

Once the appropriate conditions have been created, we enter a gilded age.  A period of near full employment and substantial profits for corporations.  This phase is called Synergy and can last 10-20 years or more.  The Synergy phase was last seen during the “mass production revolution” from 1940 to 1960.

Finally, we enter the Maturity phase.  Fast-growing and highly profitable sectors of production capital begin to reach limits to growth.  Financial capital begins to search for new investments in innovative technology, and a new technological revolution develops.

Ms. Perez outlines the 5 previous technological revolutions in this chart below:

Interestingly, I shared this book with Andrew Orobator, an intern that I have working with me on a project at Deutsche Bank.  He was intrigued and sent an e-mail to Ms. Perez inquiring as if we were in the Turning Point.  Here is her response:

Dear Andrew,
Thanks for your interesting question.
NOT ALL BUBBLES ARE MAJOR TECHNOLOGY BUBBLES
First of all, I want to suggest that you read my 2009 article ”The double bubble of the turn of the century”. If you have access to academic journals you can download it from the CJE website. If not, just download the CFAP/CERF working paper which is basically the same thing. The links are in my webpage.
Link: http://cje.oxfordjournals.org/cgi/content/abstract/33/4/779
http://www-cfap.jbs.cam.ac.uk/publications/downloads/wp31.pdf

There you will see that not all bubbles are technology bubbles and not all technology bubbles are major technology bubbles. The only ones that define the phase of frenzy of each great surge are the major technology ones.

Figure 7.2 in the book shows many medium and minor bubbles that are relatively isolated and do not change the overall economic conditions. But of course each affects a sector and can ruin several investors while having made some millionaires.

THE CURRENT MINI-TECHNOLOGY BUBBLE IS NOT LIKE THE NASDAQ ONE OF THE LATE 1990s
It has been spurred by the prices paid by by Google and Microsoft and the others when making acquisitions. These giants are in the process of defining themselves and defining the conditions of competition among them. This is typical of turning points. I wrote a short note for a European journal explaining why this bubble is not like the NASDAQ. The link is in my webpage
http://theeuropean-magazine.com/275-perez-carlota/277-the-social-media-bubble

But of course whatever the origin, the social networking stocks are overvalued and at some point there will be a panic and the whole thing will come crashing down. After that there will be some survivor giants that will define the social networking market and others that will be swalloed or disappear. It is a self-contained mini-bubble affecting a specific sector and possibly the economy of Silicon Valley.

IN MY OPINION WE ARE NOT IN SYNERGY YET
We are indeed at the turning point. The major bubbles have crashed and many things can happen now depending on the policies applied. For synergy to happen we need to change the incentive system of finance. It should become less profitable to invest in the casino and more profitable to invest in the real economy That is how production capital gets to shape the direction of growth and innovation and how we get a full recovery in the real economy.Otherwise we will have jobless growth and successive recessions and crashes. A sustainable global golden age is possible with the current technological potential but it will require very intelligent and strong leadership on the national and global levels. You can watch a video about this in YouTube
http://www.youtube.com/watch?v=svRyx2qh-jo

BUBBLES AND THE IMPORTANCE OF VIEWPOINTS
If you are an investor what you want to know is whether the valuations in the stock market are inflated or not and whether you have to get out just before a bubble bursts or stay in if the values are right.
If you are a policy maker or central banker a strategist for a big corporation or an economist trying to understand where the economy is going you want to know whether the apparent prosperity in the market is going to suddenly crash and affect everybody.

Therefore, my answer to your question is:
It is defintely a bubble for investors (including Deutsche Bank), but
it is not a bubble for the US or world economy (as the NASDAQ and 2007-08 collapses were.

I wish you fun in the debate and great success at Carnegie Mellon.
Carlota Perez