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13 New technologies: Opportunities and threats

Paulo Rodrigues Pereira

Information technology
New and advanced materials

Long waves, technological systems, and techno-economic paradigms

The discovery of cyclic phenomena of long duration in economic activity is generally attributed to the Russian economist N.D Kondratiev, who in the 1920s described the existence of long waves in the world economy.

Kondratiev [27] based his theory on the observation of trends in the fluctuation of nineteenth-century economic indicators (mainly prices), and he explained the occurrence of long waves in terms of the durability and production period of, and amount invested in, particular types of capital goods. The specific source of the long wave was the tendency of investment in these basic capital goods to occur in clusters, due to the availability of loanable funds. Kondratiev did not explicitly include the role of technical change in his analysis of the formation of long waves, but he suggested that when a major cycle of economic expansion was under way, inventions that had remained "dormant" could find new applications. However, Kondratiev failed to make the crucial distinction between inventions and innovations. (An invention need have no practical consequences, whereas an innovation has the sanction of the market.)

The notion of long waves (or Kondratiev cycles) has since been used to refer to movements in economic variables of 50 to 60 years, in which periods of rise and decline in economic activity alternate. Nevertheless, it remains a controversial item in economic theory [16].

A contrasting interpretation to long waves was later provided by Joseph Schumpeter [50] in his classic study of business cycles. For Schumpeter, the source of fluctuations in business activity is the innovation process, which he regarded as essentially discontinuous due to the nature of entrepreneurial activity. He emphasized the intrinsic instability of the capitalist growth process, rather than the general economic equilibrium and the smooth process of substitution and adaptation beloved of neoclassical economic theory. The variations in fluctuations between the three types of cycles he identified - short, intermediate, and long cycles- is accounted for by the differing impacts of different types of innovations, the long cycle being associated with fluctuations in "basic innovations," such as railroads, electricity, and motor vehicles. These "basic innovations" would cluster in the depression and early upswing phases of the Kondratiev cycle, causing surges of investment associated with "bandwagon" effects of the diffusion of new technologies related to these basic innovations. He insisted on the explosive growth of new technologies in some sectors and relative stagnation in others: once a major innovation had demonstrated profitability, this led to an imitative "swarming" behaviour as many firms rushed to get on the "bandwagon" of the new growth area. It was these spurts of innovation-related investment, caused by the simultaneously creative and destructive effects of technological innovation ("creative gales of destruction") that Schumpeter believed led to economic imbalances and particularly to cyclical phenomena in the economy as a whole and to the changing location of technological and economic leadership, both within countries and between countries. Economic growth is not merely accompanied by the introduction of new products and processes, as in neoclassical theory, but is driven by these innovations. Technical change is thus endogenous to economic progress, rather than a marginal exogenous factor. However, Schumpeter excluded social and institutional factors from the causal mechanism of cyclic economic behaviour.

The need to understand the basic forces underlying the post-war periods of economic recession, the failure of mainstream economic theories to account for them, and the recognition of the persistence and structural character of the economic crisis have revived the debate on the existence and explanation of long waves, and particularly on the role of technological innovation as the driving force behind long economic cycles.

The varieties of current theorizing about long waves in the economy range from neo-Marxists [29] to "evolutionists" [33, 34] and neo-Schumpeterians [30, 10, 17, 40]. The majority of contemporary economic theorists agree with Schumpeter's emphasis on the role of innovations in explaining Kondratiev economic cycles, but differentiate between the impact of different levels of innovation? and, contrasting with Schumpeter's emphasis on product innovations, include the critical role of process and service innovations in the transition period from the depressive to the expansionary phase of a new long wave. In particular, the neo-Schumpeterian authors stress the role of diffusion of major technological breakthroughs in the stimulation of renewed economic growth and the exhaustion of older technological systems as the main forces behind the upper turning point of the long wave.

For the neo-Schumpeterians, technical change is an evolving interactive, cumulative and institutional process that generates imbalances. Any technology thus has a history and a trajectory. Historians like Bertrand Gilles [20], Nathan Rosenberg [46, 47], and François Caron [7] have argued that technology evolves through successive formulations of technical problems and proposed solutions; these "solutions' can be accepted or refused by the economic environments and they will move along certain "normal or technological trajectories" [33, 10] until they have nothing more satisfactory to offer. Technical and economic factors thus exert combined and complementary forces on the direction of technical change: the former determining the stock of solutions available inside a technological trajectory, the latter determining the rapidity of the transition between one or another possible solution within a certain trajectory and the distance to be covered on the trajectory before it has to be abandoned for a new and more promising technological trajectory.

Building on these concepts, Christopher Freeman [16] and Carlota Perez [40] postulate that Kondratiev cycles are not an exclusive economic phenomenon but the expression, measurable in economic terms, of major changes in the behaviour of the entire socioeconomic and institutional system. These changes are the result of strong constraints exerted on the strategies and the routine operations of firms, leading to a reorientation of industrial organization and management; for Freeman and Perez, the origin of these constraints can be traced to a number of important novel features presented by the basic technologies that underlie the existing economic cycle. Kondratiev cycles are thus associated with major technical changes. However, technical change is the result of the evolution of a whole system of technologies and innovations that do not play the same role and do not have the same impact on the economy. In order to stimulate the economy, these innovations must have several characteristics that allow them to diffuse and to infiltrate into the economic system: in this case they constitute new "technological systems" leading to new "techno-economic paradigms."

A taxonomy of innovations

Four categories of innovations have been identified by Freeman and Perez [18]:

1. INCREMENTAL INNOVATIONS. Incremental innovations occur more or less continuously in any industry or service activity, although at differing rates in different industries and different countries, depending upon a combination of demand pressures, sociocultural factors, technological opportunities and trajectories. They may often occur, not so much as the result of any deliberate R&D activity but as the outcome of inventions and improvements suggested by engineers or as the result of initiatives and proposals by users or other persons engaged in the innovation process. Although their combined effect is extremely important in the growth of productivity and in the quality improvements to products and services, particularly in the follow-through period after a radical breakthrough innovation, no single incremental innovation has dramatic effects on the economy, and they often pass unnoticed and unrecorded. However, the cumulative impact of incremental innovations can lead to productivity increases greater than those initially possible from radical innovations. Generally, the progressive evolution of incremental innovations on a technological trajectory is more or less predictable.

2. RADICAL INNOVATIONS. Radical innovations represent the introduction of truly new products and processes, an unpredictable departure from the "normal trajectory" of a technology. They are discontinuous events that cannot be attributed to the cumulative addition of incremental modifications and improvements to existing products and processes: nuclear power, for example, could never have emerged from incremental improvements to conventional power stations. Radical innovations are typically unevenly distributed over industrial sectors and over time and are usually the result of deliberate R&D activities in enterprises and/or university research laboratories originating from breakthroughs in basic research or from the search for a technical solution to an identified market need. They are important as potential springboards for the growth of new markets (radical product or for big improvements in the cost and quality of existing products (radical process innovations). Over long periods of time, radical innovations may have fairly dramatic effects, but their immediate economic impact is relatively small and localized, unless a whole cluster of radical innovations are linked together in the rise of entirely new industries or services, in which case they constitute a new technological system.

3. NEW TECHNOLOGICAL SYSTEMS(SYSTEMIC INNOVATIONS). Systemic innovations are far-reaching changes in technology affecting several branches of the economy and giving rise to entirely new industrial sectors. They are based on a successful combination of radical and incremental innovations, together with organizational innovations that affect a great number of firms, forming "clusters" or "constellations" of technically and economically interrelated and mutually interdependent innovations. They often lead to a proliferation of radical innovations that diffuse into the economy, generating a large number of minor or incremental innovations ("bandwagon effect").

4. TECHNOLOGICAL REVOLUTIONS OR NEW TECHNO-ECONOMIC PARADIGMS. New techno-economic paradigms represent changes in technological systems that are so far-reaching in their effects that they have a major influence on the behaviour of the entire economy. They correspond to the "creative gales of destruction" (the decline of "old" industries and occupations, accompanied by an extremely uneven process of structural adaptation with substantial time lags) that lie at the heart of Schumpeter's theory of long waves in economic development. Technological revolutions involve the introduction of new technologies with the potential of transforming a vast array of economic activities, leading to a series of interrelated technological changes, including drastic reductions in the cost of many products and services, drastic improvements in the technological characteristics of many products and processes, environmental effects, and pervasive effects throughout the entire economy.

The rise of a new techno-economic paradigm implies a process of economic selection from the range of technically feasible combinations of innovations, whose diffusion throughout the economy takes a relatively long time [15]. This diffusion involves a complex interplay between technological, economic, and political forces, and above all the social and political acceptability of the new techno-economic paradigm: it is in fact a "metaparadigm," exerting a dominant influence on engineers, designers, and managers over several decades and implying a radical change in the set of "common sense" or "best practice" rules and guidelines ordinarily admitted in industrial production and management (i.e. in the existing "paradigm" for the most efficient organization of production).

Freeman and Perez's conception of techno-economic paradigm is much wider than "clusters" of innovations or even of "technology systems"; it refers to "a combination of interrelated product and process, technical, organisational and managerial innovations, embodying a quantum jump in potential productivity and opening up an unusually wide range of investment and profit opportunities. Such a paradigm change implies a unique new combination of decisive technical and economic advantages." However, these potentialities are at first realized in only a few leading sectors; in others, such gains cannot usually be realized without profound organizational and social changes of a far-reaching character. Periods of rapid economic expansion occur when there is a good match between an emerging techno-economic paradigm's new "best practice" set of guiding principles and the socio-institutional framework; depressions represent periods of mismatch.

Table 1 sketches some of the main characteristics of successive long waves identified by Freeman and Perez.

The "regulationist" school in France has emphasized the importance of the same set of relationships, but they differentiate between what is termed the regime of accumulation and the mode of regulation. The regime of accumulation refers to the systematic division and reallocation of the social product, which achieves a match between the transformation of the conditions of production and transformations in the conditions of final consumption. The mode of regulation refers to the ensemble of institutional forms and mechanisms, including the set of values and norms, that ensure the compatibility of behaviours in the framework of the regime of accumulation, in conformity with the existing state of social relationships. Periods of crisis involve a profound mismatch between accumulation and regulation, leading to successive regimes of accumulation that dissolve and are superseded through the effects of their own internal contradictions [1]. Thus, while the regulation school does not adopt the concept of long waves, there is a strong similarity between their concept of modes of regulation of successive regimes of accumulation and Perez's notion of the socio-political infrastructures of successive techno-economic paradigms [28].

Table 1 A tentative of some of the main characteristics of successive long waves

Approx. periodization upswing, downswing Description Main "carrier branches" and induced growth sectors infrastructure Key factor industries offering abundant supply at descending price Other sectors growing rapidly from small base Limitations of previous techno-economic paradigm and ways in which new paradigm offers some solutions Organization of firms and forms of cooperation and competition
1770s & 1780s to 1830s & 1840s
"Industrial revolution"
"Hard times"
Early mechanization Kondratiev Textiles
Textile chemicals
Textile machinery
Iron-working and iron castings
Water power
Trunk canals
Turnpike roads


Steam engines
Limitations of scale, process control, and mechanization in domestic "putting out" system.
Limitations of hand-operated tools and processes. Solutions offering prospects of greater productivity and profitability, through mechanization and factory organization in leading industries.
Individual entrepreneurs and small firms (< 100 employees) competition.
Partnership structure facilitates cooperation of technical innovators and financial managers. Local capital and individual wealth.
1830s & 1840s to 1880s & 1890s
Victorian prosperity "Great depression"
Steam power and railway Kondratiev Steam engines
Machine tools
Railway equipment
World shipping


Synthetic dyestuffs
Heavy engineering
Limitations of water power in terms of inflexibility of location, scale of production, reliability and range of applications, restricting further development of mechanization and factory production to the economy as a whole. Largely overcome by steam engine and new transport system. High noon of small-firm competition, but larger firms now employing thousands, rather than hundreds. As firms and markets grow, limited liability and joint stock company permit new pattern of investment, risk-taking, and ownership.
1880s & 1890s to 1930s & 1940s
"Belle epoque"
"Great depression"
Electrical and heavy engineering Kondratiev Electrical engineering,
Electrical machinery
Cable and wire
Heavy engineering
Heavy armaments
Steel ships
Heavy chemicals
Synthetic dyestuffs
Electricity supply and distribution
Steel Automobiles
Consumer durables
Limitations of iron as an engineering material in terms of strength, durability, precision, etc.. partly overcome by universal availability of cheap steel and of alloys. Limitations of inflexible belts, pulleys, etc., driven by one large steam engine overcome by unit and group drive for electrical machinery, overhead cranes, power tools permitting vastly improved layout and capital saving. Standardization facilitating worldwide operations Emergence of giant firms, cartels, trusts, and mergers. Monopoly and oligopoly became typical. "Regulation" or state ownership of "natural" monopolies and "public utilities." Concentration of banking and "finance-capital." Emergence of specialized "middle management" in large firms.
1930s & 1940s to 1980s & 1990s
Golden age of growth and Keynesian full employment
Crisis of structural adjustment
Fordist mass production Kondratiev Automobiles
Armaments for motorized warfare
Consumer durables
Process plant
Synthetic materials
Energy (especially oil) Computers
NC machine tools
Nuclear weapons and power
Micro-electronics software
Limitations of scale of batch production overcome by flow processes and assembly-line production techniques, full standardization of components and materials and abundant cheap energy. New patterns of industrial locations and urban development through speed and flexibility of automobiles and air transport. Further cheapening of mass consumption products. Oligopolistic competition. Multinational corporations based on direct foreign investment and multi-plant locations. Competitive subcontracting on "arms length" basis or vertical integration. Increasing concentration, divisionalization, and hierarchical control. "Techno-structure" in large corporations
1980s & 1990s to ?* Information and communication Kondratiev Computers
Electronic capital goods
Software Telecommunications equipment
Optical fibres
Data banks
Information services
Digital telecommunications network
"Chips" (micro electronics) "Third generation" biotechnology products and processes
Space activities
Fine chemicals
Diseconomies of scale and inflexibility of dedicated assembly-line and process plant partly overcome by flexible manufacturing systems, "networking" and "economies of scope." Limitations of energy intensity and materials intensity partly overcome by electronic control systems and components. Limitations of hierarchical departmentalization overcome by "systemation," "networking," and integration of design, production, and marketing. "Networks" of large and small firms based increasingly on computer networks and close cooperation in technology, quality control, training, investment planning, and production planning ("just-in-time") etc. "Keiretsu" and similar structures offering internal capital markets.

Source: Ref. 18.
* All columns dealing with the "fifth Kondratiev" are necessarily speculative.

The impact of the new techno-economic paradigm on developing countries

In the new techno-economic paradigm, technological development is increasingly becoming the dominant factor in determining a country's capacity to compete in world markets. However, the industrialized and developing countries are on very different levels of scientific and technological development, and several indicators point to a widening of the economic, scientific, and technological gap between North and South, as the adoption of the key new technologies by industry proceeds at a much faster pace in the former than in the latter.

Some analysts argue that technological transition periods between Kondratiev cycles may present a particularly favourable window of opportunity for developing countries to enter the new paradigm and to reduce or eliminate their technological gap [43, 42]. Evidence from past experience, such as when countries like Germany and the United States challenged Britain's supremacy at the turn of the century (during the transition from the second to the third Kondratiev), or Japan's rise to the front rank of the industrialized countries (during the present transition to the fifth Kondratiev), suggests that the present initial diffusion stage of the new paradigm opens up encouraging development prospects for less industrialized countries (see figure).

For Perez [42], two characteristic conditions of transition periods lie behind this window of opportunity: the discontinuity in technical progress and the duration of the adaptation period for the leaders of the previous Kondratiev cycle. In other words, while the industrialized countries are still in the process of learning how to use the new technologies, and while the required new skills are not yet widely available, all entrants, small or large, more or less developed, have a chance to participate in the development of those skills and technologies.

To what extent this has already happened in biotechnology, new materials, and information technology is therefore a crucial question for the development strategies of developing countries. Developing countries face a market in key new technologies such as biotechnology and micro-electronics that is typically oligopolistic. While some more traditional technologies are available at low costs, the latest are subject to tight control, and a high cost is exacted. The characteristics of the new technologies are often inappropriate for the production and consumption needs of poorer countries, which have to make appropriate choices and adaptations of these technologies in order to reduce substantially their inappropriateness.

Phases (prevailing paradigm)

Changing technological opportunities (Source: ref. 42, p. 15)

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